New construction is a key component of the economic growth, with commercial construction among the leading sources of new jobs and increased capital spending in practically every geographical market.
With millions of dollars on the line for investors, construction companies, subcontractors and a host of others, keeping construction projects running on schedule, within budget – and making sure everyone attached to such projects is paid in a timely fashion – is essential to a successful project.
But sometimes things do go wrong and, when they do, project owners often turn to surety bonds, which can help to save the day. These bonds, issued in various forms by financial institutions, corporations and other entities, provide important guarantees that a contractor will complete their responsibilities on a project.
“While surety bonds do not represent your typical first party insurance policy, they are similar, and surety claims personnel are parallel to those that we currently service in our insurance consulting practice,” said Glenn Ricciardelli, resident managing partner for MDD Forensic Accountants in Boston. “A surety guarantees specific performance, and once someone invokes a surety bond during a construction project, you know nerves are going to be frayed.”
Forensic accountants can assist in these situations by providing the surety company with an accurate and timely snapshot of the status of the project and what’s gone wrong on the construction site. Is a contractor behind schedule due to a lack of resources? Did a sub-contractor fail to deliver or complete a key element of the project at a critical time? Did a key subcontractor walk off the site due to non-payment by the general contractor?
“We’ll be able to gather the financial facts necessary to assist the surety in ascertaining whether there has been a default or material breach in the contract, or whether it constitutes the typical bumps that you encounter in the construction process” Ricciardelli said. “We try to establish a working relationship with the developer, the contractor, and the surety, so that we can develop a clear perspective of the status of the project as quickly as possible.”
MDD can determine who’s been paid, who’s delinquent, and what next steps might assist in trying to get the project back on schedule. In the event the surety elects to replace the contractor, MDD can assist in tracking the costs incurred to complete the project, while segregating any acceleration or increases in the cost to complete the project. MDD can also assist the surety in recovering these costs from the original contractor in accordance with the terms of the surety bond.
“The faster you find out what’s going on, the faster the surety can make the necessary decisions to try to get the project back on track and completed,” Ricciardelli said. “No one benefits from prolonged and needless disputes in the construction process, and avoiding a default is almost always better than cleaning up after one.”
By Glenn Ricciardelli. Published in Forensic Insight – April/May 2005.