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The Big Question in Surety Claims: Am I Going to Hit the Penal Sum?

Partner's surety expert Jim Carlson gives a rundown of the process of assessing and estimating the cost to complete a troubled construction contract.

Estimating the Cost to Complete a Troubled Construction Project

It’s the first and most important question our surety clients ask at claims intake: am I going to hit the penal sum? Unfortunately, it’s not a question that can be answered quickly—you’ll need a thorough assessment of the project status and an accurate estimate of the cost to complete it in order to compare it to the penal sum. Here’s a rundown of that assessment process.

First, determine how much work remains to be completed. Do not rely on a pay app review to make this determination. It may be necessary to perform a site visit to verify what portion of the scope has been completed and whether it has been completed satisfactorily. Is any rework necessary?

Then, prepare an estimate of the cost to complete the project including a detailed quantity take-off. Inventory any materials on site which may be used to offset the cost of completion. In your estimate, be sure to consider factors that may have changed since project initiation, such as:

  • Will you be ratifying existing subs or paying premium for new subs?
  • Are there mobilization/remobilization costs?
  • Has the cost of material or labor escalated?
  • Is the site still functional? Do you need to include overhead costs such as a trailer or utilities?

Once you have an accurate picture of what it will cost to complete the project, you’ll need to come up with a figure for outstanding costs associated with the work completed to date.  How much has the claimant already paid the obligee? Are any invoices outstanding? Have subcontractors and vendors been paid current? Don’t forget to include change orders in this review.

Finally, assess the cost associated with the default and the claim itself. Is the claimant entitled to compensation for delay or loss of productivity? What about attorney’s fees, or the cost of claim preparation?

Sound like an ordeal? It can be. The process described above requires both technical expertise in construction (often in subspecialties as well) and adequate time to perform a thorough investigation and calculation. If you’re short on either of those, a qualified consultant can complete it for you, and help you make the determination whether to pay out the claim or see the project to completion.