What Are The Requirements For Construction Bonding?

The rules around construction bonding are numerous and sometimes confusing. At Surety 2000, our goal is to ease the process as much as possible and this article from Commercial Construction and Renovation clearly outlines the requirements. We hope this helps you.

FROM CCR / BY DAVID CORSON

Following some crucial rules and regulations can be essential for successfully completing your construction project if you're a contractor. However, just like any other undertaking, construction projects involve some risks. Not only that but there can also be delays and other problems that may make the project fail. Due to this scenario, investors and project owners must be extra careful about their investments.   

In that case, they require the project contractors to provide a construction bond as protection. It refers to a surety bond designed to safeguard investors and project owners from disruptions and financial losses caused by a contractor's failure to complete the work as specified in the agreement. However, putting up a surety bond can be complicated and challenging if you have no idea what should be done in the first place.   

Keep reading this article to learn the requirements for construction bonding.   

How Does A Construction Bond Work?  

To better understand how a construction bond works, it's essential to familiarize yourself with the parties involved, which include the investor or project owner as the obligee, the contractor building, the construction project, and the surety company that backs the construction bond.   

Aside from the parties, it's also essential to know the different types of construction bonds. These can include:  

• Bid Bond: It's the bond submitted when bidding on potential construction projects. It safeguards the investor or project owner when the contractor backs out after winning the bid.  

• Performance Bid: It's the bond provided when the contractor accepts the bid and pushes through with the project. It protects the investor or project owner against financial losses if the contractor's work isn't according to the contract's terms and conditions.  

• Payment Bond: It's known as the labor and material payment bond, which is used to ensure the contractor can pay for their workers, suppliers, and subcontractors.  

As noted, a construction bond protects investors' and project owners' investments against an incomplete project or financial losses. It's usually required in government/public work projects and other cost-intensive undertakings.

What Are The Construction Bonding Requirements? 

Now that you're aware of how a construction bond works, it's time to know the requirements for construction bonding. However, it's vital to understand that these requirements may vary depending on the surety company you work with and the project size. But despite the differences, below are the common construction bonding requirements that you should get familiar with: 

• Steps For Acquiring A Construction Bond 

Some steps should be taken from the beginning to apply for construction bonds properly. Otherwise, the contractor may be unable to place a construction bond for the project. The following are the steps for acquiring a surety bond: 

• Review the project requirements to know if a construction bond is required; 

• Secure a bid bond from the surety company and submit it with a proposal to the investor or project owner; 

• If you, as the contractor, win the bidding, obtain a performance bid from the surety company; 

• Once the bond is placed, you should proceed with the completion of the construction project; 

• If necessary, provide a maintenance bond for the repairs.  

 With these steps, you can ensure to take the necessary construction bond for the project without sacrificing your investments if something might happen along the way.    

• Essential Documents To Prepare  

When applying for a construction bond, there are essential documents you need to prepare. These can include: 

• Fully filled-out surety application; 

• Financial statements for the past two years prepared by a certified public accountant; 

• Copy of the project contract; 

• Proof of real estate ownership to speed up the bond processing.  

Knowing and preparing these documents can help you in your application process for a construction bond easier than not preparing ahead of time.

• Cost Requirements  

Generally, there are cost requirements that should be taken into account when applying for a construction bond. For example, the cost of a performance bond is approximately 1% of the project value. But when the value of the project is approximately USD$1 million or more, the cost can range from 1.5% to 2%.  

Moreover, it's essential to know that your creditworthiness is considered when determining the surety bond's cost.  

• Miller Act For Federal Construction Projects  

When it comes to federal construction projects, you have to get familiar with the construction bonding requirements under the Miller Act. Based on this act, the contractors for federal contracts are required to place a performance bond for a project which costs USD$100,000.  

Also, federal contractors must place a payment bond to pay the suppliers. When the contractors fail to make the necessary payment, the suppliers may have the right to file a construction lawsuit before the U.S. District Court.  

Conclusion  

As a contractor, you should understand the need for placing a surety bond for large construction projects. Failure to provide a bond may cause the investors or project owners to walk away and look for other options. Hence, to successfully work on a project, keep the information mentioned above in mind to know the essential requirements for construction bonding.  

4 Ways The Construction Industry Can Keep Evolving

Over the last 20+ years, we’ve seen quite a few changes in one of our primary constituencies, the construction industry. Almost everything from capital, regulatory, trends, labor pool and more have created sea change after sea change. So what is the best way to understand the evolution of the construction industry and the needs that feed it? This is a great article from Forbes that takes a 30,000 foot view. It’s a quick read and an important perspective.

FROM FORBES / BY JOSH THOMPSON

Industries and the market evolve over time. Construction is no different. To stay successful in a constantly changing world, business leaders in construction must adjust and adapt. Making these necessary changes can be difficult, so understanding how to best evolve with one’s industry is of utmost importance. As a business leader in the construction and face maintenance industry, I've compiled some of my best practice strategies.

1. Reflect on the past.

Understanding why previous ventures did or didn't go well provides an idea of the state of the construction industry. The past also gives insight into customer desires and requirements. From a broad perspective, reflecting on the past can allow you to notice trends in any market or industry. Within construction, these trends might be the kind of materials that clients have been asking for or the evolution of popular building styles. Knowing this data can give you an idea of where your construction company should be investing its time and effort.

If something that worked for your company—or the industry at large—in the past isn't currently working, you'll know that change is necessary. At the same time, you must remember what works today won't necessarily work tomorrow. While it's important to know what's been successful for your company in the past, that may not always be the case. Overall, the past serves as an indicator and a direction marker of when and how to evolve.

2. Follow the news.

Staying engaged with current news is crucial for seeing how the construction industry and market evolve. It provides insight into many factors, such as economic, social and political changes. For example, reading the national news helped keep those in the construction field up to date about the Bipartisan Infrastructure Law, which announced a plan to rebuild roads, bridges and railways across America. Meanwhile, reading about world news gives construction owners insight into factors affecting the supply chain. To ensure you're fully caught up and able to make the best decisions for your company, follow news from major news sources as well as updates from sources geared toward construction.

3. Speak with customers.

Customer demand plays a part in the evolution that occurs within an industry. When the requirements of the customer base changes, the industry itself must change. Customers often have a lot to say when you ask the right questions and take the time to truly listen to them. Leaders in construction should ask their clients how they view their relationship with the company over the next five to 10 years. For example, the types of buildings that your clients need may change over time, especially with the increase in technology use and hybridization across industries. Thus, customer feedback serves as a way to gauge how a construction company should evolve to stay competitive.

4. Keep to your company vision.

A company vision is the basis for the company’s strategic plan. It also serves as a guide whenever adjustments must be made to that plan and gives direction to the company’s evolution. When changes seem to be happening in the market or industry, business leaders should ask themselves how they can best adhere to their company’s vision in the new circumstances.

For example, if a construction company’s mission is to provide clients with the best quality, then it should make sure its evolution includes staying up to date on new, higher-quality materials as they're developed. If a construction company's mission is building in the most efficient manner, then it should make sure that it can easily adapt to and incorporate more efficient processes as they emerge. This is why a company vision is so crucial.

Today's business world is not the same as that of your parents and grandparents. It changes as the world develops and as people's wants and desires change. The key to success is ensuring that your company uses those changes to continue to meet demands. To do this, business leaders should keep in mind current trends, customer demands, company goals and lessons learned.

Why You Should Consider Opting for a Surety Bond for Your Business

There is no better way to show commitment to your customer as a surety bond. It is proof that you believe in your ability to meet the obligations you’ve set forth. And although of our business here at Surety 2000 centers around construction bonds, performance bonds, etc., we feel that every business that delivers a product or service to customers can use a surety bond. This is a great article that explains the benefits to all businesses and worth the read.

FROM LEGALREADER / BY ELISABETH WASHINGTON

The advantage of this bonding is that it proves you can make good on your obligation to the consumer.

Small businesses seeking contracts must justify their value. A surety bond is an enforceable contract between a small business and another party that guarantees the completion of the agreement. Businesses that take on building projects and seek government contracts frequently need surety bonds.

What is the Surety Bond?

A surety bond is a contract that ensures that a contract’s terms will be followed and that each party upholds their half of the bargain. Although these Commercial Surety Bonds are applicable for any contract, they are most frequently utilized for government projects and house building.

A surety bond typically involves three parties:

• The principal is the business owner who buys the bond to submit a bid or carry out the task.

• The company or other organization that needs the surety bond is known as the obligee. Government entities are typical obligees, but anyone looking for reassurance that work will get done can request a surety bond.

• The insurance provider who backs up the bond is known as the surety. If the principal doesn’t complete the job, the surety firm must take over and see that it gets done.

The types of bonds that your business might require include:

1. Fidelity Bonds: These protect companies’ finances in the event of employee fraud or theft.

2. Bonds for Licenses: They are frequently required in addition to business licenses in order to operate. For instance, a liquor tax bond is required if you apply for a liquor license. This bond serves as your pledge to pay your taxes.

3. Business Service Bond: If the employees steal from your consumers, this bond can help to safeguard your clients. This is crucial if you frequently send workers to customers’ homes for work.

If you are still uncertain about the necessity for business bonds, see the top four causes written below for why even small firms require bonds as well.

Helps in Customer Acquisition

A bond promises to fulfill obligations to clients or pay them back. It says you must pay the customer compensation if you fail to perform your duty. You must make up the bond company’s losses when the bond settles a claim for your employer. Unlike insurance, a bond does not exempt you from responsibility for issues with consumers.

The advantage of this bonding is that it proves you can make good on your obligation to the consumer. Prospective clients may demand you have specific bonds. Federal contractors will only cooperate with bonded companies. You can greatly increase the competitiveness of the business by purchasing suitable bonds.

Needs for Providing Employee Benefits

If you have staff members, you likely give them some perks. Whether a 401(k) or a retirement plan, you’ll need bonds to cover these benefits for your employees.  These bonds safeguard the individuals in your plan from fraud, dishonesty, or even theft. So, if you steal and the plan members don’t get their benefits, they may file a lawsuit against you to get money from your bond.

Might Be Compulsory for Your Industry

Some small firms or industries must obtain bonds to operate. For example, surety bonds are frequently needed in the restaurant service sector. Plumbers and other independent contractors frequently need surety bonds.

Along with this, the following additional small enterprises may also require bonds to function:

• Health clubs, hair salons, and barbershops, as well as patient care

• Financial services like real estate agents, escrow agents, and collection agencies

• Private institutions

• Manufacturers, merchants, and distributors of alcoholic beverages

• The public notary

• Construction firms

Remember that you will also require other types of bonds to operate. Additionally, you could need licensing or fidelity bonds and specific small business insurance policies such as workers’ compensation insurance. Before you conclude the insurance coverage, you should double-check the regulations in your location because each state has a separate set of insurance needs.

Helps You Stabilize the Business

Some bonds can aid the company in ways that a regular insurance policy may be unable to. For instance, as mentioned earlier, a fidelity bond might protect you if one of the employees tries to steal from a consumer or from your business. So, the coverage will protect you against your own losses and those of others.

Overall, getting the right surety bonds will protect you from complex losses that customers may cause. Ultimately, this can benefit your company with a big boost to its brand image and help it become a leader in its field.

How Can You Obtain Bonds for Your Company?

Finding bonds that meet the demands of your company is the next step after deciding to purchase bonds. Working with your insurance carrier or a specialty bond business will help you achieve this. Your bond purchase price may vary depending on several factors, such as:

• Form of bond

• Industry

• financial background

• Credit rating

• Bond’s worth

Final Words

Though there are several reasons why your business might require a surety bond, the reasons mentioned above are identified as the top ones. Whether you own a restaurant, hair salon, or construction business, most small enterprises share at least these two characteristics: to ensure sustained success with clients, they require insurance and bonds. Therefore, take the right decision and grow your business successfully.

Construction Surety Bonds Are More Relevant Than Ever. You Can Thank Inflation, Supply Chain Challenges and Labor Shortages

There is no doubt that we live in tumultuous times. The current economic situation combined with geopolitical upheaval and uncertainty about health has caused challenges in every industry, construction. being one especially hard hit. Supply chain delays, labor shortages (skilled and otherwise) and rising prices have caused schedules and budgets to potentially break down… more frequently than ever.

Read this great article on how construction surety bonds can be the answer during these trying economic times.

FROM RISK & INSURANCE / BY COURTNEY DUCHENE

Construction surety bonds guarantee that projects get completed at cost and on time, even during periods of economic distress.

Whether it’s a bridge or a public school, every public construction project you pass required a surety bond at one point.  

The U.S. government requires every contractor it works with to purchase a surety bond as a way to ensure their work will be completed in a timely and cost-effective manner. Contractors purchase a bond and, in turn, the surety agrees to meet the contractors’ obligations if they’re unable complete the project — even if that means finding another contractor or compensating the project owner for the costs they’ve incurred. 

“Schools and highways don’t get built without surety bonds in place,” said Mike Heidrick, vice president, head of construction surety at The Hartford.  

“Those bridges that you go across in Boston or New York? All of those required a bond at one time. All the highways that you’re driving on required a bond. All public construction — from school parks to ball fields to high schools to elementary schools — required bonds.” 

Bonds have played an essential role in public construction projects for centuries, but today, forces like inflation, supply chain delays, labor shortages and the drive to build high-performing renewable energy projects makes this financial guarantor more critical than ever.  

Surety Bond History: From the 19th Century to Today 

Construction surety bonds became widely used in the U.S. after the Civil War. During the Reconstruction era, the federal government hired a number of contractors who failed to complete the projects they’d been hired to do.  

“There were lots of contractors that came and did a lot of work for the federal government, and what happened is these contractors got their first payments and then they disappeared. Today we have the Miller Act for federal work, and states have Little Miller Acts, that require bonding of publicly funded work,” Heidrick said.  

So the government stepped in and required contractors to buy bonds equivalent to the cost of the project as a means of guaranteeing their work. That way, if the contractor decided to walk away before the work was completed, tax dollars were protected. 

Today, surety bonds help guarantee everything from the construction of new roads and public buildings to renewable energy projects like solar panel fields and wind turbines.  

Investments in the construction and real estate industries as a result of the Inflation Reduction Act will likely further the need for bonds as new public projects get underway. That’s on top of the nearly ​​$550 billion of investment in new infrastructure projects expected over the next decade, according to Bipartisan Infrastructure Law estimates. 

In addition to the public works requirement, private investors and developers often seek out bonded contractors to protect their projects.  

Inflation, Supply Chain Issues and Labor Shortages  

From building new manufacturing sites to provide companies with relief from semiconductor shortages to undertaking renewable energy projects, federal and state governments in the U.S. are creating a number of opportunities for contractors that will need to be bonded.  

Moreover, several economic factors make today’s construction projects more complex, increasing the need for projects to be bonded. Worsening supply chain delays, inflation and labor shortages are all influencing how much a construction project costs and how long it lasts.  

Let’s start with inflation. Building materials costs rose 20% between January 2021 and January 2022, an Associated General Contractors of America analysis of government data found. Costs of steel, lumber, roofing products and insulation were all affected. Though NBC News has reported that building materials costs are beginning to come down, many developers are still struggling with materials pricing concerns.  

Beyond inflation, much-needed investments in infrastructure could easily be delayed due to supply chain bottlenecks, adding costs to a project as timelines swell. Even if a builder has all the materials they need, they may struggle to find workers. The industry currently faces a shortage of almost ​​430,000 workers, Associated Builders and Contractors reported last year. That shortage is only expected to grow, as 40% of construction workers in the U.S. will likely retire over the next 10 years, per 2022 reporting from Forbes.  

“Today a majority of contractors are experiencing a shortage of labor,” Heidrick said.  

“To the owner of the project, the surety bond provides peace of mind that if the contractor fails and doesn’t complete the project, they’ll have someone else who will.” 

Government bonding requirements can help the public have faith that the contractors working on public projects will be able to rise above these uncertain economic times. Unfortunately for private projects, Heidrick says, some investors do away with surety bond requirements in an attempt to lessen project costs. That strategy can be challenging if a contractor needs to leave a project due to supply chain struggles or labor shortages. 

“When you have tough economic times, it can really affect the health and well-being of a contractor,” Heidrick said. “You want to make sure, as a project owner, that you have a bond on it.” 

Risk Management to the Rescue 

When underwriting a surety bond, Heidrick and his team assess a contractor’s financial health as well as the risk management strategies they have in place to detect whether supply chain delays or staffing shortages could affect a project.  

“Good contractors are good problem-solvers,” he said. “Every construction job is unique unto itself. Every one of these jobs has problems, and every one of these contractors has great systems in place to identify problems early so that they can go in there and correct those problems.”  

As part of the process, bonding partners will also help contractors consider what risks they may be assuming with a particular contract for a project. If a renewable energy project contract wants a contractor to guarantee a wind turbine’s or a solar panel’s efficacy, rather than just the building process, a builder may not be comfortable assuming that long-term risk.  

When a bonding partner reviews contracts to determine whether they want to underwrite a project, they can alert contractors to this kind of language, helping them stay abreast of new exposures.  

“We’re in the business of helping people keep their promises,” Heidrick said. “We need to understand every aspect of the contract. We don’t want our contractors taking an ownership risk where they don’t have to.”

50 Effective Construction Project Manager Interview Questions

At Surety2000 so many of our clients are in the construction business. As with many other industries, one of the most important roles is Project Manager. This is especially important in the building trades because of the cascading aspect of the individual elements in a construction project. If one element doesn’t happen on time, it holds up everything that comes afterwards, i.e. the plumbing needs to be done before the sheetrock does up, etc.

We found this great blog article that outlines what one should look for in a Project Manager and we wanted to share it with you.

FROM CLICKUP / BY HAILLIE PARKER

Fun fact: Construction project management roles are in high demand.

And that trend isn’t falling anytime soon!

The United States Bureau of Statistics predicts that construction project management positions will see an 8% increase by the end of 2031—a higher growth rate than any other in that industry. 🛠

Another fun fact? It’s also one of the highest-paying positions in the field. 👀

This can make landing your next dream job more challenging through in-depth interview processes, competitive applicants, lengthy qualifications, and more.

And for the recruiters or HR departments conducting the construction project management interview…

There’s a lot riding on the questions you ask to secure the best candidate because the construction manager you select will have a big impact on the execution of the project.

But luckily, we can help you out on that front with 50 unique and telling construction project management interview questions to ask your next candidate.

The Increasing Prevalence of Surety Bonds in Private Construction Projects

Well, considering it’s a cornerstone of our business, we’ve been at the forefront of surety bonds for the construction industry for 20+ years, only our solution is electronic which is about the most efficient and failsafe methodology for delivery. So yes, its critical for attorneys in construction practice dealing with private projects to become expert in all things surety bonds. And because they are so immersed in ensuring the accuracy and safety of the transaction, knowing that a solution like electronic bonds exists is essential to their education.

FROM THE LEGAL INTELLIGENCER / BY JOSHUA LORENZ

For construction attorneys, it’s now critical to understand the ins and outs of surety bonds and how they’re used in the context of private projects.

During uncertain times, people look for a security blanket of added protection when embarking on new projects, and surety bonds are one way to provide that. For decades now, surety bonds—typically three-party agreements between the surety, contractor/subcontractor and project owner—have been required for most public construction projects. Recently, and largely stemming from uncertainties caused by COVID-19, ongoing supply chain woes, and material shortages and inflation, many more owners and investors have begun requiring bonds for private construction projects, too.

For construction attorneys, it’s now critical to understand the ins and outs of surety bonds and how they’re used in the context of private projects.

Why Use Surety Bonds

There are several reasons why private owners may prefer, or even require, the use of surety bonds, which generally are noted as a project requirement in the RFP, but also can come up during various stages of contract negotiation.

Private contractors often work on several projects simultaneously, and with the current labor and supply-chain constraints there may be delays at any given time. These delays can domino into higher material costs, postponed project deadlines and possible contract breaches.

In private projects, bonding protects the owner from contractor default on the terms of their contract, and guarantees the contractor is protected against possible disruptions, unfinished projects, failure to meet contract specifications and unpaid debts. In this way, bonds offer extra assurances to the owner, and can also help contractors stand apart from their competitors, provided they’re able to win project bids and satisfy the criteria that’s required of them.

Types of Surety Bonds

The two primary types of surety bonds utilized in construction are payment bonds and performance bonds, though they can serve a slightly different purpose for private projects than their federal and state counterparts.

With the help of payment bonds, project owners can mitigate their exposure to financial risk and ensure that everyone, including bidders, contractors, subcontractors, suppliers and construction workers, is paid for the full scope of work they complete. Performance bonds, on the other hand, are put in place to ensure that the bonded scope of work gets completed in accordance with the specific terms laid out in the project contract.

Performance bonds are much less common in private construction projects due to the added cost and because owners, generally speaking, don’t contract with those whom they don’t trust to get the job done. Private owners who have worked with certain contractors before or are aware of their reputation may not need a performance bond to fall back on. If a relationship or solid reputation has already been established, there may be very little performance risk to worry about at the outset.

Challenges With Surety Bonds

Similar to insurance policies, bonds certainly can provide a substantial amount of security for private owners and contractors. That said, there are always obstacles to consider when pursuing a bond with a surety company.

Cost is the main drawback of proceeding with a bonded project. Bonds most often are equal to the contract value, and bond premiums are generally 1-3% of the bonded amount. During significant inflation, people may not be able to take on as many jobs depending on costs associated with their bonding capacity and requirements for a project. If a project costs 20% more to perform, that likewise will consume more of a contractor’s overall bonding capacity. The bottom line is any time you’re requiring bonding on a project, that’s more money out the door from a cost perspective.

The bond claim approval process also presents challenges for parties to navigate. Surety companies don’t just hand out money haphazardly—there are thorough investigative processes that are used to determine whether a bond claim is legitimate. Though sureties can seek reimbursement from the responsible party for any paid claims under the bond, they are initially responsible and cannot always collect.

After a claim is made and submitted to the surety company, the surety will then evaluate the principal party who is obligated to the bond, the claimant, the circumstances underlying the claim, and any defenses that the bonded party may have. This investigative process takes time as payment of a claim is far from automatic.

Additionally, not having sufficient bonding capacity may limit a contractor’s or subcontractor’s ability to work on a given project. Similarly, owners requiring a project to be bonded may limit the pool of potential bidders, thus potentially increasing the cost of the work. Bonding capacity is set by the surety based largely upon previous business and financial operations. Bonding capacity is also partially determined by a party’s track record and the success they’ve had on prior contracts, as well as the volume of work they’re committed to performing.

It’s important to remind clients that every surety company is different. Depending on the methods employed by the underwriter, the level of risk associated with the scope of work and the surety’s determination about a party’s qualifications, some parties might not be able to get bonds approved, or may only be approved at a higher rate.

The Attorney’s Role

Overall, as surety bonds become more commonplace in private projects, construction law attorneys have a responsibility to help clients navigate the benefits, drawbacks and uncertainties associated with bonded projects. Advising clients to ask the right questions from the start and consult with other participants on the project about whether the project should be bonded and what the terms of their contract and bond(s) require will set them up for a more successful project outcome and, ultimately, more fruitful and trustworthy working relationships.

THE USE OF CONSTRUCTION TECHNOLOGY IN SURETY BOND CLAIMS

This article is an easy way to understand the impact that technology has on the construction industry, in terms of how sureties can interact with project management software to foster review and completion… in real time. This incredible savings in time and effort—both impacting cost—is also some of the the core value propositions of electronic surety bond systems like Surety 2000, along with the aspects of accuracy and safety. Those companies that are not embracing technology are short changing their ability to achieve truly successful outcomes in their construction projects.

FROM VERTEX / BY FRANK BENWAY

The use of cloud-based and SaaS project management platforms in the surety’s investigation, monitoring, and completion of bonded projects has increased significantly over the last ten years.

It wasn’t long ago that submittals and shop drawings required that seven or more hard copies be prepared, circulated, and returned in hard copy format. Today, construction management firms, general contractors, subcontractors, project owners, and AEC firms rely on cloud-based technology and Software as a Service (SaaS) platforms for the paperless transmittal and storage of project documents. Digital versions of plans and specifications, submittals, shop drawings, and record drawings, as well as the preparation and tracking of daily reports, change order requests, meeting minutes and more are now are the norm.

There’s little doubt that these platforms, which include Submittal Exchange, Projectmates, and e-Builder, have made a lasting impact on how the business of construction is done. The general consensus is that, when used properly, these innovations are valuable in providing a comprehensive record for continuous access by all project stakeholders.

What does this technology mean for sureties? How does this innovation help the investigation, monitoring, and completion of bonded projects? Here, we examine the role of cloud-based and SaaS project management platforms in the work of surety claim professionals.

EASE OF ACCESS CAN EXPEDITE PROJECT REVIEW AND COMPLETION

Before the advent of these innovations, a surety’s books and records investigation was likely to require the creation of a “war room” in the principal’s office. A copy machine or reprographic vendor would be commandeered to duplicate reams of the project files needed for the surety’s investigation of the project(s) and completion of the bonded obligations. 

Today, a principal or obligee can create login credentials for the surety or its consultant in its project management software. With this “key to the kingdom,” the surety can immediately access and begin to review the (hopefully) robust project record.

In addition to expediting the surety’s books and records review, having the data electronically can smooth the transition of a project to a completion contractor or assist the surety itself in monitoring the project to completion:

• If the surety is bidding the project out to a completion contractor, the surety can easily disseminate the status of project records (submittals, etc.) to the bidders. The bidders can then inspect the project records before completing a proposal and signing a completion contract or tender agreement.

• If the surety is monitoring its principal’s progress on a project, the surety or its consultant can be granted access to the project management portal in order to “keep a finger on the pulse” of the project in real-time.

• Some software platforms allow “read-only” access, which may serve to quell any concerns that a project Owner or Architect might have about giving a third-party real-time access to the project record.

There is, of course, a word of caution. As we all know, any technology is only as good as the data provided. In the case of the investigation or completion of a distressed project, it is not uncommon to discover that a powerful project management software has been underutilized by an overworked project team. For example, the software may have great tools for the management of change orders and project costs. If, however, the incoming change order proposals from subcontractors piled up in the Project Manager’s inbox and have not been entered into the software, the reporting will not be up to date or accurate. For this reason, while access can be a useful tool, it is just one of many factors in the success of the surety’s investigation and books and records review of the bonded project.  

THE ROLE OF THE COMPLETING SURETY IN ENSURING THE CONTINUOUS AVAILABILITY OF A PROJECT MANAGEMENT PLATFORM

As part of the surety’s books and records investigation, the surety should inquire which software platforms for which the principal pays the subscription fees. In the event of a default or termination of its principal, sureties should take care to maintain the continuity of project management platforms that are or were the responsibility of their principal.

While it is expected that the principal pay subscription fees for its own project management tools (i.e. Procore), the specifications of certain projects may require the surety or its contractor to procure the account for the project documents portal. Ultimately, it is in the surety’s best interest to ensure that payments to the platform vendors are current, and perhaps, even consider making interim payments to bring them up to date, as the cost of interruption in access to the data or, worse, loss of the data could prove to be much costlier. 

There is an alternative. Many cloud-based platforms allow for the download of a project archive, which provides a complete copy of the project record as of the time the archive is prepared. Downloading the archive, if available, should be considered a best practice for the investigating or monitoring surety to preserve a copy of the project record. This action can then eliminate the need for the surety to concern itself with the monthly subscription dues by another party. 

THE COVID-19 PANDEMIC AND PROJECT MANAGEMENT SOFTWARE

For sureties, governmental and companywide travel restrictions will likely continue to hinder their ability to travel to project sites and principal’s offices to conduct investigations. Where bonded projects have complete records available through cloud-based platforms, sureties and their consultants may be able to conduct parts of project investigations remotely.  Ultimately, this technology will play an important role in assisting sureties in conducting investigations of their bonded projects and fulfilling the obligations of their bonds during the pandemic and likely for the long-term.

What recession? AIA Consensus Construction Forecast Panel optimistic about the construction outlook for this year and next

With all the “bad news” we are receiving on a daily basis around the economy: runaway inflation, the big resignation, the Fed raising rates, supply chains disrupted like never before, Wall Street in a bear market, etc.. you’d think that the construction industry would be trippin over itself to just maintain a flat growth. On the contrary, not only is the outlook rosy for this year, but also next year according to the AIA Forecast Panel. So if you are in construction, get ready to rock and roll.

FROM AMERICAN INSTITUTE OF ARCHITECTS / BY KERMIT BAKER

Commercial construction recover underway, and key institutional categories are bottoming out, but industrial sector seen as providing disproportionate share of growth

Construction spending on buildings is projected to increase just over 9% this year and another 6% in 2023 according to the mid-year update of the American Institute of Architect’s AIA Consensus Construction Forecast. This outlook is somewhat more optimistic than what was projected at the beginning of the year, largely due to the extremely strong gains in the manufacturing category, as well as surprising strength in retail facilities.

Both categories likely benefited from the gains in consumer spending on goods during the pandemic as spending on services faded. Additionally, supply chain problems that affected the economy over the past two years have encouraged manufacturers to reshore (i.e., supply domestically) a portion of their production while simultaneously increasing their storage capacity to better cope with potential future disruptions.  Warehousing and distribution facilities are classified in the manufacturing category if they are located at the manufacturing site, and otherwise in the retail and other commercial sector. The growth of e-commerce during the pandemic also dramatically increased the need for distribution facilities.

Economic prospects worsen

Somewhat surprisingly, as the prospects for construction spending have improved since the beginning of the year, the outlook for the broader economy has significantly deteriorated. A growing set of economic indicators have turned negative, and many economists feel that the prospects of an economy-wide recession have increased. Among the more worrisome indicators are:

• Stock market declines – a bear market is defined as a 20% decline in stock prices from their most recent peak. This threshold has been crossed in recent weeks.

• Inflation – consumer prices have seen steady gains so far this year, with the June figure showing a 9.1% increase over the past year. Producer prices have been just as volatile, with the price of inputs to construction increasing in the 15% range in recent months.

• Interest rates – the Federal Reserve Board has been aggressively raising short-term interest rates since the beginning of the year to help combat inflation. Three-month treasury bills increased 1.5 percentage points between January and July, with future rate hikes all but assured. The rate for 30-year fixed rate mortgages increased well over two percentage points over the same period.

• Consumer sentiment – consumer sentiment scores fell with the onset of the pandemic in early 2020, but then began to recover. However, as supply chain disruptions caused inflation to accelerate beginning in early 2021, consumer sentiment began to plummet. Currently, consumer sentiment scores are about as low as they have ever been since the University of Michigan began collecting them in the early 1950s. One explanation for the unusually sharp decline in these scores is that they are highly correlated with retail gasoline prices. The recent jump in gasoline prices coupled with growing recession fears has apparently produced concerns over where the economy is headed.

• Business confidence – While business confidence scores, as measured by the Conference Board’s CEO Business Confidence Index, have only turned negative in recent months, they are coming off their highest recorded levels of several decades. The precipitous drop in stock prices and the pessimistic outlook for corporate profits obviously are key factors in this decline.

• Housing starts – the housing and home improvement industries have been one of the few bright lights in the economy during the pandemic. Housing starts nationally increased 7% in 2020 as the pandemic set in, and another 16% in 2021. This year, homebuilding has been on a pace to produce another healthy gain. However, sharp gains in house prices – they have been growing at a 20% annual pace in recent months – as well as increased mortgage rates – have dampened households’ willingness as well as their ability to purchase a home. Since housing is traditionally a leading indicator of the economy, this emerging weakness is a concern for future economic growth.

A strong jobs market

The employment situation is notably at odds with the growing list of negative economic indicators. The economy has added over 20 million payroll positions since the lows of the pandemic, and the national unemployment rate is well below 4%. Businesses have many more positions to fill than there are candidates to fill them, leading to serious labor shortages in many industries.

Still, the national labor force is smaller than it was prior to the pandemic, and there is no shortage of theories offered for this scarcity of available workers. One is that the pandemic encouraged many older workers to retire earlier than might be expected. Another is that the time at home during the pandemic encouraged a “great resignation” where workers are leaving their current employment to look for better paying jobs, or opportunities that provide the option for remote work. However, the most plausible explanation is that workers have been responding to the unique circumstances of the pandemic where there were unusually high levels of illness coupled with child-care and other family-care responsibilities that prevented these caregivers from re-entering the labor force.

What’s the evidence of this? Despite a recent decline in the size of our labor force compared to pre-pandemic levels, the number of men in the labor force has increased by almost 600,000, while the number of women has declined by almost 700,000. This theory is reinforced by the age distribution of the labor force. The age category that saw the steepest labor force losses over the past two years is 18–34-year-olds, which suggests that child-care or other family-care responsibilities may have encouraged many women to leave the workforce.

Building activity finally recovering

The construction industry is not without its own set of challenges. Supply chain disruptions coupled with general inflation has pushed up inputs to construction by almost 15% over the past year. Most contractors are facing labor shortages which pushes out construction schedules, and rising interest rates are lowering commercial property values, thereby making new construction projects less profitable.

However, challenges to the economy and the construction industry notwithstanding, the outlook for the nonresidential building market appears promising for this year and next. Construction spending has picked up through the first half of the year, particularly for retail and manufacturing facilities. The AIA’s Architecture Billing Index (ABI) points to further growth in the coming quarters. The ABI has been positive every month since February 2021, and for over half of these months the ABI score was at least 55, considered to reflect very healthy growth in revenue at architecture firms.

Furthermore, new project work coming into architecture firms, as well as inquiries for future projects, have been very strong, indicating design revenue at architecture firms will continue to grow. Growing workloads have pushed up backlogs at architecture firms, now averaging seven months and near their highest level since before the Great Recession.

Since the ABI has been shown to lead construction spending activity by 9-12 months, the building construction market is projected to see healthy gains this year and into 2023. The AIA Consensus Forecast Panel is projecting a 9.1% increase in spending for nonresidential buildings this year, and an additional 6.0% next year. The commercial construction market is projected to see mid-single-digit percentage gains both this year and next, spurred by strong growth in the retail and other commercial facilities. Modest gains in the office sector this year are expected to accelerate a bit in 2023, and the hard-hit hotel sector is finally projected to recover next year.

While the industrial market is expected to pace the building construction upturn this year and next, the institutional sector is forecast to begin its recovery this year and accelerate moving into 2023. Given the diverse collection of facilities in this category, the institutional recovery will be uneven. Construction spending in the healthcare sector never declined during the pandemic, and this strength is projected to continue with 5%-6% gains both this year and next.

The education market suffered from remote learning as there was less immediate need to renovate older facilities or build new ones. However, with most educational institutions back to in-person formats, modernization and added space needs will be more apparent, with growth projected at 2% this year and an additional 5% in 2023. Finally, there is significant pent-up demand for amusement and recreation facilities as these activities begin to return to normal and delayed projects come back on-line. The forecast panel is projecting upper-single digit percentage gains in spending for this category for both this year and next.

Top 6 Construction Project Challenges

At Surety2000, many of our clients are in the construction industry and associated trades.  We talk to them constantly and try to be a good partner in anticipating their needs in regard to bonding.  As such, we found this great article that outlines some of the construction project challenges discussed in our office by our team every day and felt that perhaps it would be great information to share.  Many of you will recognize these situations and hopefully have learned how to mitigate them or avoid them completely.

FROM OUR FRIENDS AT MICHAELPAGE

There are many potential pitfalls in the life of a construction project. Project managers are tasked with keeping a site running smoothly, safely, within schedule and on budget. Sometimes, this is a very difficult ask.

According to one study, 98% of construction projects come in over-budget and 77% of them suffer significant delays.

So, what is leading to these delays and budget issues, and how can project managers prepare? Here are just six typical challenges facing a construction project, as well as some proactive strategies to curb them.

1. Inadequate Risk Management

Often, project managers put safeguards in place for long-term risk. Short-term issues, however, often are left out of the equation. These issues can snowball quickly and start to have a real impact on the bottom line.

Whether it’s subcontractors that turn out to be unreliable, scheduling conflicts, or the changing tastes of stakeholders, any seemingly small issue could derail a project. Therefore, it’s important to have contingency plans. Build some wiggle room into schedules, and make investments in programs like safety training to avoid any of those potential issues.

2. Lack of Structure

Without clear goals, it’s difficult to get things done in an efficient manner. A construction project can easily fall behind or run over budget (or both) if people don’t have a clear target they need to hit. And without these goals, it’s difficult to hold people accountable for their part in a project.

Performance management is a key aspect of project management. In order to implement this and keep everyone on task, they all need clear tasks to perform. Break down bigger, project-wide goals into smaller, daily targets for individuals to accomplish. If something isn’t done one day, it’s compounded into the next. Keep people accountable through set processes. This way you can keep the whole project from crumbling beneath you.

3. Poor Communication

Communication is an important tool in any profession, but it’s especially important when work is delegated amongst various parties. Without clear and effective communication, important tasks can slip through the cracks and the team can remain unaware of an issue until it’s too late to rectify. Therefore, project managers need to enact clear guidelines.There should be communication up a clear ladder that informs the team of any progress or obstacles at the end of each day. This way, problems can be solved proactively. If in-person meetings are not an option, using different types of software could be an excellent solution.

4. Unrealistic Expectations/Bad Forecasting

Some clients and stakeholders may make some big asks. Whether they want a project completed on an accelerated schedule or on a limited budget, there may be some challenges that come with their expectations. While some things are possible for a skilled project manager, some things simply aren’t. Working with unachievable goals can actually hinder productivity; why exhaust yourself working overtime when you’ll only fall short despite your effort? Some of these expectations are set due to bad forecasting. It could be that this forecasting, much like risk management, focuses on the long-term instead of the short-term. Break those forecasts down into monthly, weekly, and daily goals to see if they are actually achievable. Then, if necessary, communicate the issues with stakeholders. Provide an alternate plan so that they can see an aggressive, yet achievable timeline or budget. Manage expectations from the beginning and you can set up a winning project.

5. Delayed Cash Flow

The construction business relies on invoicing, which can sometimes be an outdated system. And if payments fall behind, it could negatively impact a company’s cashflow. This can in turn dry up a well of funds for other projects and cause delays.

Therefore, systems of invoicing need to evolve. With improved software and enough follow through, construction companies can ensure that cashflow does not affect other projects negatively.

6. Limited Skills

Construction is very much a reputation-based industry. People tend to work with people they know and trust. This can often be a great thing, as teams who know how to work together can be incredibly efficient. But when there is a skills gap in the team, it could cause some delays.

The solution is to be aware of these skills gaps before they have an impact on the project. Once you detect these gaps, you can fill them quickly and efficiently.