Construction managers working on 35 state courthouse projects have bucked state law by not fully bonding their work, but now will have to provide millions of dollars to insure their work immediately, according to an audit released by the chief justice of the state Supreme Court on Tuesday.
A legal opinion by Northern Kentucky lawyer William Geisen concluded that state law, regulations of the Administrative Office of the Courts and the contracts between construction managers and counties for new courthouses require 100 percent payment and performance bonds as soon as the contracts are signed.
Instead, in the past few years, several construction managers in the AOC's $880 million courthouse construction program have provided bonds for between only 5 percent and 6 percent of the construction cost.
"Mr. Geisen conducted a thorough and unbiased review of current bonding practices on our courthouse projects and found that the Administrative Office of the Courts has allowed certain construction managers to furnish performance and payment bonds that are legally insufficient," said Chief Justice John D. Minton. "I will be asking the county judge-executives to require the construction managers on their projects to immediately furnish a performance and payment bond equivalent to 100 percent of the contract sum.
"I am deeply committed to restoring the integrity of our construction program," Minton said.
The bonds are a form of insurance to guarantee the construction work.
The additional cost of the full bonds — which could be as much as $3.6 million — will be paid by the affected construction companies. The premium for 100 percent bonds is already included in what the state pays construction managers.
Minton became chief justice last year, replacing Joseph E. Lambert, who oversaw the ambitious program to put a new courthouse in every county.
Minton appointed Geisen to investigate the program, after the Herald-Leader revealed that Codell Construction of Winchester was routinely bonding only the amount of its fee on courthouse projects rather than the 100 percent required by state law. AOC Facilities Director Garlan VanHook resigned shortly before the audit began.
Codell has been the construction manager on more than 60 percent of the courthouse projects since 1998. It is the manager on 24 of the 35 projects currently at issue, or nearly 70 percent. The construction managers on the remaining 11 projects are Alliance Construction of Glasgow or Branscum Construction of Russellville.
In some cases, bonds were not provided at all, or were provided only in the last two months after open-records requests for the bonds were sent to the county governments.
Washington County, for example, is about to open its $12 million judicial center. The contract for the project was signed March 13, 2006. Codell did not acquire the performance bond until Jan. 8, 2009.
"Codell obviously disagrees with several of Mr. Geisen's legal opinions and conclusions, but respects his efforts and will comply, as they always have, with the AOC's bonding requirements for the courthouse projects," said John W. Hays, an attorney for Codell.
'A red herring'
The total cost of courthouse construction under way or about to start is $381 million, so Geisen's opinion could cost the companies millions of dollars.
At issue are the bonds required for construction management at-risk, a mode of construction used by the AOC. Under such a contract, the construction manager takes on the total risk of the project by holding all the contracts with subcontractors. The bonds are required to protect the public, which is considered the owner.
Instead, Codell and other companies were bonding their fee — about 5 percent of the project's cost — and requiring the subcontractors, such as plumbers and electricians, to bond themselves for 100 percent. Otherwise, they said, the project would be "double-bonded."
However, the required bonds protect the owner from problems with the construction manager. If Codell or another company went bankrupt under the current practice, the county could not recoup large losses.
Geisen called the double-bonding issue a "red herring raised by certain CMs-At Risk within the program in an apparent effort to avoid the actual requirements" of state and AOC regulations.
In his opinion, he said the practice of underinsurance came out of a meeting on Dec. 18, 2007, between AOC, several construction managers and several architects. The construction managers "apparently convinced" the AOC representatives that bonding their fee and the subcontractors would be acceptable.
Louisville construction attorney Bruce Stigger and bond expert Todd Loehnert, who first noticed the AOC bonding practice, said they were pleased with Geisen's opinion.
"It was important to the construction industry and the people of Kentucky that this type of wrongful conduct be immediately corrected," Stigger said. "Hopefully all contractors will now play by the same rules when performing public works projects."
The bonding issue sparked a flap between Codell and two national bonding groups. The two groups wrote letters to 35 county judge-executives reminding them about the state law requiring 100 percent bonds. In return, Codell threatened to sue the groups.