Q & A: Navigating The Relet Process
April 2, 2024
In this Surety Today: The Blog post we will discuss Navigating the Relet Process. The format of this post will be in a Q & A form taken from an interview with Mr. Mark Stein, MSPM, Vice President with The Vertex Companies. When the principal is terminated and the obligee makes demand under the performance bond, the surety typically has a variety of options to consider; two of those options are takeover or tender. Generally, those options require that the surety conduct a relet process to find a suitable completion or a tender contractor. In this blog post, we will discuss the relet process and delve into what factors should be considered in deciding whether to relet or not, the steps in a relet, preparing the relet documents, subcontractor ratification, locating bidders, and more.
Our special guest for this blog post is Mr. Mark Stein, Vice President with Vertex Companies located in Irving, Texas. Mark has worked as a construction professional for over 25 years with senior and executive project management experience, including large scale hospitality and resorts, telecommunication infrastructure, institutional, residential, and heavy highway projects in the US Caribbean, and South America. At Vertex, Mark is an expert forensic surety consultant in construction project management. He has conducted over a thousand investigations for property and casualty insurance claims, surety bond claims, construction claims for insurance carriers, attorneys, building owners, developers, adjusters, you name it. His areas of expertise include construction, project management, telecommunications, infrastructure, building envelope constructions and cladding materials, roofing, non-structural waterproofing, hard surface flooring, wood flooring, millwork paint coating, EFIS stucco, and other construction related systems. He earned his Bachelor’s of Science Degree in Construction Engineering Technology from Central Connecticut State University, his Master’s of Science Degree in Project Management Construction from Walden University and his Doctor of Business Administration Degree in Project Management, also from Walden University.
Q: So, the first question for Mark is, what are some of the factors that the surety should consider when deciding whether to relet or not?
A: So, some of the considerations that not only the consultant, but the surety typically looks at is what is going on with the principal? Are they financially solvent? Do they have appropriate staff? What kind of work are they involved in? Are they a general contractor or are they a small, artisan subcontractor? We must also consider the location of the project. What does the schedule look like at the time of the default or termination and what are the time requirements for the completion? Are liquidated damages an issue. We also look at if there are any other contractors available to possibly complete work. Some big highway jobs, for example, might have two or more subcontracts doing the exact same type of work. Something very quick is, “hey, could one of the other subcontractors jump on this?” We also need to understand, both from the principal and the obligee, why is the principal being defaulted or terminated? What are the extent of the issues? What kind of deficiencies are there? Or, is it just bad blood. Anther relevant factor is the balance of the contract funds, how close is the surety to a penal hit? Then, lastly, are there payment bond claims coming in? Typically, this is a big red flag for not only financial solvency of the principal, but, at times, is a tip of the iceberg. When you start getting payment bond claims in, it can tell a story.
Stover: These are all things that I know in my experience, in the past 32 years, we have looked at all these factors when we are trying to make this decision. I would also note, I think part of what needs to be considered is the level of completion. The closer you get to the project being complete, the more difficult it may be to find a contractor that is willing to come in and accept the potential risks, is it worth their time? Also, another factor can be who is the obligee, what is their reputation, as well as the reputation of the project. Some projects get that reputation as just being a really troubled project. Nobody wants to get involved or you get a really bad obligee. We had a case recently where we were doing a relet and we got a bid and the contractor said, I’ll do the work for the surety as a takeover, but I’m not going to work directly with this obligee. So, sometimes you get a difficult, demanding or an incompetent obligee, it can affect the relet decision.
Q: What about the typical relet premium? Because I know that that has been something that I think across the industry, we are seeing much larger premiums.
Absolutely. Historically, and when I say historically, let’s talk about pre-Covid and post-Covid. Pre-Covid a typical range was somewhere between 20% and 25%. It was considered a norm. It’s something that, me as a consultant, as well as some of my surety clients, kind of anticipated and basically expected. Yes, alright, we understand we are going to get a ding. But I can tell you that since Covid, and even more recently, with some of these inflationary pressures, we have seen pricing 75% or more in base bid unit costs for projects that were let literally as late as 2020 or 2021.
Q: Alright, so you’ve made that determination to proceed with the relet. So, what are the typical steps in the process? Walk us through that.
A: At Vertex, we have a standardized SFO or RFP. I’m from the Northeast, but I like RFP better. It’s what I’m used to. And we issue those to some qualified contractors. So, I would say step one is preparing the RFP and then making sure you have a decent list of potential qualified contractors. Timeliness is always a factor. Naturally, as I had indicated earlier, LD’s, if they’re on a project and they’re quite hefty, they can continue to accrue as the project goes forward. Typically, the project is not going to stop for one subcontractor, so we need to be able to do something that would normally take months in a regular construction project and we actually try to turn that into weeks.
The steps specifically would include getting all the project documentation, number one, so we understand what’s going on, but number two, to be able to pass that along to our potential bidders. Like I said, we evaluate the folks that we’re going to be sending this out to, and we also look at possible ratifications of subcontractors and suppliers to our principal. That could definitely save some time and perhaps even some money. And then it’s basically just assembling the package and distributing it to the bidders. Most everything nowadays is done electronically. It helps out tremendously. And then after that package is sent out, we try to give at least a week’s lead time, at least here in Texas. The amount of construction going on in Texas is crazy. So, we give them about a week or so to be able to look at the documents. We then hold a site visit. Depending on the particular project, it may be required or it may just be recommended, but it’s highly recommended for the bidders to go out to the site, to look at it. Then we have a brief period just in case contractors have any questions. I would say lately more and more contractors do have questions that we were not able to answer, either on the bid walk or within the documents themselves. Sometimes, as a consultant or surety, we don’t have the answers at those times we have to go back to either the obligee or an engineer of record to ask and receive specific questions from the bidders. But, most definitely, there is also a closing date for the bid process. When the bids come in, they have to be analyzed, reviewed, basically a writeup or an analysis is sent to the surety. Then, basically selecting a bidder and negotiating between the surety, and, at times, even the obligee.
Q: Okay, so, we’ll focus in on some of these steps as we go forward here. One question I had though is how much time are you typically seeing the relet process take from the start to the bid closing these days?
A: So again, depending on the complexity of what is being relet, I would say realistically we are looking at three to five weeks.
Q: So, going through these steps that you just talked about in the relet process, where are you finding most of the holdups in the process?
Typically, a lot of it comes down to the bidder’s understanding of what’s being asked of them. And so we’re seeing a lot of time with responding to potential bidders questions, and a lot of times the answers are actually right in the bid package, but often, as I just mentioned, we have to get additional information. It could be very, very minute, one small point, but it could be worth $150,000. So, a lot of time is actually being taken between either going through the documents, finding the answer to that potential bidder, or going back to, like I said, either the obligee or the engineer record for that particular project, getting the necessary information, sending that out to not just the bidder that had made that list of questions, but basically everybody else allowing them to review and revise anything that they’re about to send in. And at times we even have to revise our schedule of values that we ask them to fill out. If additional information through some of these questions come in, it’s that intermediate portion that actually does take a lot of time nowadays.
Q: Alright, one of the steps you mentioned, of course, in the process is to procure the project documentation. So, most people know what these are, but just run through what some of these documents are that are necessary for the relet process.
A: Sure, sure. So, documents which are a must are naturally the original contract between the principal and the obligee. If the principal is a lower tier, we usually ask for the copy of the contract between the obligee and the owner, all of the drawings, specifications, addenda, any additional change orders that are approved or potentially approved, any supplemental instructions, requests for information and responses back from the governing body, whether it’s the architect or the engineer, submittal logs, making sure that we have all the submittals so bidders can know actually what was submitted and approved, payment applications, the baseline schedule and any updated schedules, inventory of material on hand, and if they’ve actually been paid for or not, any deficiencies that may be listed depending on where we are in the project cycle, any punch lists if it’s near the end of the job and any back charges claims or unfortunately if it’s already into LD’s, get an assessment of where they are with LD’s and how many days they’re behind.
Q: One of the other steps you mentioned was ratifying subcontractors. Let’s talk about that for a minute.
A: Sure. So, a subcontractor ratification is basically just taking something that’s already in existence between the principal and either a subcontractor or supplier. Again, depending on the complexity of the job, this may entail items that are not readily available or a specific task a subcontractor was willing to do that might not be easy to come by. And, naturally, if we’re looking at a job that was bid out three or four years prior, or two or three years prior, as we mentioned above with escalating costs, the ability to save some potential money and time with some of these subcontractors and or suppliers is going to be extremely helpful. Naturally, we have to look at the contract or the purchase orders they have in place to make sure that they can and are willing to be ratified.
Q: One of the other key steps to the process is finding potential bidders, walk us through that process.
A: I don’t know what it is, but we are hearing that either potential bidders are either super too busy, they’re understaffed, or the other big one is taking over somebody else’s work and taking on that risk. But what we do and we have to do is find bidders. And so typically we go back to the surety and ask them to speak with their underwriters or if we have the relationship to speak with the underwriters directly and some brokers in the area knowing what type of work that is being relet and see if they can help out. Naturally, we look at the original bid tab, most public projects are required to post those, so those are easy to get. But we also go back to and talk to the owner or the obligee and find out if they have any folks that they want to include, contractor associations, some databases for MBE’s, DBEs and WBE’s, and even principal recommendations. I have had multiple successes in getting names of two or three companies where there is a good enough relationship with the principal where they can actually get bidders to come forward and help out and finish the work.
Stover: You mentioned the DBE directories, which raises the issue of whether the surety will have to find a replacement contractor to match any socioeconomic compliance that the principal was supposed to satisfy. And this issue could really impact the process. The surety needs to examine the contract documents to see what the requirements are and whether there are any terms requiring continued use of such a contractor. Sometimes you can convince the obligee to waive the requirement or convince them that it does not apply to the surety under the performance bond, but if you’ve got to come up with another MBE or DBE or WBE, it can make the process that much more difficult.
Q: The next step is assembling that bid package. Talk us through that step.
It is like baking a cake, basically. You have all the ingredients there, you literally just have to put it together. Most companies such as Vertex, we have a standardized template. Basically, it includes instructions to the bidder, key dates – when the pre-bid conference is, when the bids are due, if there’s addenda information, what the standard process is to provide us their questions or comments. The description of work naturally, list of ratified subcontractors that we’ve included, specific requirements for insurances and bonding and then just a ton of appendices. All those documents that we had talked about previously, all of the relevant ones are part of that package. Depending on the surety, we will also include a copy of the completion agreement or the tender agreement. And then like I said, date and time for a prebid walk. Again, everything is electronic nowadays. Typically with all of the information that we just mentioned, it’s pretty voluminous. So again, technology is wonderful. We’ll set up an FTP site, give all the bidders access for a specific amount of days, that way they can download and review all the information that they need without producing just tons of paper and documents. So it goes out pretty quickly.
Q: One question I have is, and I’ve seen this go different ways with different consultants, but do you typically require bidders to provide a bid bond in the relet process?
A: That is a good question and it really depends on a project by project basis. Typically, some of the things we look at is what is the anticipated cost to complete? Is this like a hundred thousand dollar job or a $20 million job? What is the percentage of completion and what kind of comfort level do we have with the bidders list.
Q: Finally, let’s talk about the bid closing and selection.
A: This is probably the most complex part of the relet process, and I can tell you that it pays off if you put in the hard work upfront – that is really getting a very well-defined scope of work that is agreed upon by either the owner or the obligee, making sure that it is literally spot on if there are any carve outs for latent defects of the previous contractor, things like that. At the end of the day, we just need to make sure that every bidder, feels comfortable for not only this bid but future bids, that they are going to be given a fair shake. So, we have to make sure that everything is apples to apples. If there are wild anomalies in the numbers, we’ll have to go back, contact a specific bidder, ask for some clarification. Other times we are just going to find that you can invite 10 people, nine people will show up to the bid walk, but only one person shows up and actually provides a bid on the date due. Then it’s back at the phones. Really going to all the people that went there asking why they didn’t want to provide a number. Naturally, at the end of the day, the surety doesn’t want to walk into any negotiation with one number. So, the bid analysis could be a big headache, but like I said, if time is spent well in the front end making sure that you’ve got a good hard schedule of values, the analysis process can go a lot quicker.
We at Surety Today want to thank Mark for joining us and providing all of his insights and expertise. If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group, or our guest, Mark Stein, MSPM, V.P., The Vertex Companies, LLC, 1600 Corporate Court, Suite 100, Irving, TX 75038, O: 972.746.2335, mstein@vertexeng.com.