Secrets of Bonding #70: Labor, Contracts, and Labor Contracts

On the subject of Bid and Performance / Payment Bonds, the process of obtaining one always includes a Bond Request Form.  This document is required by surety company decision makers (bond underwriters), who need to view a summary of the relevant details.

They also use this form to document the approval of the bond, and may make note of special conditions they are requiring, the bond rate and execution / shipping instructions.

The bond request form contains general info identifying the client and the beneficiary of the new bond (the obligee), plus specific details about the project.

For example, it will ask for the description and location of the work, the start and end date, and details about the performance. Subcontractors will be described. There will be a question about other projects the contractor is performing.  There will also be a question about labor on the project.

The labor question is usually part of a group like this:

Est. Materials:___%     Est. Labor___%     Est Overhead / Profit___%

(It’s worth noting that the sum of the three should equal 100%!)

The answer to the labor question has certain implications for the underwriter. There is no “normal” scenario, but let’s use this for illustration:

Materials: 30%     Labor: 60%     Overhead/Profit: 10%

If 30-60-10 is a response within the range of normal, how would you interpret this?

Materials: 90%     Labor: 0%     Overhead/Profit: 10%

This looks like a material supply contract.  The client has a product they are selling.  They have no “on-site labor.”  They are not assembling or incurring any labor costs at the project location.  When evaluating the relative degree of risk associated with bonding this contract, is there more or less risk than normal?

You may run into the opposite situation:

Materials: 0%     Labor: 90%     Overhead/Profit: 10%

This is a “labor contract.” Maybe a general contractor needs carpenters on a project so they give out a labor only subcontract. Would underwriters consider this factor a plus?

The answer is that labor is considered more unpredictable than materials.  You know the exact cost of materials, but how much for installation? There are variable factors that can influence the ultimate cost of project labor (human productivity, worker morale, quality of supervision, design deficiencies, weather, other contractors, etc.)

Conclusion:

A material “supply contract” is easier to bond than a labor and material contract or a labor contract.

 

What about this?

Materials: 40%     Labor: 60%     Overhead/Profit: 0%

Sounds like the subject of a future “Secret!”

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