Beacon News

One of the most important consulting services that Beacon provides to our clients is performing Cost-to-Complete (CTC) Analyses for ongoing construction projects. Having a good understanding of where a project stands financially is critically important for all project stakeholders, especially for Surety companies dealing with troubled projects. Developing a high-quality CTC Report for a complex construction project requires skill, experience, and a good methodology.

For Surety-claims-related projects, a CTC study is typically requested for two reasons. In the first case, a Surety’s Principal has requested financial assistance and an independent study is required to determine the accuracy of the monetary amount requested and if financial assistance is worth considering. In the second case, the Principal has already been defaulted. The Surety now needs to know the loss potential, cash requirements, and completion options available to satisfy the Performance Bond.

In both cases the Surety needs to confirm that it is responsible for performance obligations. This is accomplished by investigating how the Obligee has acted in a financial and managerial sense. The Obligee is obligated to pledge all remaining contract funds to the Surety before the performance obligation is in effect. Moreover, the Obligee has the financial responsibility to the Surety not to overpay the Principal during the prosecution of the previous contract.

Goals Of A Cost To Complete

• Study to determine the cost to complete a defaulted or near defaulted project at current market price
• Study to determine the Surety’s loss liability potential
• Tool to assess completion options
• Study to help establish required reserve funding
• Tool to assess the technical nature and scope of work of bonded project
• Tool to make business decisions that are: Appropriate / Supported / Cost Effective / Sensible

Over the years, Beacon's team has refined its cost-to-complete procedures and has created a formal CTC process and guide used by our staff, along with relevant spreadsheet and report templates. Some of the key aspects to this process are highlighted in this article. In summary, the process involves four main parts:

(1) Initial Communication / Document Collection
(2) Contract / Document Review
(3) Follow-up Communications Related to Any Open Questions
(4) Report Generation

Initial Communication / Document Collection

Depending on the complexity of the project and how many different contractors, subcontractors, and vendors are involved, this process may require requesting project documents from multiple parties. With Surety-claims-related projects, we request a fairly long list of information from the Principal and the Obligee. This includes all contracts between the principal and obligee, project specifications, drawings, subcontractor agreements, key contacts at vendors and subcontractors, project accounting info, change order information (completed, pending, and future), and other related information.

Obtaining and reviewing a complete set of project documents is critical for building an accurate CTC Report. It's typically a good idea to have a face-to-face meeting with the key parties, as well as formal follow-up meetings. We typically request 15-20 different types of documents/information in order to get a complete financial picture for a project.

Document Review & Analysis

Because of the large amount of information associated with complex construction projects, we typically involve a team of staff members to analyze the project documents and extract the information relevant to CTC analysis. To ensure accuracy of the CTC information being distilled, numbers are often cross-checked by different team members and dollar values that are plugged into the templates get carefully double-checked against the source materials. During this process, our team also reviews the terms of the Surety Bond to understand how the bond relates to the overall construction project (e.g. the terms and condition and what the Bond covers).

The terms of the project's contract impact which "template" our teams use when creating a CTC Report. For example, if a project has a "Lump Sum" contract, we use a different template compared to project's having a "Unit Price" or "Cost Plus" contract. Other contract-related factors which we review and assess are Alternates, Allowances, Liquidated Damages, Contingencies, and Special Conditions.

During the process of reviewing and analyzing the source documents, we often need to communicate back and forth with the Principal, the Owner, the Surety and subcontractors to verify information about the project status, which change orders have been approved, any project extensions granted, and other factors that could impact the overall project cost or schedule.

Follow-up Communications Related to Any Open Questions

Depending on the size and complexity of the construction project, as well as how much work remains to be completed, there may need to be a significant amount of communication to ensure that all of the relevant information is received in order to finish a comprehensive CTC Report. In some cases, it is necessary to double-check that specific documents (or numbers) provided by the Principal, subcontractors, or vendors are indeed the most recent and up to date.

During this process, Beacon often identifies issues that the Surety was not aware of and which can have a financial impact on the project; For example, issues with subcontractors or project delays which were not apparent prior to the CTC analysis. This is a side benefit of the CTC review process which helps our clients to make better business decisions and mitigate their financial risk by identifying issues sooner rather than later.

Report Generation

Once the financial details of the CTC analysis are complete, Beacon's team packages the CTC Report in a format that provides our clients with a clear, easy-to-digest summary of a project's estimated Cost to Complete, along with additional supporting materials and explanatory text. When appropriate, the CTC includes a "best case" and "worst case" analysis for those projects which may be subject to delay-related penalties or other factors which could potentially impact the overall cost range.