CR 92-91 Performance Bond - Mainstreet Clock Tower•
•
April 15, 1992
AK CAGGAIihi,
Thomas . Harmenin
Community Develo
rector
Council Report 92 -91
PERFORMANCE BOND - MAINSTREET CLOCK TOWER
Proposed Action.
Staff recommends adoption of the following motion: Move to approve
alternate financial security requirements to be met by the contractor
for the Mainstreet clock tower and authorize the Mayor and City
Manager to execute the necessary documents.
Approval of this motion will provide the means by which the contractor
for the clock tower can meet financial security requirements for the
project.
Ov rview
On December 3, 1991 the City Council awarded the bid for the clock
tower to the low bidder, Michaelson and Associates. Since that time
Michaelson and Associates has been undertaking the necessary steps to
facilitate the fabrication and assembly of the clock tower components
to allow for its installation in May.
One provision within the specifications for the clock tower requires
that the contractor provide the City with a performance bond in the
amount of the contract ($54,774). The purpose of the performance bond
is to provide the City with the financial resources to complete the
project if the contractor defaults on the project. For a variety of
reasons, Mr. Michaelson has not been able to obtain a performance bond
and has proposed an alternate means of providing security to the City.
This security involves providing the City with title to lake shore
property which Michaelson owns in Minnesota, a doubling of the
warranty period for the clock tower, and the assignment of ownership
of the clock tower components which Michaelson has purchased.
After detailed discussions with the City Attorney and RLK Associates,
staff is recommending acceptance of the proposed alternative security
arrangement. This recommendation is being made as it is felt the
proposed financial security improves the City's situation and places
the City in a better position overall than if the contractor had
provided a standard performance bond.
Primary Issues to Consider
o Why was the contractor unable to provide a performance bond?
o What are the details of the proposed alternate financial
security?
o Has the City Attorney reviewed this matter?
Supporting Information
o Analysis of issues
o Alternatives
o Letter from Michaelson and Associates (to be provided at City Council
o Letter from Jerre Miller meeting)
CR92 -91
Page 2
Primary Issues to Consider
o Why was the contractor unable to provide a performance bond?
Michaelson and Associates has experienced difficulties in obtaining a
performance bond or letter of credit for various reasons. These
appear to include:
o The proposed project is relatively unique and rare in
nature.
o The City's specifications do not provide for any type of
payment to the contractor until the project has been
completed and accepted by the City.
o The contractor does not have extensive experience in
building clock towers for public agencies and has modest
financial resources.
o The cost to obtain a bond or letter of credit is
prohibitive. This is due in part to the fact that Mr.
Michaelson has little if any experience in building
clocktowers for public agencies. This apparently presented
concerns to the bonding companies.
o What Are The Details of The Proposed Alternate Financial
Security?
The following resources are proposed to be provided to the City in
lieu of a performance bond or letter of credit:
o Michaelson will transfer all rights, title and interest to
the City in the clock components consisting principally of
the bells, tower structure, and clockworks components.
o A security interest will be provided to the City in a 32
acre tract of unimproved property on Lobster Lake located
near Alexandria which has been valued at $150,000.
o An agreement to extend the present warranty for the clock
and clockworks from 3 to 6 years.
Upon discussions with the City Attorney and RLK Associates, staff is
recommending acceptance of the proposed alternative security
arrangement due to the following reasons:
o A doubling of the warranty period is considered important
due to the unique nature of the product which the City is
purchasing.
o The security interest in the 32 acre tract of property is
almost three times higher than the contract amount. In
addition, the City will be in a better position to rely on
this property for financial security in the event of a
default than it would be with a performance bond.
CR92 -91
Page 3
o The City will own components for a clock tower, in the event
of a default, at no cost.
o Has The City Attorney Reviewed This Matter?
Attached is a memo from Jerre Miller which comments on the proposed
alternative financial security. Mr. Millers memo concurs with staff's
recommendations.
Alt rnatives
o Approve staff's recommendation.
o Deny staff's recommendation. If this should occur,
Michaelson would be required to meet the original
requirements of the contract specifications. Presuming he
is unable to do this, it could result in a default by the
contractor on the project which would appear to
significantly delay or halt the project at this time.
o Approve staff's recommendation with changes. This
alternative may be possible but should be discussed with the
contractor.
•
C I T Y O F H O P K I N S
MEMO
Date: April 15, 1992
To: Tom Harmening
From: Jerre Miller
Re: Michaelson Contract For Clock Tower
This letter is based on various telephone conversations and
conferences with you, the offices of RLK and Mr. Michaelson.
It is also based on assumptions formed from conversations and
correspondence with Mr. Michaelson.
I have assumed Mr. Michaelson's difficulty or inability to
acquire the Performance Bond called for in the contract
equates with Michaelson's relative inexperience as a
contractor and modest resources coupled with the unique and
relatively rare nature of the contract to be fulfilled. A
bonding company in addition to a hefty premium would likely
require a strong financial statement and collateral.
Similarly, an alternate approach in the form of a Letter of
Credit from a bank would have identical concerns and would
likely consider a bank fee of approximately 10% or more of
the contract amount.
In consideration of a contract change waiving the bond
requirement, Michaelson has offered to transfer all right,
title and interest to the City in the clock components
consisting principally of the bells, a security interest in a
32 acre tract of unimproved property on Lobster.Lake near
Alexandria worth approximately $150,000.00 as appraised and
an agreement to extend the present warranty from three years
to six years.
If all of my assumptions are essentially accurate, the City
will improve its position by obtaining an agreement to double
the warranty period which I consider to be important because
of the very nature of the product the City is purchasing.
1010 First Street South Hopkins, Minnesota,55343
Phone: 612- 935 -8474 Fax: 612 935 - 1834
An Equal Opportunity Employer
Secondly, by obtaining security on property bearing triple
times value would be easier to rely on in the event of a
default then dealing with a bonding company.
I presume the benefit Michaelson gains in giving the property
as security to the City avoids the mortgage fees and delay
inherent in mortgage loan financing through a lending
institution.
Assuming this arrangement is understood by all parties, I
would obtain a Memorandum Abstract on the property and
complete the financing package and draft or review a draft of
a Bill of Sale for the clock parts. Because the parts would,
remain in Alexandria, evidence of sufficient insurance would
be strongly advisable.
If you have any other th
aspect of the transacts
know.
or questions concerning this
h Mr. Michaelson, please let me