Knowledge Corner

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Despite the fact there is a set project schedule, we often find that construction projects are delayed and finish later than expected. As a result, Owners will often attempt to assess their liquidated damages against their Contractors for the delay at the end of the project. In doing so, Contractors typically claim that the delay was either Owner-Caused or a Concurrent Delay, which means the delay occurred due to acts of others beyond their control by multiple, independent parties.

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Last week, we learned about calculating your company’s Return on Investment (ROI). We discussed that, in general, the lower the risk, the lower the return—whereas, the higher the risk, the higher the return. This week, we will dig further into Net Profitability and Rate of Return with our example Contractor, XYZ Company. With that as a backdrop, what should the Owner of a construction company require in return for the risks taken?

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What is the appropriate compensation for the Owner of a construction firm? Is a healthy salary plus expenses enough to justify the business risk that a Contractor takes—or should that Contractor also be building wealth using the construction firm as an investment vehicle?

Unfortunately, there is no one right answer to these questions. However, answering the question on an individual basis does depend on the Return on Investment (ROI) a Contractor expects for their business.

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In Part 1, we discussed the major difference between Liability Insurance and Performance Bonds. In addition, we reviewed the steps the Surety must take if a Performance Bond Claim is made. This week, we will explore how the courts have viewed this situation.

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Depending on the type of construction project, the General Contractor may be required to provide both General Liability (GL) coverage along with Performance & Payment Bonds. In that situation—if a claim were to arise dealing with a construction defect—a common question is who will cover the loss?   

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Last week we explored the types of financial ratios available to the Contractor and began investigating liquidity ratios. This week, we will continue our discussion on liquidity ratios. We will be referring back to our XYZ Company example from last week.

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Financial statements report the condition of a construction company and serve as a basic measurement of the company’s strength or weakness. To Creditors like Banks and Sureties, these statements are an essential underwriting tool when making decisions like bonding to support the Contractor. The ability to read and understand these statements is an extremely valuable management tool.

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A surety bond is a three-party contract between the Surety, the Principal, and the Obligee. The Surety is the party that issues the Performance Bond along with the Labor and Material Payment Bond, which promises to answer for the default of the second party—its Principal. The Principal, in many cases, is a General Contractor. Typically, a Surety will become aware of any project problems when claims are made against the Payment Bond. This includes allegations of unpaid subcontractors and material suppliers.

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Sureties are a specialized division within the insurance industry that work with Contractors to underwrite and provide bonds. When working on a construction project, you may be asked to provide a bond. A bond is a three party agreement between the Surety, the project Owner, and the contractor on the project.

There are several different types of bonds, but each is written to guarantee certain contractual obligations and to guarantee the contractor’s duties to the Owner-provided that the Owner fulfills its obligation to the contractor. Below is a list of the most frequent types of bonds: