MBEX Has the Scoop

Construction Bond Claims - Part 3

So far, we have covered Bid Bonds and Payment Bonds. For our third and final exploration of bonds claims, we will take a look at Performance Bonds.

-------

Performance Bonds, a common type of surety bond, are issued either by a bank or surety company and provide a guarantee that a contractor will finish a project on time while meeting the agreed-upon specifications. Should a contractor fail to deliver on a project, either by not completing it or otherwise failing to meet their obligations, the developer of the project can attempt to recover their losses by demanding payment equal to the bond's value. This is known as "calling the bond."

It's been said that handling a performance bond claim is like driving an ambulance and not a hearse. Every claim has varying levels of urgency, cooperation/agreement among the participants, and unique challenges. 

When a bond obligee, the project owner, decides to call a performance bond, the claims process is set into motion. When a call is made on the performance bond, the first thing the surety company will do is launch an investigation.

The typical process is as follows:

- Acknowledge receipt of the claim and send an intial request to the project owner for information and documents;
- Send an intial request to the principal for documented position;
- Review the underwriting file, which is comprised of a credit file and a bond-specific file;
- Review the contract documents and bond form;
- Perform an accounting of remaining bonded contract funds;
- If appropriate, assemble an investigative team, which can include outside legal counsel, a construction consultant, and sometimes an accountant; and
- Attend a site visit and in-person meetings.

If the surety company determines that conditions have been met when the performance bond is called, they will then move on to one of four different options for handling the situation:

1.) Help finance the principal,
2.) Find a new contractor,
3.) Complete the project, or
4.) Do nothing.

-------

The right surety partners will work with contractors to avoid claims, and if the situation is unavoidable, to mitigate the severity of it. Choosing the right surety with a track record of resolving claims while minimizing legal fees is important for any contractor to consider. 

Construction Bond Claims - Part 2

Everyone appreciates getting paid for the work that they do, but rarely do employers have to take out a special type of bond just to guarantee that they’ll pay their employees, subcontractors, and suppliers. This is where a Payment Bond steps in, the second type of construction bond we are exploring this week. 

------

To start, what is a Payment Bond? A payment bond is a type of surety bond issued to contractors that guarantees all entities involved with the project will be paid. A payment surety bond is a legal contract, a type of bond, that guarantees certain employees, subcontractors, and suppliers are protected against non-payment. Other common names for these include "construction", and "labor and material". In government contracting, these bonds are sometimes referred to as "Miller Act Bonds".

A payment bond is one type of surety bond that most government projects require of all contractors bidding on their projects. Surety bonds are also becoming more popular on commercial projects.

A payment bond claim arises when the principal (known also as the contractor) fails to pay subcontractors, laborers, and/or suppliers. Generally the surety has the right to assert all of the principal's defenses as well as its own surety defenses --- which commonly include notice and time limitations. Notably, the bond provides recourse for only proper "claimants," so the principal and surety need to confirm the claimant has standing to pursue the claim. The project owner, or person hiring the contractor, will indemnify themselves through this type of surety bond in-case they become liable for unpaid employees, subcontractor or suppliers.

When might you need a payment bond? Payment bonds are typically used in conjunction with performance bonds and are oftentimes even on the same bond form. Contractors purchase payment bonds when negotiating a construction contract to reassure those working with them that they will be paid appropriately and on time.

-------

In short, as long as a contractor has clear means to pay their employees, subcontractors, and suppliers, they should be able to qualify for a payment bond. This will allow the contractor to bid on a much wider range of construction projects.

Construction Bond Claims - Part 1

Contractors always work to avoid claims situations, but should also be proactive about understanding the process. There are 3 main types of construction bonds: bid bonds, payment bonds, and performance bonds. Contractors should be familiar with the claims that can arise from each. This week, we take a look at Bid Bonds.

------

First, what is a bid bond? A bid bond is issued as part of a supply bidding process by the contractor to the project owner, to provide guarantee, that the winning bidder will undertake the contract under the terms at which they bid. 

The cash deposit is subject to full or partial forfeiture if the winning contractor fails to either execute the contract or provide the required performance and/or payment bonds. The bid bond assures and guarantees that should the bidder be successful, the bidder will execute the contract and provide the required surety bonds.

A bid bond claim arises when the contractor, also known as the "supplier" or "principal," is the successful bidder but fails to enter into the contract and provide final bonds.

Generally, the principal and surety are bound to pay a stated sum (for example, 5-10% of the contract price) to the owner (or general contractor), also known as the"obligee". The principal and surety should make sure the bond form caps liability at a defined amout --- typically the difference between the principal's bid and the bid of the next highest bidder, not to exceed the penal sum of the bid bond.

Contractors prefer the use of bid bonds because they are a less expensive option and they do not tie up cash or bank credit lines during the bidding process. Owners and general contractors also use bid bonds because they establish and confirm that the bidding contractor or supplier is qualified to undertake the project.

-------

Leveraging one's relationship with the right surety gives a contractor the knowledge and experience of their claims team. Knowing the basics is the first step for any contractor who wants to take on bonded jobs.

The Most Valuable College Majors are Construction-Related

A recent analysis from Bankrate, a publisher and provider of financial product comparison tools, shows three of the five top-earning and most secure four-year college majors are related to the construction industry.

An engineering degree of any kind offers a clear path to steady employment and a solid income. But once engineering specialty stands out. Architectural Engineering --- a discipline focused on the science of buildings --- ranks #1 of Bankrate's latest look at 159 college degrees. Compared to civil engineers who learn to build roads and bridges in addition to buildings, architectural engineering emerged as a distinct major for students who want to focus primiarily on buildings.

Construction services came in as the #2 most valuable major, followed by computer engineering. Electical engineering came in as the highest-paying degree.

For this study, Bankrate looked at the median incomes and unemployment rates of American workers based on the subject of their bachelor's degrees. The higher the income level and the lower the unemployment rate, the better.

Not surprisingly, STEM majors (science, technology, engineering & math) make up everyone of the top 25 degrees in the study, with engineering degrees claiming eight of the top 10 spots and 14 of the top 20 spots.

Here are the Top 20 College Majors, ranked by Bankrate:

1) Architecutural Engineering
2) Construction Services
3) Computer Engineering
4) Areospace Engineering
5) Transportation Services & Technologies
6) Electrical Engineering
7) Materials Engineering & Materials Science
8) Civil Engineering
9) Mechanical Engineering
10) Chemical Engineering
11) Engineering Mechanics, Physics & Science
12) Pharmary, Pharmaceutical Sciences & Administration
13) Industiral Production Technologies
14) Health & Medical Prepatory Programs
15) Electircal Engineering Technology
16) Metallurigcal Engineering
17) Industrial & Manufacturing Engineering
18) Materials Science
19) Miscellaneous Engineering
20) Naval Architecture & Marine Engineering

Source: Bankrate's 2021 ranking of the most and least valuable college majors

Of course, students shouldn't pick their college major based on future income, unemployment rate and the amount of schooling required. STEM degrees aren't for everyone; studnets wlll be their most successful pursuing a field that's interesting to them. 

-------

To read more about Bankrate's study and a full look at the 159 ranked college degrees, click here.

7 Books for Construction Professionals

Construction is a constantly evolving field. In order to be the best, one must remain competitive and stay on top of the latest trends. You need a solid understanding of construction fundamentals to leadership to project management.

Now, no one is going to disagree that the best way to learn construction of any kind is to get out in the field. But, a little reference material never hurt.

In honor of National Author’s Day, we’ve scoped out a handful of titles and recommend them to those starting a construction career or wanting to advance their skillsets.

Construction Management Jumpstart: The Best First Step Toward a Career in Construction Management by Barbara J. Jackson
- If you are just getting started in construction management, this is a must-have. Not only will you learn the fundamentals of the industry but this well-organized guide provides a step by step walk-through of all stages of project management including project costs, administering contracts, monitoring performances and safety and more. Think of this as your A-Z guide for project management from estimating, scheduling, to new technology and safety.

Markup & Profit: A Contractor’s Guide by Michael C. Stone
- Described as a great book with clear and practical advice, this one is a must read.

Code Check Complete: An Illustrated Guide to the Building, Plumbing, Mechanical, and Electrical Codes by Redwood Kardon, Douglas Hansen, & Paddy Morrissey
- More practical than the others on this list, but a solid reference book nonetheless.

Contractor’s Survival Guide by Jason Reid
- This book focuses on solid principles for any business, but with a construction angle.

Construction Business Management: What Every Construction Contractor, Builder & Subcontractor Needs to Know by Nick Ganaway
- With over 25 years as successful commercial contractor under his belt, Ganaway offers real-world advice from marketing to hiring, and even how to get paid.

Construction Leadership Success: The Construction Foreman’s Definitive Guide for Running Safe, Efficient, and Profitable Projects by Jason C. McCarty 
- McCarty shares great advice for managing teams and projects with an eye for the construction industry.

A Builder’s Guide to Accounting by Michael Thomsett
- This one helps to build a solid understanding of accounting – good even if you’re using accounting software.

And, we have a few recommendations for the kids, too:

Rosie Revere, Engineer by Andrea Beatty
- A New York Times best seller, this story follows a little girl who sees inspiration everywhere.

Goodnight, Goodnight, Construction Site by Sherry Dusky Rinker and Tom Lichtenheld
- Called “a standout picture book, especially for those who like wheels with their dreams.”

Architecture According to Pigeons by Stella Gurney
- This one is for slightly older kids, but it gives an overview of famous structures.

Who Made This Cake? by Chihiro Nakagawa and Junji Koyose
- What if we built cakes the way we build buildings? This is what would happen. It’s a Horn Book Fanfare Award-winner, too.

Members Approve SCBX + MBEX Merger

Members of both the St. Cloud Builders Exchange (SCBX) and the Minnesota Builders Exchange (MBEX) held and completed a vote to approve the merger of the two organizations, and the vote passed near unanimously.

This decision paves the way for an effective merger date of November 1, 2021. On November 1, active members of SCBX will become MBEX members for a complimentary trial period of 60 days. Terms of the merger call for MBEX to continue operating two physical plan rooms located in Minneapolis and Duluth, expanding social events to include the St. Cloud area, access to the MBEX Online Plan Room, and two special-term MBEX Board seats offered to former SCBX Board members.

St. Cloud members will be receiving further information, such as Plan Room log-in and membership benefits information, directly from MBEX very soon. 

If there are questions about the merger, the merging process, membership or its benefits, please reach out to one of the following individuals:

- Tom Getzke, MBEX Executive Director: tg@mbex.org | 612-381-2625
- Ashlee Hartwig, MBEX Membership & Communications Manager: ah@mbex.org | 612-381-2631
- Lisa Berezni, SCBX President: lisa@negenarchitects.com | 320-250-3304
- Brian Kalla, SCBX Vice President: brian@stcloudacoustics.com | 320-363-8585
- Steve Sauer, SCBX Board Member: steves@ericksonelectricmn.com | 320-290-3943

The approval of this merger marks the third time MBEX has expanded membership and services to the regional commercial construction industry. In 2013, the Builders Exchange of St. Paul merged with the Minneapolis Builders Exchange to form MBEX. The Duluth Builders Exchange then merged with MBEX in 2019.

To learn more about the merger and its terms, please click here.