MEC&F Expert Engineers : 10/16/14

Thursday, October 16, 2014

DISTRESSED PROJECTS AND SURETY CLAIMS

DISTRESSED PROJECTS AND SURETY CLAIMS
https://sites.google.com/site/metropolitanforensics/distressed-projects-and-surety-claims
Construction owners and contractors know all too well the risks involved in completing projects.  Often, conflicts are inevitable – and when they occur, they are always expensive.  Vague contracts, insufficient communication, and lack of transparency combined with project changes, complex construction, and time constraints increase the exposure of all parties to disputes and claims.  



Corporate sureties issue bonds to a party (Obligee) to guarantee performance (performance bond) or payment (payment bond) of an obligation by a third party (Principal).  The Surety assumes liability for non performance or nonpayment in case the terms of the obligation or contract are not performed and there is no defense to the claim.  Often a surety will dispute liability because its Principal is not liable or because the surety itself has a defense to the claim of the obligee.
When a contractor defaults and is unable to complete a construction project or cannot pay a subcontractor (i.e., does does not fulfill its bonded obligation), the Obligee can make a claim demanding that the surety company satisfy the obligation or pay the bond penalty.  The surety company has the right to reimbursement from the principal in the case of a paid loss or claim.  In these situations, Metropolitan can help.

Surety's performance options under a performance bond claim
Surety's investigation
A surety's first obligation upon receiving a performance bond claim is to commence an investigation of the claim.  The surety's investigation is a fact-finding exercise intended to promptly determine whether the bond principal is in default of its contractual obligations and if so, whether the surety has liability under the performance bond.  Because the surety's investigation will determine its response to the claim, it is important that the surety conduct the investigation in an expeditious and comprehensive manner and gather as much information as is reasonably available.

In making its investigation, the surety should gather information from as many sources as possible including the surety's own files, the obligee, and the bond principal.  After receiving a notice of a claim from the obligee, the surety should acknowledge the claim, request further documentation to substantiate the claim, and reserve its rights and defenses.  The surety should also send a letter to the principal and the indemnitors under the Agreement of Indemnity, notifying them of the claim, of the surety's exposure to potential losses under the bonds issued on behalf of the principal, of the principal's duty to cooperate with the surety during its investigation of the claim, and of their indemnity obligations under the Agreement of Indemnity.

Under many performance bonds, before a surety is required to act, the obligee must formally declare the principal in default of its contractual obligations.  Depending upon the bond form and its interpretation by the courts, an obligee's failure to comply with the bond provisions or the underlying contract terms incorporated by reference under the bond for declaring a principal in default may discharge or exonerate the surety's liability.  When the bond does not require the obligee to declare a default and the obligee has not terminated the principal, but the surety has been advised that the principal is in default of its bonded obligations, it may be prudent for the surety to begin its investigation.

Surety's use of construction consultants
A construction consultant is an engineer or construction manager who specializes in project and construction management.  At the preliminary stage of the bond default process, the construction consultant can furnish information such as the following:

·                     the percentage of completion of the principal's work;
·                     the quality of the work;
·                     the projected completion date;
·                     estimates of the cost to complete the work, either by the principal or another contractor; and
·                     the identification and analysis of claims made by the principal, the obligee, or subcontractors.
If the surety decides to procure bids for the completion of the contract, the construction consultant will put together the bid package and evaluate the bids.  If the surety takes over the completion of the work, the construction consultant will:

·                     monitor the completion of the work by the completion contractor;
·                     approve requisitions for payment submitted by the completion contractor; and
·                     act as a liaison between the obligee and the obligee's project representative.

Generally, a surety needs a consultant whenever the surety's own personnel lack the skill, knowledge or expertise to perform the investigation.

The Surety's may also use legal consultants to provide services in the following areas:
·         the identification and evaluation of defenses that may be available to the surety;
·         the interpretation of legal documents;
·         the drafting of documents relating to the bond default, including takeover agreements, completion agreements, tender agreements, tri-party agreements, etc.
·         the handling of litigation that arises from the bond default, such as claims against performance bonds and payment bonds, and recovery actions against the principal and indemnitors;
·         participation in meetings and negotiations related to the bond default;
·         miscellaneous services.

The Surety may also need accounting consultants to provide services related to ascertaining the principal's financial condition to enable the surety to determine its exposure to loss from the bond default and to enable the surety to assess which option it should choose to respond to the default.  Technical consultants to advise the surety on specialized issues of engineering that may arise in connection with a bond default. For example:

·                     If there was a structural failure on the project, the surety may need to retain a structural engineer to analyze the adequacy of the design.
·                     A surety may need to retain an architect or engineer to review the competency with which the plans and specifications for the project were prepared.

Surety's performance options
Once the surety completes its investigation, it must decide the most appropriate means of responding to the performance bond claim.  Generally the surety has six options:
·                     take over and complete the project;
·                     tender a new contractor;
·                     finance the bond principal's completion of the work;
·                     indemnify the obligee;
·                     buy out the bond obligation; or
·                     deny the claim.

Defenses to performance bond claims
The surety can assert all of the defenses of its principal including:

·         the obligee's failure to provide plans and specifications that are free from defects;
·         the obligee's failure to act - Unreasonable delays by the obligee, as well as the obligee's failure to act, may constitute a breach that will relieve the principal, and ultimately the surety, from liability;
·         impossibility of performance – A determination that work which the principal was to have performed has become impossible to perform can be a defense available to the surety;
·         the obligee's wrongful termination of the principal's contract;
·         the obligee's failure to provide notice to the principal and an opportunity for the principal to cure incomplete or inadequate performance;
·         setoffs or counterclaims – A surety is entitled to assert any setoffs available to its principal against the obligee.

The surety must be given notice of default and the opportunity to perform.  When notice of default is required under the bond, the declaration of default must be stated in clear, direct, and unambiguous terms; and a failure by the obligee to provide the principal and the surety with an opportunity to perform (i.e. cure incomplete or inadequate performance by the principal) can discharge the surety from liability under the performance bond.

Another defense available to a surety is a material alteration of the underlying contract.  A material alteration is a nonconsensual increase of the surety's risk by some act of the obligee that changes the bonded contract.   A material alteration is a fact-dependent inquiry often to be decided by a jury.  Relatively minor changes do not amount to material alterations.  The alteration must be a material, substantial departure from the original risk so that a reasonable person would either have not undertaken the risk at all, or would have charged a greater premium;
Other defenses of the surety include:
·         Overpayment by oblige;
·         Termination for convenience;
·         Release of principal;
·         Failure to mitigate


Surety's performance options under a payment bond claim
A payment bond is also known as a labor and material bond.  It is a contractual guarantee to the owner-obligee that the surety-obligor will pay labor and material suppliers and subcontractors should the contractor-principal fail to pay.  In the event the principal or its subcontractors fail to pay persons or entities who supplied labor and/or materials to them, the surety is obligated to step in and pay the entities the amount owed to them, up to the penal sum of the bond.  A payment bond limits claimants on the bond to those having a direct contract with the principal or with a subcontractor of the principal.  Generally, an owner-obligee cannot make a claim against a payment bond.

Investigation of payment bond claim by surety
When a surety is presented with a claim under a payment bond, it should contact its principal and request that the principal acknowledge the amount of the claim or explain why the claim should not be paid.  The surety should also acknowledge receipt of the claim and inform the claimant that it has begun its investigation by contacting its principal.  This acknowledgment should include a reservation of rights.  The acknowledgment to the claimant should also request a description of the claim, the basis for the claim and supporting documentation for the claim.  If the surety determines that the claim is covered under the bond, its payment to the claimant should be in consideration for a release of the surety from the claim and the assignment of the claim against the principal to the surety.  If the surety concludes that the claim is improper, the surety should advise the claimant of its decision to deny the claim.  However, if any portion of the claim is determined to be undisputed, the surety should tender payment of the undisputed portion and obtain a partial Release and Assignment from the claimant.  As part of the investigation process, the surety should consider hiring a construction consultant as under the performance bond procedure.

Defenses to payment bond claims
A payment bond surety has a number of defenses that it can assert to payment bond claims including the following:

·         the principal's defenses;
·         the principal's setoffs/counterclaims;
·         the claimant's material breach of contract;
·         the failure of the claimant to give proper notice;
·         the failure of the claimant to commence suit within the time prescribed by the bond or by statute;
·         the failure of the claimant to bring suit in the proper court;
·         the penal sum of the bond as a limitation of liability;
·         the claimant's failure to mitigate its damages; and
·         defenses based on particular subcontract provisions, including the pay-when-paid and pay-if-paid defenses.
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METROPOLITAN’S CONSTRUCTION SURETY SERVICES
Metropolitan offers Surety Construction Claims analysis and Distressed Project Completion services.  We clearly understand the urgency of performing risk evaluations during construction default situations for sureties.  Our team assists Prime Contractors, Subcontractors, Owners, Attorneys, Sureties and Insurance companies in construction disputes and surety bond claims involving contract performance issues on building, industrial and civil projects.  Our breadth of experience in the construction industry provides us with the well-rounded skill set to offer the array of services necessary to efficiently and effectively resolve surety claims and assist the owner to complete construction on distressed projects.
To that end, we specialize in the investigation, independent evaluation and resolution of all types of surety claims regardless of the stage of the claim.  We have been assisting and/or managing technical and construction issues related to performance, payment, and non-contract surety bond disputes and claims. This includes analysis and oversight of the completion of medium to large construction projects with the goal of resolving claims and disputes.  Our involvement can begin anytime from the initial filing of a claim to the oversight of the completion of defaulted work.  Regardless of the stage of the claim, our basic approach remains the same:
·         we start with in-depth research of project documentation and data collection;
·         sort out information relevant to the dispute issues;
·         interview project team members;
·         analyze evidence gathered; and
·         generate an objective evaluation of the claim issue based upon the contract terms, including:
·         Delay
·         Disruption
·         Acceleration
·         Design defects
·         Termination
·         Differing site conditions
·         Change order impacts
·         Suspension
·         Consequential damages
·         Analysis of filed liens



As part of our investigations and analysis, we provide many, if not all of the following services:
·         Bid review and analysis
·         Bonding score
·         Assess the work completed to date and inventory the project site
·         Perform investigative cost audits and forensic review
·         WIP report review
·         Generate benchmark and “cost to complete” construction estimates
·         Prepare default reports
·         Analysis of filed liens
·         Provide on-site project management from our staff of professionals
·         Analyze project schedules and generate alternative recovery schedules (delay analysis)
·         Generate a financial impact analysis and recovery plan
·         Perform performance bond, and payment bond claim review and analysis
·         Perform Fidelity Bond claim analysis and evaluate claims presented
·         Make recommendations to Surety Counsel as to choice of remedies (default, cure, takeover or relet) and participate in establishing loss and expenses reserves
·         Perform project re-lets/Ratification of subcontractors and vendors
·         Completion strategy and protocol analysis
·         Project Completion Management
·         Perform change order review/claim preparation and negotiation
·         Discovery assistance and deposition package preparation
·         Forensic investigation of architectural and engineering issues
·         Project Monitoring
·         Assist in negotiating and settling, tender, takeover, completion, joint escrow, sub-contract and other contractual agreements necessary to discharge surety's obligations, working with Surety Counsel.
Our experience in both the technical application and practical aspects of surety claim investigations results in thorough, prompt, and cost-effective analysis and resolution of each unique case that comes our way.  Our experience includes claims analysis, delay analysis, surety completion services, construction management and administration, preparation and review of contract documents, partnering facilitation for major construction projects, and litigation support.
Metropolitan has directed and performed virtually all types of claim analyses including delay and inefficiency (typically using measured mile for inefficiency); assessed responsibility for contract changes, and calculated various types of delay damages. Metropolitan has analyzed claims on commercial, healthcare, educational, highrise, highway, government, residential, prison, environmental remediation, and transit projects.  Metropolitan has provided these analyses during the project to help the project team resolve disagreements and avoid disputes; and after the project has completed to help the parties resolve their differences without resorting to costly litigation.






Extensive Experience helping Sureties
Metropolitan also has extensive experience helping sureties fulfill their bond obligations resolve disputes after a contractor has defaulted.  This work includes the evaluation of contractor bid pricing, evaluation of the contractor’s ability to perform work, risk assessment, evaluation of termination, construction completion services, claim and litigation support services, loss recovery services, evaluation of payment bond claims, negotiation and settlement of payment bond claims, and construction defects investigation services.  Metropolitan has provided these services for commercial, development, educational, and assisted living projects.



Where after contractor default and demand upon the surety is made, and the remaining balance of contract funds are insufficient to cover the costs needed to complete the contractor’s scope of work, the surety may look to third parties to recover some or all of the losses it is about to incur.  This section of the materials will discuss the viability of such claims, and some of the defenses that may be asserted against them. 
Underlying the surety’s claim against third parties is that their errors or omissions impaired the surety’s rights, diminished the contract balance, or increased the surety’s risk of loss.  Most often the acts of the architect will come under scrutiny.  Other potential targets include accountants, lenders, construction managers, inspectors, engineers and other design professionals.  The most common assertions by the surety against the design professional are: (1)  failure to properly inspect work in place, (2) failure to properly supervise the contractor, (3) failure to timely respond to RFIs or submittals, (4) premature release of retainage, and (5) failure to properly certify contractor pay applications resulting in over payment of the contractor. 


As projects become more complicated, underwriters face ever-increasing challenges in determining a principal's capabilities. A pre-bonding evaluation by our technical experts can help you write more business by proactively identifying risk and can also help prevent sureties from bonding principals who may only be exhibiting the subtlest signs of difficulty. You can request an evaluation of a principal or project before a bond is ever issued. As a full service surety claims consultant our services include:
  • Credit relationship investigations
  • Prior surety experience investigations
  • Banking relationship investigations
  • Management investigations
  • Principal accounting and financial reviews
  • Indemnitor accounting and financial reviews
  • Bid evaluation and assistance
  • Cost estimate reviews
  • Budget reviews
  • Cash-flow analysis
  • Contractual commitment investigations


Metropolitan’s Disbursement Control Services insure that construction funds are disbursed from an independent third party and specifically directed to the bonded project. Synchronizing payments with objectively verified completed work remains the best way to instill new levels of accountability and efficiency. The degree of our involvement relies solely upon your discretion. Surety consulting services include:
  • On-site job inspections
  • Direct application of project funds
  • Itemized project accounting
  • Specialized surety requirements

Metropolitan distinguished itself decades ago for our ability to respond to problems quickly and decisively, demonstrating our ability to reduce surety losses. Often, it isn’t enough to determine what went wrong. You need a partner who helps make things right, compensating for any lost time and money. The key to our successful track record rests in the depth of analysis and expert execution only Metropolitan can provide. Our surety consulting services to you may include:
  • Default and termination investigations
  • Cost-to-complete reviews and estimates
  • Bid procurement
  • Project relet
  • Principal or relet contractor monitoring
  • Settlement negotiations
  • Specialized surety requirements
  • Principal affirmative claim and defensive claim analysis and preparation
  • SBA audit coordination and support
  • Errors and omissions reviews
  • Accounting and financial reviews
  • Financial and operations monitoring
  • Project management monitoring
  • Project completion

CONSTRUCTION DEFECTS SERVICES


Metropolitan specializes in addressing and resolving disputes involving public work projects, business/commercial disputes, complex construction defect, environmental health and safety issues, construction delay and contractual matters, partnerships, homeowners association, retail centers, and real estate issues.  Our three decades of forensic experience includes advanced research and analysis of code, materials and building practices, as well as the development of comprehensive repair methodologies for maximization of repair and restoration efficiency.  We have financial and legal education, expertise and experience that we used to better focus our engineering arguments and presentations to the various parties.  We have successfully participated in dispute resolution mediation, arbitration, and settlement procedures on numerous occasions.



Metropolitan’s design experience includes civil site improvements for single family housing, multi-family housing, commercial and industrial land development, roadways, public works construction, pipelines, reservoirs, pump stations, hydraulics and hydrology, and environmental impacts of construction defects.  We are also proficient in all aspects of claims handling and management, including damage, liability and coverage issues, reserving, risk transfer, auditing, litigation management and expense control measures.


We are effective negotiators and work hard to resolve cases in a manner that avoids the additional time and expense of a trial.  We help both insurers and insureds with water damage claims regarding:
  • Stucco: When a builder improperly installs stucco or the building paper behind it, water can seep in and cause damage to the building's framing and sheathing.
  • Siding: When a builder improperly installs vinyl or steel siding or the housewrap behind it, water can seep in and cause damage to the building's framing and sheathing. Additionally, poor installation may cause the vinyl or steel siding to warp or buckle.
  • Leaky roofs: Roof leaks are often caused by faulty construction, including poor shingle installation, failure to install kickout flashing and the use of defective shingles.
  • Foggy, leaky, or improperly installed windows: Improperly installed flashing can allow water to seep around and through the windows and into a property. This can damage the windows, causing them to rot. It can also cause damage to the building's framing and sheathing.
Water leaks can quickly damage and ruin property. And, left uncorrected, water leaks can lead to pervasive mold growth.  We assist our clients in addressing these construction defect and property damage claims against their builders to repair these problems. From our offices in several Northeast and Midwest states, we assist clients facing construction defect issues across a ten state coverage area.


We understand the different needs faced by individual and commercial policyholders, as well as community associations and farm and ranch policyholders. As an individual policyholder, you may be concerned about where you will sleep and live, as well as additional living expenses. As a commercial policyholder, you may be most concerned with recovering for your business interruption and lost profits. Either way, we can work hard to secure the results you need.



Metropolitan has extensive experience in the fields of moisture/water infiltration/intrusion, roof system failures, lath, plaster, mortar, stucco, drywall, dimensional stone, handset applications, prefab installations, light-gauge metal stud, fireproofing, architectural pre-cast concrete, and EIFS for all types of facilities.  Our skills and experience include design, construction estimating, material take-offs, site inspection, corrective construction detail, scheduling, subcontractor and field crew coordination, contract drafting and execution, worker and environmental health and safety.



We have handled thousands of factual issues dealing with:
·         Delay, disruption, extra work and impact claims;
·         contractual change orders;
·         standard of care;
·         cost of repair;
·         scope of work disputes;
·         mechanic’s liens;
·         stop notices;
·         bid protests;
·         errors and omissions;
·         environmental matters, including mold;
·         construction defects, as well as contract drafting and review;
·         green technology defects, including vegetative roof systems and wind turbines;

We are including our web address below, should you wish to find out more about us and our services.  We are very competitive.  We will beat every competitor’s prices and quality of work.  We provide discounts for multiple assignments.



Risk Management Services at Metropolitan
·         Serve as an integral part of the business management team as an outsourced risk manager
·         Overview current loss prevention and loss mitigation processes
·         Provide project management services to ensure critical processes are completed in a timely manner and consistent with overall needs
·         Provide an objective and independent expert evaluation of the current risk program, including a written report containing specific findings and recommendations
·         Identify and assess your current and potential risk of loss
·         Develop alternate (non-insurance) methods of risk financing
·         Assist in strategic planning to achieve long range risk management objectives
·         Develop risk management education coursework for specific needs
·         Provide guidance during merger, acquisition and divestiture activities
·         Provide expert witness and litigation support

Metropolitan Engineering, Consulting & Forensics (MECF)
Providing Competent, Expert and Objective Investigative Engineering and Consulting Services
P.O. Box 520
Tenafly, NJ 07670-0520
Tel.: (973) 897-8162
Fax: (973) 810-0440
E-mail: metroforensics@gmail.com
Web pages: https://sites.google.com/site/metropolitanforensics/
https://sites.google.com/site/metropolitanenvironmental/
https://sites.google.com/site/metroforensics3/
We are happy to announce the launch of our twitter account. Please make sure to follow us at @MetropForensics or @metroforensics1
Metropolitan appreciates your business.
Feel free to recommend our services to your friends and colleagues.