Other building projects caught up in bond flap

lblackford@herald-leader.comMarch 17, 2009 

The University of Kentucky's $450 million hospital building project will be insured for $450 million.

Why?

Because "it's the law," says Bill Harris, UK's director of purchasing.

UK has hired Turner Construction, a national firm, to manage the project. That means Turner oversees the work of contractors such as the plumbers and electricians. Turner will require those contractors to bond — or insure — 100 percent of their work, and UK will require Turner to bond 100 percent of the overall construction costs.

"This is how the owner protects themselves in the event something goes wrong," Harris said. "Yes, it adds to the price, but we feel it's the law."

Kentucky statute and standard contracts require a 100 percent performance bond by construction managers on public projects such as UK's new hospital.

But three other municipal buildings in the state have not been fully bonded by the construction manager — Codell Construction.

Those projects are an $8.2 million sportsplex in Knott County, a $10 million county administration building in Campbell County and a $3 million library in Lincoln County.

A spokesman for State Auditor Crit Luallen said she wants to look into the bonding of the three projects. "We were not aware of problems with surety bonds in these counties," said spokesman Terry Sebastian. "Our office will, however, certainly be looking at this issue and determining if additional review steps need to be taken in the audit process."

Audit ordered

The Administrative Office of the Courts already has ordered an audit of its $880 million construction program, which has apparently allowed firms to underfund the bonds on Kentucky's courthouses. Codell has worked on the majority of courthouse projects and routinely bonds about 5 percent of the projects' costs, rather than 100 percent.

Luallen has said that the AOC projects are not under her purview.

For some courthouses, Codell didn't provide any bond, which the company called an oversight. Bonds were later provided. In most cases, Codell required subcontractors to be bonded at 100 percent. Codell representatives say this covers 100 percent of the construction costs, which meets the standard of the state law.

Codell has said it stands ready to provide 100 percent bonds on all its courthouse work if the AOC audit finds it should. The auditor, Fort Mitchell lawyer William Geisen, said his work should be finished in the next couple of weeks.

Not all construction experts understand the point of view of Codell or the AOC.

"I don't think there's any ifs, ands or buts about it," said Mark Gillming, a vice president at Messer Construction. Messer recently provided a performance bond for the full cost of the $95 million Biomedical Research Building III at the University of Louisville.

He said most construction managers guarantee to do a job at a certain price.

"If it's a $50 million job, they're guaranteeing that," he said. "What happens if the CM (construction manager) goes under and it's a $51 million job? Who is going to protect the commonwealth then?"

Officials unworried

But several officials who hired Codell said they're not worried about risking taxpayer money. The company was construction manager on the $8.2 million sportsplex that opened in Knott County in October 2007. Judge-Executive Randy Thompson said Codell never provided any bond for its own work, but all the contractors were fully bonded.

That means if something had gone wrong with the plumbing company, its work would have been insured. But if Codell had gone bankrupt and caused cost overruns, the county would have been on the hook.

"I never felt there was any risk; it all went smoothly," said Thompson, who was convicted of vote-buying last month but is free on appeal.

Campbell County Administrator Bill Horine doesn't see much of a need for a bond for Codell either. The company has managed the $13 million expansion of the jail and is currently overseeing the new $10 million county administration building.

Again, all the subcontractors are fully bonded, but Codell is not.

"We're not at risk for anything Codell is doing," Horine said. "They're providing construction management services, and if they went belly-up we'd bring in someone else to do that."

Horine said it also saved the county money to not have 100 percent performance bonds on the construction manager.

Codell is also managing the construction of the new Lincoln County Library. All of the subcontractors are bonded; however, Codell representatives said the library board did not want to pay the additional premium of a Codell bond.

The library director, Kay Peppard, did not return calls requesting comment.

Codell said in a statement that it will provide a bond if asked.

Statutes 'pretty clear'

Nick Makes, a senior vice president at Turner Construction's New York office, said 100 percent performance bonds are pretty common across the country.

"Most state statutes are pretty clear on that issue," he said. "By getting a full bond, you get the full value of the project backed up by an insurance policy. By getting a partial bond, you have partial insurance. You could get a group of lawyers to argue the advantages and disadvantages of each side for a long time."

And they probably will.

Two national surety bond groups — whose members do benefit financially from 100 percent payment and performance bonds — sent letters to 35 county judge-executives building courthouses to warn them about their possible insurance vulnerability.

Codell sent a letter back to the groups threatening to sue.

Reach Linda Blackford at (859) 231-1359 or 1-800-950-6397, Ext. 1359.

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