Payment Bond Required For Utility Work, by Partner Andrew Richards, as published in the Subcontractors Association Newsletter, July 2024

Section 137 of the State Finance Law requires, among other things, that whenever a municipal corporation issues a permit subject to compliance with section 220 of the Labor Law, such permittee or its contractor or subcontractors furnishing work shall post a payment bond. This comes into play when a contractor contracts with a utility company and a permit is needed for the street opening to perform subsurface work.

While the work to install gas mains and services or other subsurface utility work is not public work, the contractor is still nonetheless required to post a payment bond. The problem with this requirement is that the contracts between a utility contractor and a utility company are for several years with an unspecified contract sum. Generally, the contract states that the contractor will receive individual purchase orders for specified areas on an as needed basis.

However, while the rates are set for the labor and material, the contractor is not guaranteed any work pursuant to the contract. Despite this, the utility companies place a not to exceed value on the entire multi-year contract and require the contractor to post a payment bond in the sum of this not to exceed value. This places a burden on the contractor with respect to its bonding line. Most contractors have a specific ceiling to their bonding line and the contract with the utility company may hit that ceiling notwithstanding the fact that no work is guaranteed. This may prevent the contractor from bidding on public work for several years unless its bonding line is increased.

As a result, it is important for contractors to understand the bonding requirements in the contract and negotiate the payment bond amount with the utility company before the contractor signs the contract. It is my experience that the utility companies will negotiate the amount of the payment bond, but such negotiations must happen before the contractor signs the contract. Many times, the utility company will not provide the amount of the payment bond in advance and then the contractor is in a weak position to negotiate the amount of the bond.