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The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

Teaching and Learning the Foundation of Construction Estimating

John W. Adcox Jr., EdD, CPC

ABSTRACT This article provides an overview of construction estimating as it is performed today and a framework for learning and teaching estimating.

Individuals in the

construction industry must always continue to learn and adapt due to the constantly changing world of construction. Learning construction estimating continues to be an extremely difficult process and lifelong endeavor.

Key Words Estimating, Construction, Computer Estimating, Take offs

INTRODUCTION In the world of construction, estimating and the ability to estimate is the single most required skill of individuals who seek a profession in construction.

The

requirements for learning and understanding estimating are the most difficult concepts to understand, even for people who have actually worked in the field. Estimating is an area of construction that develops from a technical processing skill to an art when an individual’s knowledge and experience peaks. This paradigm explains the lack of clear and definite methods for teaching, learning, and understanding estimating. This article will develop, for the student of construction estimating, a learning path that, if followed,


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

will provide clear understanding to the process, technical skills required, and basic methodologies. It must be stressed that this article will attempt to provide a systematic approach to real world estimating that is being performed in the construction field today. In order to be successful in our industry, the ability to estimate is certainly the heartbeat of construction. Estimating abilities can be learned by individuals who have little construction experience (quantity take off personnel) and represent the beginning of becoming an estimator.

There is complete truth to the belief that one must have construction

experience to become a true estimator capable of providing estimates to owners for approval. The responsibility for the future of a construction company rests with the accuracy of those estimates.

Obviously, the final estimate would be reviewed and

approved by upper management or the construction company owner.

WHAT IS ESTIMATING? Estimating is the knowledge, skills, ability, and art of determining the cost to perform some type of construction work. Included in this cost requires: A scope of work, working conditions, materials required, labor required, equipment required, payment schedule, completion schedule, type of work, owners, contractor capabilities, and profit and overhead requirements. With all these variables and others, the purpose of this article is to provide for the reader a learning system for estimating. Taking the body of estimating knowledge required for success and developing a beginning base of working knowledge typically requires classification and organization of key concepts, terms, and systems. It is very easy for individuals to understand some


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

of the simple calculations but have an extremely difficult time mastering the total estimate requirements of a complete construction project. For example, calculation of concrete is a relatively simple calculation and should take only a few examples for an individual to understand the units we use to calculate (cubic yards) and be able to perform the simple math involved. Yet, with these calculations, some basic general knowledge is needed.

This knowledge begins with the ability to read plans (so

dimensions can be found for the formula) and knowledge to convert math units to the correct units needed for the various formulas. Finally knowledge that the answer found is a theoretical amount which must be adjusted for installation, waste, overhead and profit. This example demonstrates how one material in a construction project can require an extensive base of knowledge. Carefully reading and reviewing the contract documents and understanding the construction schedule along with the methods of construction are the last facets of being an estimator/manger. This provides a logical path for one to develop this estimating knowledge.

HOW IS IT PERFORMED? Estimating is performed in phases, pieces, systems, etc. and is performed by every contractor and construction worker. For the beginning estimator, a starting point for learning can be established with a list of knowledge requirements for success. Therefore, for complete use and understanding the following concepts and principles are needed.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

Basic Knowledge Requirement: (Quantity take off estimator)

1.

Ability to read and understand plans and specifications.

2.

Capability of performing algebra math calculations (contractors do not use calculus).

3.

Capability of organizing data in a logical flow once the system has been identified.

4.

Understanding of the basic construction process.

5.

Understanding of the basic construction materials.

6.

Understanding of the basic building systems.

The knowledge requirements may be obtained in the classroom environment or from work experience. Estimating is performed with a pencil, calculator, or computer depending on the type of construction and company.

WHO PERFORMS ESTIMATING? Estimating, in some form, is performed by virtually everyone in a construction organization.

The best estimates are typically a result of a team collaboration of

construction personal (i.e. foreman, superintendents, project managers, and owners, etc.). Unfortunately, there is never enough time to estimate. Estimating is one of the key functions a construction company must perform well; yet could be considered nonproductive when bids are not won. For example, if you hire an estimator for $600.00 per week and it takes four weeks for that individual to develop an estimate, the


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

company overhead would require a large annual volume of work to cover the weekly overhead loss. In developing an estimate, normally a line item for an estimator is not included, which means their salary will be paid from the overhead and profit of the company or profits from another project.

If the estimate has too many errors, the

company may lose money and even go out of business. For these primary reasons, estimating duties in a small company, (an annual volume under five million dollars a year), will normally be performed by upper and mid management. A perfect estimate does not exist. The estimate which documents the final profit/loss on the project is the real estimate. Estimating becomes the first step in a construction company’s process for staying solvent and earning a profit.

The estimate becomes the budget for the

construction project a construction company will be building. Without the proper on-site management, correct buyout, project management, and collection of monies due, estimates normally result in loss of profit. Evaluation of a construction company and its abilities to perform estimating is paramount for a successful company. Estimating is not only done in the office, but in the field. Many winning estimates which have mistakes (for example, items left out) can be saved to actually generate a profit when a veteran superintendent or project manager suggests alternate construction methods or products that may save on the budget, schedule or labor. Never hesitate to ask opinions, methods, and suggestions for all components in an estimating situation. Many times a subcontractor or supplier will suggest solutions that can bring an estimate back to a profitable or break even course.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

Those who perform the estimate should be a team of individuals who focus on obtaining work and generating a profit. Normally, one person is in charge of bringing the estimate to its final form, but it takes the cooperation and assistance of many people to make it a success. Estimating must be a team effort. A student graduating from a construction management program will have the ability to organize an estimate, obtain subcontractor quotes, perform quantity takeoffs on basic construction materials, and provide upper management or the owner an estimate for their review. The final adjustments and review will rest with the owner or upper management. Today's construction firms expect long hours and positive results from their estimators. Construction estimating is the heart of all construction work. Construction professional must have the ability to estimate for a successful career.

KNOWLEDGE REQUIRED In order for an estimating teacher to evaluate what is needed to perform estimating basic knowledge levels are required.

1.

Knowledge of basic mathematics.

2.

Knowledge of the basic sequence of building or constructing.

3.

Knowledge of reading plan and specification.

4.

Knowledge of interpreting plans and specifications.

5.

Knowledge and acquisition of organizational and planning skills.

6.

Knowledge and ability to communicate with others.

7.

Knowledge of scheduling.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

8.

Knowledge of the work and labor environment.

9.

Knowledge of the estimating process and how to analyze data.

10.

Knowledge of construction contracts.

11.

Knowledge of various construction processes.

12.

Knowledge of construction materials and equipment.

Understanding the gestalt of any body of knowledge demands focused time and effort. The basic building blocks needed for learning estimating are never complete. Individual effort and work are mandatory for anyone to become an estimator. The odds are that most students of estimating will not have all the knowledge and skills needed. The individual who desires and has the drive will achieve success as an estimator and contractor.

STEPS FOR ESTIMATING It is critically important in learning a complex body of knowledge that a clear objective be provided. The steps for estimating should provide a clear path to learn and understand.

As noted earlier, the basic knowledge for learning estimating would

constitute step one. Step two involves a classification of what is being estimated. For example, if it is concrete, then where are the plans, what are the working conditions, what are the costs associated with the materials and subcontractors?

Is concrete the only item being

estimated, or is it one component in a larger estimate? During what phase of this project is the concrete needed? How do we organize the data such that we can record


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

and update this data? These questions are normally followed by step three: what type of construction are we going to perform? Each type has its own unique form and format. Step four is determining the various systems and components needed and what line item amounts are needed. Are second quotes needed? How many quotes are needed to provide the lowest competent estimate? Obtain costs and analyze the pricing of the various components or systems. Step five follows with the placement of everything into an organized format. This is usually a prepared form either on a computer program or company form.

Of course the type of estimate; design build, competitive bid,

negotiated, lump sum, cost plus, construction management, etc. will have a major impact on each of these sections. The final step, (step six), involves the careful review of the final estimate, application of profit (how much?), overhead amount (how is this allocated?), and check for omissions and errors. The above steps provide the general sequence and framework required in developing an estimate for most construction projects. Learning estimating for the novice requires a tremendous amount of time, effort and practice. Having the ability to provide a cost estimate for performing some type of construction work is not a foundation our educational system provides at the lower grade levels. Yet, the basic knowledge tools is provided and when coupled with at least one technical oriented estimating class a student can perform estimating functions or tasks. The term 'estimating' takes on many different meanings, applications and the following scenarios will provide examples...


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

The first example is the estimating performed on the construction site. A project where a superintendent has carpenters and laborers to form and pour 10 feet of wall 8 inches thick and 10 feet high. In order to actually make this happen, the superintendent would determine labor requirements, schedule requirements, order the correct amount of material, decide what form system will be used, equipment needs, and so on. The next step would be to estimate the schedule for the materials delivery, labor needs, location, inspections, concrete delivery, and form stripping. Individuals performing this type of estimating must have detailed knowledge of construction techniques, systems, and complete understanding of normal, everyday construction work practices. How can the typical university student or novice begin to estimate a process of which they have little or no knowledge? Therefore, this type of estimating normally requires actual work or on site experience.

Teaching methodologies such as videos, internet sites, site tours,

lectures, discussions, and reading enable beginning estimators to learn. The next scenario is quantity take off estimating, which is normally the type of estimating that universities provide to their students.

In this scenario, basic plan

reading, basic math, common formulas, and the common units that are used are typical areas where classroom knowledge is required. Of course, the answers are theoretical and will need to be modified for waste, actual on site adjustments, and further adjustments for the different ways materials are purchased.

For example,

demonstrating to students how to calculate how many linear feet of 2x4 double top plate are needed to frame a room, the answer would be the length of the walls as found on the floor plan and then double since there are two plates.

If that number were

determined to be 140 linear feet, while that is the correct amount, which is not the way


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

this material would be purchased. A 2x4 is normally purchased in lengths of 8, 10, 12, 14, or 16 feet. The final linear feet purchased would probably be different based on the lengths selected.

Certain parts of the building will dictate different size or length

materials and this data is not on a set of bid documents. The problems of relating construction materials, local practices, and waste must be developed from experience and study.

Even with the best instruction in the world, it is suggested a potential

estimator needs as much hands on experience as possible. A final scenario involves the actual estimating performed in a small general contracting company. If the work is competitively bid, the process (briefly outlined) requires obtaining

contract documents, performing quantity take offs, calling many

subcontractors and vendors for quotations, analysis of these quotations, calculation of critical areas (i.e. concrete, etc.), evaluations of the construction systems to be used, determination if this project is one that the company does well, evaluation of the competition, analysis of the company's needs, profit and overhead level required and determination if the company would be successful, and finally an analysis to see if the company can handle this project. From the above scenarios one could state estimating is as simple as a math formula calculation or as complex as an analysis of a complete business operation. Many people see estimating as an art when the final adjustments and bids are being prepared for final submission. Yet in each of these examples a building block for the development of a complete estimator continues.

It does reach a level where pure

calculation is only one basic step. If your money and livelihood were determined by an estimate, how would you perform?


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

One of the most difficult concepts to teach beginning estimators is the variations and processes that can be followed in estimating. For the beginning estimator the major concerns are where do I start?

Typically, when estimators are hired in a

construction company they are given a set of contract documents (plans and specifications) and requested to determine certain quantities, costs or estimates. In most cases these are direct costs and represent a portion of the project being estimated.

In some cases several quotes from a subcontractor are requested and in

other sections a complete detailed estimate required. It is suggested that a master format using the CSI (Construction Specification Institute) designation be used. After a careful review of what areas you are estimating and how that fits into the complete estimate an estimator should be able to organize his/her time efficiently to generate the quantities.

Each quantity or quote that is calculated must be recorded.

Information and structured filing are critical, since this is only a portion of the total estimate and normally takes several days to obtain all of the various quotes and enter the quantities into the estimating system.

Estimating entails faxed quotes, phone

quotes, estimator’s calculations, organization of these components, and an analysis of the complete contract document to be sure errors and omissions have been held to a minimum. Being able to determine the overall scope of the estimate and what sections are needed and organized represents the way estimates are performed. Teaching and learning estimating in order to be effective must provide real world examples and allow for actual problems. Typically, a review of mathematics needed for construction estimating is required. The basic understanding of quantity take offs must be mastered in order to develop complete construction project estimates.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

One of the most effective methodologies used in teaching and learning estimating incorporates the following steps.

An introduction and discussion of

estimating, its purpose, function, requirements, and place in a construction operation and construction industry. Basic mathematics, construction problems beginning with site work, concrete, masonry, finishes, etc. are given for calculations and understanding. Many problems are needed to develop the knowledge and precision required for good estimating. For example, use a real world construction estimating project that provides a complete set of contract documents and requires the learner to perform a complete estimate. The estimate should follow a real world procedure. This not only has unit price estimating, but also actually requires the learner to obtain at least two quotes for various specified subcontracted areas.

This concept broken down into a learning

paradigm:

1. Introduction to estimating 2. Learning basic construction math and materials 3. Learning basic construction methods and systems 4. Performing basic calculations required in construction estimating 5. Organizing and using estimating forms 6. Performing a complete real world construction estimate using The combined real world method

Using the sequence noted above will provide a logical path for learning construction estimating.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

COMPUTERS AND ESTIMATING SOFTWARE Another teaching tool, the use of computers and estimating software does benefit the contractor. Primarily by providing a platform for reducing math or omission errors, organizing the estimate, organized storage, quick modifications, reproduction of simple estimate and a slight increase in speed. However, without constant use speed can be lost in relearning software.

Uses of available estimating software packages are

excellent. Yet the estimating software learners will have a large investment in the time it takes to become proficient as well as incorporating new upgrades.

In real world

application daily use of the estimating software is normally required. The requirement of using estimating software everyday for some small companies creates a hardship on many construction operations and teaching environments.

The managers normally

doing the estimating have daily project management duties for their on going projects.

CONCLUSIONS Learning estimating is dependent on the actual area of construction estimating an individual or company will be performing. A general contractor is estimating the complete project, while a masonry subcontractor will be primarily interested in estimating and performing block or brick quantities. Yet each type of estimating should carefully review the project size, complexity, schedule, quality level required, structural placements, delays in work due to waiting for other subcontractors, availability of materials, location of project, and so on.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

Factors such as quantities calculated, how they are ordered, the benefits of quantity purchases, use of “equal to” products, alternate construction methods etc. plays a major role in determining an estimate. The incorrect estimate on any of the previous areas will result in estimates going from profit to loss. Unless all factors are considered a contractor may not be able to stay in business or enjoy the profit margin they deserve. Teaching general construction estimating requires a complete understanding of the learner’s basic knowledge requirements, steps normally used in construction estimating, a paradigm for teaching, and use of real world contract documents. (Plans & specifications).

Estimating is the heartbeat of construction.

REFERENCES

Adrian, J.J. (1982). Construction estimating: An accounting and productivity approach. Reston, VA: Reston.

Ahula, Hira N, & Campbell, W.J. (1988). Estimating: From concept to completion. Englewood Cliffs, NJ: Prentice-Hall. Allen, E. (1990). Fundamentals of building construction (2nd ed.). New York: John Wiley & Sons.

Benedict, B., & Anderson, G. (1994). construction. Albany, NY: Delmar.

Estimating for residential & commercial


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

Hardie, G.M. (1987).

Construction estimating techniques.

Englewood Cliffs, NJ:

Prentice-Hall.

Lewis, J.R. (1983). Basic construction estimating. Englewood Cliffs, NJ: Prentice-Hall.

Neil, J.M. (1982). Construction cost estimating for project control. Englewood Cliffs, NJ: Prentice-Hall.

Petri, R.W. (1979). Construction estimating. Reston, VA: Reston.

Schuette, S.D., & Liska, R.W. (1994). Building construction estimating. New York: McGraw-Hill.

Stitt, F.A. (1992). Project management checklists: A complete guide for exterior and interior construction. New York: Van Nostrand Reinhold.

JOHN W. ADCOX, Jr., EdD, CPC is an associate professor of construction management in the department of Building Construction at the University of North Florida (UNF). He has a bachelor and a master’s degree in industrial education from Mississippi State University and an EdD from the University of Florida in Curriculum and Instruction. He is a State of Florida Certified General Contractor and State of Florida Certified Roofing Contractor. He serves as construction consultant and owned and operated a general contracting business for over 30 years. He has authored many articles, taught many seminars and is in process of writing an estimating textbook.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

PERFORMANCE BONDS: CONDITIONS AND DEFENSES THAT POTENTIALLY RENDER A PERFORMANCE BOND VOID AND DISCHARGABLE Donald A. Jensen, Jr, JD, LLM, PhD

ABSTRACT A surety bond is not an insurance policy. A surety bond is a guarantee. The surety guarantees that the principal in the bond will perform the obligation stated in the bond. For example, the obligation in a performance bond is that the principal will complete the project. Bonds sometimes state, as a condition, that if the principal fully performs the stated obligation, then the bond is void; otherwise the bond remains in full force and effect. If the principal fails to perform the obligation stated in the bond, both the principal and the surety are liable on the bond, and their liability is joint and several. That is, either the principal, surety, or both may be sued on the bond, and the entire liability may be collected from either principal or the surety. The amount in which a bond is issued is the penal sum or the penalty amount of the bond. Except in very limited set of circumstances, the penal sum or the penalty amount is the upward limit of liability on the bond.

Key Words Performance bond, contract risk, secured transaction, indemnity agreement.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

INTRODUCTION This paper examines the frequently litigated performance bond. The importance of a performance bond is minimization of financial risk. This minimization of risk results from one’s failure to satisfactorily perform a construction contract. In short, a performance bond is a security instrument, in the sense, the surety provides a line of credit to the construction contractor serving as a financial guarantee to the owner. This financial credit line is secured by the contractor’s unencumbered asset portfolio serving as financial collateral. (Welch, Morelewicz, Ruck, and Treker, 1992). For this credit line, the surety charges a premium (interest rate) that equates to risk inherent in the credit line extension. (Crewdson, 2000). Therefore, this type of credit transaction is commonly termed a secured transaction (Bachrach, 1990; UCC Article 9, sec. 9-105 et seq), Sykes v. Everrett, 83 S.E. 585 (1914). Before issuing a performance bond, the typical surety will require the execution of a general indemnity agreement.

The general indemnity agreement is designed to

supplement a surety’s common law rights to reimbursement and indemnification, thereby creating the secured credit transaction. Four Season Envtl., Inc. v. Westfield Cos., 638 N.E. 2d 91 (1994). This supplementing is accomplished by two contractual provisions typically stipulated to in the general indemnity agreement. The first provision is termed the indemnity clause. The second is titled the collateral clause. It is the combination of both clauses that creates the secured credit transaction known as suretyship. Therefore, by definition, suretyship is a contractual relationship, whereby one party contractually


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

promises to be answerable for the debt, default, or miscarriage of another. (RESTATEMENT OF SECURITY § 82 , 1941); Four Season Envtl., Inc. v. Westfield Cos., 638 N.E. 2d 91 (1994); Madison County Farmer’s Assn. v. American Employer’s Ins. Co., 209 F.2d 581, (1954). As noted, in the typical construction setting, a performance bond serves as a guaranteeing mechanism providing financial protection to the project owner in the event the bonded contractor contractually defaults. (Crewdson, 2000). The principal (contractor) is the one primarily and ultimately obligated to build the construction project. The obligor (surety) is financially obligated to the obligee (owner) as set forth in the performance bond, and is relieved of contractual obligation and duty to the obligee once the principal satisfactorily performs the contract. Tri-State Ins. Co. v. U.S., 340 F.2d 542, (1965); Sanitary Systems, Inc. v. Am. Surety Co. Of New York, 331 F.2d 438 (1964); Tudor Dev. Group, Inc. v. U.S. Fidelity and Guaranty, 692 F. Supp. 461, (1988). The following performance bond language represents the typical contractual relationship described above:

If the contractor shall, in all things stand to and abide by, and well and truly keep and perform the covenants, conditions and agreements in the foregoing contract on his part to be kept and performed, then this obligation shall be null and void; otherwise it shall remain in full force and effect.

In short, this language states that if the principal on the project defaults on the underlying contract, the surety has a contractual obligation to the obligee to complete the


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

construction project. (Crewdson, 2000). Hays Livestk. Com’n Co., Inc. v. Maley Livestk. Com’n Co., Inc., 498 F.2d 925, (1974). Where the surety performs the contract pursuant to its performance bond obligations, however, the principal and, if appropriate, third-party indemnitor bear the ultimate liability for the financial loss because of the surety’s contractual, statutory and/or equitable rights of indemnification and reimbursement (In re: J.T. Morgan Fin. Corp., 124 B.R. 293, 930 Bankr. S.D. N.Y. 1991). Thus, the primary distinction between financial loss and suretyship involves recognizing the significant difference between a surety bond and an insurance policy. Main Supply, Inc. v. United Bonding Ins. Co., 263 N.E. 2d 314 (1970).

At this juncture, it is important to note that a surety bond is not an insurance policy. For example, in Lumbermens Mutual Casualty Co. v. Agency Rent-A-Car, Inc., 128 Cal. App. 3d 764, 180 Cal. Rptr. 546 (1982), the court stated:

“Insurance has been defined as a contract whereby one undertakes to [indemnify] another against loss, damage or liability arising from an unknown or contingent event; whereas a contract of suretyship is one to answer for the debt, default or miscarriage of another ....”

United States v. Fisk, 675 F.2d 1079, (1982); Madison County Farmers Ass’n v. American Employers Ins. Co., 209 F.2d 581, (1954), each having similar holding.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

The Restatement of Security §82 defines suretyship as follows:

Suretyship is the relation which exists where a person has undertaken an obligation and another person is also under an obligation or other duty to the obligee, who is entitled to but one performance, and as between the two who are bound, one rather than the other should perform.

This legal definition, establishes that suretyship is distinct, dissimilar, and, unlike insurance because there is no shifting of contractual obligation to a separate legal entity. (Richards, 1952; Cross, 1963; Backman, 1943; Cushman, 1960).

The shifting of

contractual obligation is the basis for the hyper-distinction that the principal and obligor always remain jointly and severally liable to the obligee. (Bruner, 1998; Crewdson, 2000; Clore, 1995). Unlike suretyship, there are only two parties to an insurance contract, the insurer and the insured. A suretyship contract (performance bond), however, involves three parties: a) the principal (contractor), b) surety (obligor), and c) owner (obligee). (Sterns, 1993; 74 Am Jur. 2d Suretyship Sec 3; Uniform Commercial Code, § 1-201 (40), 1978). In essence, the performance bond defines the principal’s obligation and stipulates that the surety is liable for all financial obligations (contractual obligations and duties) equal to the penal amount of the bond (stated contract limit of liability stated on face of bond) if said principal fails to satisfy same’s contractual obligations under this tripartite arrangement. The surety’s obligation is thus only secondary and, therefore arises when the condition


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

precedent occurs, namely: principals inability to satisfactorily perform the contract. (74 Am. Jr. 2d Suretyship, Sec. 3).

One commentator summarizes suretyship and the tripartite contractual relationship as follows:

“The essential function of a surety bond is to guarantee the performance on contractual obligations. A surety bond is not...an insurance policy; rather, it is ...a credit guarantee... [A]s opposed to the insurer, the surety does not anticipate the possibility of loss even in a particular instance of transaction. As a consequence, the premium paid to a surety is a professional service fee. The surety, unlike the insurer, has the undiminished right to pursue its principal for indemnification; in fact, indemnity contracts between the principal and the surety inevitably underlie all performance bonds. Insurance merely protects an individual from an unknown risk of loss, while suretyship guarantees the performance of a predetermined, affirmative contractual duty.� (Foster, 1983).

Thus, it is the financial guarantee of a predetermined contractual duty aspect of the surety bond that separates suretyship from insurance. In summary, a suretyship is a financial guarantee whereby the surety suffers a financial loss only if the principal fails to perform its financial obligations, and, thus same is unable to reimburse the surety. For this


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

financial risk level, the surety is compensated by charging a premium against the financial obligation, namely: the contract price equaling the obligating debt. Thus, the surety provides financing to indemnify the owner against default by the principal by perfecting the typical secured transaction utilizing pledged collateral by the principal to secure the guarantee by the surety. Therefore, the surety’s obligation is no greater than that of the principal.

Moreover, a performance bond does not obligate the surety unless the

contractor is declared by the owner to be in default. The sections to follow shall discuss the following issues regarding a performance bond: invoking the performance bond obligation, performance bond conditions, surety defenses, and discharge of the surety by an extension of time or by failure to give notice.

INVOKING THE PERFORMANCE BOND OBLIGATION As previously indicated, because the conditions of a performance bond flow to the benefit of the owner, thereby guaranteeing that the general contractor will complete the project on time and in a satisfactory manner, the surety is liable if the general contractor’s performance is unsatisfactory. (Restatement of Security, § 82, 1941). A surety’s liability and obligations under its performance bond is generally measured by the corresponding liabilities and obligations of the principal (the contractor). Hardaway v. National Surety Co., 211 U.S. 552 (1908); Employers Mutual Cas. Co. v. General Service Administration, 93-1, ¶25,482 (1992). Accordingly, where the surety does not have any separate limitations on liability in the bond, its obligations will be co-extensive with those of the principal. American Surety Co. v. Wheeling Structural Steel Co., 114 F.2d 237 (1940).


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

Generally, if the obligee has not performed its contractual obligations to the principal, and the surety has no dischargeable relief from liability to obligee, thus the obligee may have a valid performance bond claim against the surety. ( 74 Am. Jur 2d, 1966, Suretyship § 165 (1974); Chicago College of Osteopathic Medicine v. George A. Fuller Co., 719 F.2d 1335 (1983). In order for the obligee to effectuate a valid claim against the surety, the obligee must generally perfect the following four events before the surety must perform under the performance bond: (a) the obligee must declare the principal to be in default under the contract, (b) the obligee must properly terminate the principal’s right to proceed under the contract, (c) the obligee must have performed its obligations under the contract and, (d) the principal must actually be in default (an uncured material breach of performance) under the contract. (Bruner, 1998; Clore, 1995). Because of the co-existence paradigm between surety and principal, the surety is jointly or severally liable under the performance bond for one or more of the following: (a) the excess cost and completion of the construction contract (costs in excess of the contract balance), or defective work, (b) damages incurred by a lender covered by a dual obligee rider to the performance bond, (c) delay damages, including liquidated damages, incurred by the obligee to the same extent as the principal is liable to the obligee for delay under the contract, (d) damages incurred by the obligee as a result of warranty items or latent defects, and, (e) with respect to the Federal Miller Act, the surety may be liable for taxes that are collected, deducted, or withheld from wages paid by the principal in performing on the bonded contract, but not remitted to the IRS. Employers Mut. Cas. Co. v. General Servs. Admin., 93-1 ¶25,482 (1992); Mai Steel Serv. v. Blake Constr. Co., 981 F.2d 414


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(1992); United Structures of Am., Inc. v. G.R.G. Eng’g. 9 F.3d 996 (1993); Bob Davis Masonry, Inc. v. Safeco Ins. Co. Of Am., 883 P.2d 144 (1944).

Not every breach by the contractor qualifies however as a default invoking the surety’s obligation to perform. The following events typically constitute a contractor’s default: (a) failure to pay labor, (b) failure to pay material, (c) allowing lien actions to be brought against a property, (d) dilatory performance in the work, (e) abandonment of the work and (f) bankruptcy proceedings. Massachusetts Bonding Ins. v. U.S., 71 Supp. 36 (1947), U.S. for the Use of Gibson v. Harmon,192 F.2d 999 (1951), U.S. for the Of H.O. Kilsby v. George, 325 F.2d 54 (1963). When a contractor has breached a contractually stipulated condition of the contract, the owner must give a written record detailing each instance that defines the contractors anticipatory breach, and request that the contractor give written assurance of cure regarding same. (Tasker, Murphy, Schwartzkopf, 1997). If the contractor does not make cure within the applicable period specified by the owner (typically defined by general conditions of the agreement), then the owner may claim that the contractor is in technical contractual default. Subsequent to this action, the owner thereafter makes a formal written demand on the surety to perform under the provisions of the contract bond. (Clore, 1995). At this juncture, the owner’s rights against the surety are coextensive with those of the contractor. Thus, if the surety should disavow liability under the contract bond, then the owner may bring a civil action against the surety. Case law requires the surety to anticipate the contractor’s breach. However, once a


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default is declared by the owner, the surety must seek to pay the cost to complete (completion theory of contract damages) the construction project. (Tasker, et el, 1997). Here then, the surety typically requests that the contractor make written statements admitting default under the contract, and seek demand against contractor’s collateral employed to perfect the secured interest the surety maintains in the contractor’s asset base. Then, the surety seeks to settle with the claimant on the performance bond and, then seeks assignment of the claim against the contractor. Indemnity Insurance Co. Of North America v. U.S., 74 F.2d 22 (1941). Because the surety agreement between the contractor and the surety is a valid and enforceable contract, the surety may therefore rely on any contractual defense available to the contractor. Typical defense positions may be: (a) impossibility; (b) fraud and, or (c) duress in procuring the construction contract. Thus, the surety also has the right to rely on the defenses that exist within the bond itself. Kalfountzos v. Hartford Fire Ins. Co., 44 Cal. Rptr. 2d 714 (1995); Indemnity Insurance Co. Of North America v. U.S., 74 F.2d 22 (1941). The surety may therefore assert a valid disobligation defense and, hence create objection to the owner’s attempt to enforce the performance bond provisions upon the surety by declaring contractor to be in default. (Crewdson, 2000; Welch, Morelewicz, Ruck & Trecker, 1992). As noted, the contractor’s obligation under the performance bond is tri-union in effect, meaning all financial obligation are tri-confluent to the owner, contractor, and the surety. In this manner, the surety’s obligations is defined by: (a) general conditions of the contract, (b) the plans and specifications, and (c) the performance bond. United States


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Fidelity and Guaranty Co. v. Gulf Florida Development Corp., 365 So.2d 748 (1978). Therefore, the nature of the surety’s obligation is strictly financial as expressed by the terms of the construction contract and performance bond. Thus, as a general rule, absent language limiting liability incorporated into the bond, the surety’s liability is for all direct and consequential damages attributable to, and resulting from the principal’s breach of the bonded contract. Continental Realty Corp. v. Andrew J. Crevolin Co., 380 F.Supp. 246 (1974). Caroline Nursing Home v. Dix Constr. Corp., 285 N.E. 2d 904 (1972).

PERFORMANCE BOND CONDITIONS Federal and state statutes regarding a public works contract frequently mandates a performance bond. For example, under the federal Miller Act, 40 U.S.C. § 270a, before awarding a contract exceeding $25,000 for the construction, alteration, or repair to a federal public building or public work to a contractor, the contractor must provide a performance bond with a surety or sureties (co-suretyship) satisfactory to the owner awarding such contract, and in such amount the owner deems adequate, for the protection of the United States. In vonLusch v. Hoffmaster, 253 F. Supp. 633 (1966). Similarly most state statutes, known as Little Miller Acts, require a performance bond for a contract amounting to certain sum for all construction work performed by any state, county, or local government. United States ex rel. James Simon Co. v. Avdelt Constr. Co., 446 F.2d 820 (1971). In each instance, the statute is for the financial protection of the governmental body in the event of the principal’s failure to perform. Consolidated Elec. Supply, Inc. v. Bishop Contr’g. Co., 423 S.E. 2d 415 (1992); Southern Contr’g Inc. v. H.C. Brown Constr.


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Co., 450 S.E. 2d 602 (1994). The use of performance bonds however, is not limited to a governmental body. Private owners frequently utilize this type of financial protection. (Fla. Stat. Ann. §713.02, 1992). In this instance, the performance bond is generally executed in favor of a single named obligee, usually the owner of the construction project. There may, however, be a co-obligee or a dual obligee named in the performance bond. The co-obligee or dual obligee is usually the financial lending institution financing the construction project for the obligee/owner. In such instance, the construction lender receives the same protection as the obligee, and the construction lender’s rights is conditionally based on the obligee’s performance to the principal. King Bros. v. Utah Dry Kiln Co., 374 P.2d 254, (1962); RioGrande Lumber Co. v. Darke, 167 P.241 (1917). As previously noted, a performance bond is issued having a penal sum (equal to contract price) limiting the monetary amount of the surety’s liability under the performance bond. Except under certain circumstances, the performance bond surety is not liable to the obligee for completion costs to the extent that same exceeds the penal sum of the bond. Simmons, Inc. v. Pinkerton’s, Inc. 762 F.2d 6591 (1985); Coyne-Delaney Co., Inc. v. Capital Development of Ill., 717 F.2d 385 (1983). Every performance bond is different however regarding the liability circumstances. Some performance bonds greatly detail contractual conditions giving rise to an obligee’s rights to claim against the performance bond surety, and subsequently the surety’s rights and options given the event arises. Therefore, as a general rule, the scope of the performance bond surety’s liability is defined by the performance bond’s terms and conditions language. L & A Contracting Co v.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

Southern Concrete Servs., 17 F.3d 106 (1994), Marshall Contractors, Inc. v. Peerless Ins. Co., 827 F.Supp. 91 (1993). Furthermore, it is important that the contractor understand that the terms and conditions of the construction contract be construed together with the terms of the performance bond to determine the surety’s liability. State of Florida v. Welsley Constr. Co., 316 F.Supp. 490 (1970); Trustees of Bricklayers Local No. 3 v. Reeco, 747 F.Supp. 606 (1990). Thus, the typical performance bond formulating the underlying construction contract is expressly incorporated by reference in the construction contract. In some states, the construction contract is automatically, by operation of law, incorporated by reference. (O.C.G.A. § 13-10-1 et. seq. and 36-82-101 et. seq.). Regardless of the foregoing, the underlying construction contract ultimately defines the surety’s liability in the event of its principal’s default and, in turn, the principal’s liability to surety. State of Florida v. Welsley Constr. Co., 316 F. Supp. 490 (1970). For example, the AIA Document A311 Performance Bond sets forth the obligee’s obligation prior to making a claim against the surety, and the surety’s options. Another type of performance bond, known as a defeasance bond, merely states that the obligation of the performance bond is null and void if the principal promptly and faithfully performs the construction contract. Lemon & Assoc. v. Johnson Serv. Co., 440 P. 2d 386 (1968). Otherwise, the performance bond remains in full force and effect.

A Miller Act

Performance Bond is examplimatic of a defeasance bond. Therefore the performance may be controlled completely by state statute. Rexroth & Rexroth, Inc. v. General Cas. Co., 51 Cal. Rptr 505 (1966); City of Medina v. Holdridge, 346 N.E. 2d 339 (1970). As a result, the contractor must understand the procedural steps when managing a performance bond


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claim and, also carefully read the performance bond (and any applicable statutes) to determine the principal’s and surety’s obligations and liabilities. Hamilton & Speigel, Inc. v. Board of Educ., 195 A. 2d 710, (1963); Carrier Corp. v. Glassman Constr. Co., 225 A. 2d 448 (1967); Heglar v. McAdoo Constr., 487 S.W. 2d 312 (1972). For example, if the performance bond has incorporating language making reference to the construction contract, the set of contract provisions is generally treated as conditions applicable to the bond and, thus controlling.

If the bond is required by statute, the liability of the

performance bond surety will be defined by the statute, even when the bond is not literally in statutory form. Heglar v. McAdoo Constr., 487 S.W. 2d 312 (1972). Further, in a majority of jurisdictions, if the bond provides coverage in excess of the coverage required by the statute, the performance bond surety will be deemed to have agreed to provide the greater level of coverage. Peerless Ins. Co. v. Board of City Comm.’rs. Ex rel. Ben Dyer Assoc., 273 A. 2d 15 (1968); Triple Cities Constr. Co. v. Dan Bar Contr’g. Co., 285 A.D. 299 (1959). Because the performance bond usually incorporates the construction contract, absent limiting language in the bond itself, the surety’s liability under the performance bond is generally coextensive with the principal.

However, the performance bond surety

generally assumes no liability beyond the penal amount set forth in the performance bond. (Bruner, 1998). Therefore, the surety is typically not liable for damages exceeding the penal sum (face amount of bond) of the performance bond. (Clore, 1995; Bruner, 1998). Thus, the surety can limit same’s liability by disclaiming liability for certain damages, or by expressly setting forth that the surety’s sole obligation is to guarantee completion of the


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construction contract and nothing more. (Tasker, et el., 1997). As a consequence, the surety is not liable if the principal is not liable under the construction contract terms and conditions. Further, because the surety’s liability is no greater than the principals the surety similarly has the right to assert any defenses vis-a-vis available principal. Therefore, if the obligee waives a claim against the principal, same also waives a claim against the surety. For example, if the bonded contract is voided because it was induced by fraud, both the surety and principal would be released from contractual obligations thereto. (Welch, et el, 1992). Thus, to ascertain the liability of the performance bond surety, the bond language must be examined carefully to determine the surety’s intent. If the bond incorporates the principal’s construction contract, the terms and conditions of the construction contract must be read, in conjunction, with the terms of the bond to determine the surety’s liability. If the bond is required by statute, the surety’s liability will be that which is set forth in the statute, absent broader bond language.

SURETY DEFENSES It is important for the contractor to understand that a surety‘s liability under the performance bond is as follows: (a) surety assumes no obligation or duty greater than principal has to obligee, (b) a separate duty and obligation flows directly to the surety from the obligee, and (c) a breach in duty or obligation by obligee to surety renders the surety’s obligation nugatory. Kalfountzos v. Hartford Fire Ins. Co., 44 Cal Rptr. 2d 714 (1995). For example, if the owner has provided defective plans and specifications to the principal, then


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impossibility of performance is a defense the surety may assert in denying liability under the performance bond. 13 Am. Jur. 2d Building and Construction Contracts § 28 (1964); United States v. Spearin, 248 U.S. 132 (1918). Likewise, the obligee’s duties owed directly to the surety, which duties may alleviate liability under the bond in whole or in part, include, for example: (a) a material or cardinal alteration to the underlying contract without the surety’s knowledge, (b) a substantial or cardinal extension of time by the obligee for the principal’s performance of the contract, (c) overpayment and/or failure to mitigate by the obligee, or improper/inadequate notice or default which is prejudicial to the surety. U.S. v. Freel, 186 U.S. 309, 22 S. Ct. 875 (1981); Texas Refining & Marketing v. Aetna Cas. & Sur., 895 F.2d 637 (1990); United States v. Reliance Ins. Co., 799 F.2d 1382 (1986); Argonaut Ins. Co. v. Town of Cloverdale, 699 F.2d 417 (1983); Keene Corp. v. International Fidelity Ins. Co., 736 F.2d 388 (1984); Balboa Insurance Co. v. U.S., 775 F.2d 1158 (1985); 48 C.F.R. 49.402-3. As previously noted, the surety possess each contractual defense available to the principal. For example, the typical defense is that the principal has not materially breached the contract, antithetically the obligee has and, therefore, the obligee wrongfully terminated principal. This result has a legal premise that the surety’s liability under the performance bond is identical to the principal’s liability. (Crewdson, 2000). Thus, if the principal has a complete defense to the obligee’s claims, so too does the surety. Detroit Fidelity & Surety Co. v. Bushong, 175 N.E. 683 (1931); Hoskin, et al v. Aetna Life Insurance Company, 117 P.2d 80 (1941). Therefore, as with a payment bond, the surety possesses all contractual defenses, and counterclaim offsets typically available to the principal. Stated in the


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

alternative, the surety’s liability for the principal’s defaults is no greater than the principal’s liability as set-forth in the bond agreement. (Starns, Law of Suretyship, 5th ed.). Indemnity Insurance Co. V. United States, 74 F.2d 22 (1943). Further, the performance bond language may provide the surety independent contractual language. For example, a classic independent defense is a significant contract modification that materially alters the contract risk thereby formulating a cardinal change. (Crewdson, 2000). In certain instances a cardinal change provides the surety a discharge regarding further bond obligations. Ramada Development Co. v. United States Fidelity and Guaranty Co., 626 F.2d 571 (1980); Continental Bank & Trust Co. v. American Bonding Co., 605 F.2d 1049 (1979). This contractual discharge occurs because the performance bond obligates the surety to certain known foreseeable risk formulating consideration for the agreement. (Clore, 1995; Tasker, et el, 1997). Thus, consent of the surety to additional contractual risk is necessary in order to expand same’s liability beyond the terms and penal sum stipulated in the performance bond. Allied Fidelity Insurance Co. v. Pico, 656 P.2d 849 (1983); Maryland Casualty Co. v. City of South Norfolk, 54 F.2d 1032 (1932). This legal construct is termed strictissimi juris, a Latin phrase meaning, “of the strictest right or law.” In essence, this concept of a change to the underlying consideration between the principal and the obligee results in a discharge because the surety’s obligation runs to original agreement and not the modified contract. Detroit Fid. & Sur. Co. v. Bushong, 175 N.E. 683 (1933). Consequently, in recognition of this doctrine, (the strictest right of law) the typical performance bond contract provides contractual language allowing terms of the underlying construction contract by change order. Further, such language provides for the


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surety’s consent to such a modification in advance. Trinity Universal Insurance Co. v. Gould, 358 F.2d 883 (1958); Massachusetts Bonding & Ins. Co. v. John R. Thompson Co., 88 F.2d 825 (1937). There does exist however, the contractual situation whereby the performance bonded contract is significantly modified requiring greater performance by the principal than was originally required by the underlying construction contract. In this situation, the surety may possibly be able to achieve a discharge because the change to the work scope represents a material, or substantial departure from the original risk that the surety has been compensated for under the original premium charge.

However, it must be

demonstrated that the surety never consented to the contractual change. Brunswick Nursery & Convalescent Center, Inc. v. Great American Ins. Co., 308 F.Supp. 297 (1970). In the construction contract context, a surety’s consent to a contractual modification takes place in two instances. Haddock Constr. Co. v. Wilbur, 169 P. 2d 599 (1946). The first instance relates to an inherent change in the construct work itself. The court system has viewed this inherent proclivity toward change to be foreseeable and, thus contemplated by each party at the signing of the performance bond and concomitant contract. (A.1.A. Doc. A311). A different result occurs however sometimes when the court examines the construction contract language containing a work modification provision. Here, change order provisions in the underlying conditions of the contract often incorporated by reference into the performance bond, thus the court determines that the surety has given consent via the merger doctrine. (Am. Jr. 2d § 27 (1964). Finally, occasionally the performance bond contains contractual language that modifies the


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construction contract creates consent by the surety. There is however, exception to this legal proposition when the performance bond or the base construction contract implicitly provides consent by the surety, and a subsequent cardinal change to scope in work arises. The court system has applied the cardinal change concept to find a discharge under these circumstances in which the parties could not have reasonably anticipated the change in question as being within the scope of the work when the contract was commenced. For example, in Employers Insurance of Wausau v. Construction Management Engineers, a subcontractor executed, on March 6th subcontract in the amount of $2.3 million. A subcontract performance bond was issued equaling that amount. On March 7th, without the surety’s knowledge, the subcontractor executed an additional agreement that expanded the contract work scope to an amount equaling a total contract price of $6.2 million. The court found that this amendment to contract represented a substantial modification in the original contract, thereby expanding the original scope of risk beyond the intent of the parties with regard to the surety’s original performance bond obligation. Accordingly, at least as between the obligee and the surety, the surety was deemed to be discharged from any further bond obligation. Whether a change in contract work scope causes a performance bond discharge in favor of the surety is a factually intense question whereby the original construction agreement is measured against the specific circumstances surrounding the contract modification. For example, a slight increase in the building height, along with a change in a window size and the omission of a window, is clearly an amount that materially alters project scope to warrant a discharge. In another case, adding an entire floor to a building


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was deemed to discharge the surety. Furthermore, a litany of change orders radically increases the scope of the work and, thus materially increases the risk to the surety even though the principal agreed to the multiplicity of changes to the agreement. The foci therefore, is whether there has been a material alteration to the overall financial obligation of the surety. If such a significant change has occurred, typically the court will grant a complete discharge. (Crewdson, 2000). Typically a claim on the performance bond results from the principal being unable to perform a contractual obligation. Therefore, the question of prejudice towards the principal is related to whether the material alteration to the contract causally related to the principal’s financial demise. If the material alteration is provable, the surety is typically entitled to a contractual discharge defense. In a technical contractual sense, a significant material contractual alteration arises when the principal and obligee bilaterally agree to modify the construction agreement without giving proper prior notice and subsequently receiving the surety’s consent. antithetically, if the obligee is not directly involved in the modification, the court is unlikely to give a discharge to the surety.

United States v. Reliance Insurance Company is an example of a material alteration to a contract whereby the surety was exonerated from the obligations stipulated in the performance bond because of a change in allocation of revenues without the surety’s consent. The court observed as follows: A surety... may, for any or no reason, conclude not to furnish its bond with


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

respect to a particular contract. When it has committed itself with respect to one contract, amendments which cover that agreement into a significantly different... should be brought to the attention of the surety so that it may exercise its own business judgment as to whether it wishes to continue its commitment. It is not for the parties to the contract to decide among themselves that their amendments are of no interest to the surety, at least when, as here, those amendments go beyond mere matter of form.

Ultimately, the final question and analysis is whether the change either as a cardinal change or a material change, the surety must satisfy its burden of proof that on the facts of the specific case at hand either the quality or the magnitude of the change resulted in a modification that significantly exceeded the original contract risk, thereby exceeding the original project scope, and requiring additional risk of financial loss to the surety. In essence, what the discharge provides the surety with is a mitigation of contractual damages.

DISCHARGE OF THE SURETY BY AN EXTENSION OF TIME, FAILURE TO GIVE NOTICE, OR IMPROPER PAYMENT Under traditional principles of suretyship, an unauthorized extension of contract time will exonerate the surety. Keene Corp. v. International Fidelity Insurance Co., 736 F.2d 388 (1984). The logical basis for this is that a time extension increases the financial risk exposure to the principal’s non-performance, thereby further financially encumbering the


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

surety. Moreover, regarding a dischargeable time extension, the facts must demonstrate that the time extension to the date of substantial completion creates a financial detriment to the surety. Armstrong Transfer & Storage Co. v. Mann Constr., Inc., 458 S.E. 2d 481 (1995). An example would be an attempt to impose liquidated damages upon the surety as a result of the failure of the principal to perform on time. If the obligee has granted unwarranted time extensions to the principal, the surety may possibly demonstrate the liquidated damages clause, its risk was thereby increased. (Crewdson, 2000). While this falls within the purview of failure on the part of the obligee to mitigate damages, there are still those circumstances in which it can be characterized by the surety as a defense arising from a material, unauthorized alteration in the contract’s basic terms as to time of performance, the consequence of clear and demonstrable injury to the surety. National Sur. Corp. v. United States, 31 Fed. Cl. 565 (1944). A failure to give notice to the surety is rarely a meaningful defense to the surety. Although the present AIA A312 performance bond requires notice to the surety in order to provide an opportunity to meet with the obligee owner before an actual declaration of default, it is unlikely that the failure to give proper notice will result in a discharge to the surety and defeat the obligee’s claim. The AIA A201 General Conditions has long required that the surety be given notice of default. This has not, however, resulted in a discharge of the surety when the default notice provisions are not met. Even if the notice requirement is a contractual condition precedent, some courts, in essence, read the notice out of the bond if there has been no showing by the surety of actual prejudice. The court system likewise has ignored bond notice requirements where it


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has been shown that the surety had actual knowledge of the claim or some other ambiguity in the contract relieved the obligee of giving proper notice.

Pennex Alum. Co. v.

International Fid. Ins. Co., 818 F. Supp. 772 (1993). As one commentator observed concerning notice provisions, The contracts of compensated sureties frequently contain such a condition, but some courts are reluctant to give the condition its ordinary meaning; and hold that the surety is discharged only to the extent of the loss suffered. Town of Clarkstown v. North River Ins. Co., 803 F. Supp. 827 (1992). Because payment provisions, such as creating retainage requirements, benefits the surety, overpayment by the owner to the contractor may operate as a defense discharge to the surety’s future obligations. Airtrol Engineering Co. v. U.S. Fidelity & Guaranty Co., 345 So. 2d 1271 (1977). The reason for the conclusion is because such an event reduces the contract balance available to the surety for completion of the project after a default. National Sur. Corp. v. United States, 31 Fed. Cl. 565 (1994). The net effect is to increase the surety’s financial exposure to the obligee. This is clearly true where the architect/owner fraudulently certifies progress payments beyond the defaulting principal’s actual progress. Overpayments made in good faith to the contractor, however, may not discharge the surety. Balboa Insurance Co. v. Fulton County, 251 S.E. 2d 123 (1978) ( overpayment made in reliance on progress payment requests certified by architect).

Moreover,

unauthorized prepayments made by an owner may not discharge a compensated surety under the performance bond as long as: (a) the funds were used to pay for construction of the project and, (b) the surety was not damaged by the prepayments. Basic Asphalt & Construction Corp. v. Parliament Insurance Co., 531 F.2d 702 (1976); Gibbs v. Hartford


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Accident and Indemnity Co., 62 So. 2d 599 (1953). Where an architect, or escrow agent has negligently certified progress payments to a contractor, thereby damaging the surety by reducing the contract balance available to the surety upon completion of the work, the surety may have a negligence cause of action against the architect for the resulting damage. Peerless Insurance Co. v. Cerny & Associates, Inc., 199 F.Supp. 951 (1961). Illustrative of the point is Prairie State National Bank v. United States, 164 U.S. 227 (1986). A typical construction contract stipulates a condition that the obligee shall make periodic payments to the principal during the course of construction. As a consequence, the obligee pays only a portion of the cost of construction and keeps a percentage (usually 10 percent) as retainage (also termed salvage) in the event the principal fails to complete the contract work. The retainage amount plus the remaining contract balance held by the obligee at the time of the principal’s default are rarely sufficient to complete the project. By requiring a performance bond from the principal and the surety, the obligee shifts the financial risk of the principal’s failure to perform the construction contract to the surety. In Prairie, the owner made unauthorized or premature payments to the contractor, but failed to withhold retainage. From the perspective of the surety, the unearned portion of the contract to be performed, unpaid contract balances owing and due, and salvage amount (retainage) represent financial security against future project scope performance. The court reasoned that the surety relied to its detriment upon such contract provisions when executing the performance bond. Payment provisions according to appropriate earned value and retainage requirements in certain percentages thus benefit the surety. Thus, overpayment by the owner to the contractor may be a discharge of the surety’s obligations,


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because such an event reduces the contract balance available to the surety for completion of the project after a default. See also National Sur. Corp. v. United States, 31 Fed. Cl. 565 (1994). In addition to premature payment, the court system also recognizes that the underlying risk to the surety is directly related to overpayment of the contract balances. (Brandt, 1905; Glassman Constr. Co., Inc., v. Fidelity and Casualty Co., 356 F.2d 340 (1966)). For example, if the owner was to pay the contractor eighty percent of the contract balance when only forty percent of the work is complete and when the owner’s obligation under the contract was to pay only for work and materials in place, then the harm to the surety is obvious and demonstrable. Similarly, if the owner pays the contractor for work which is not in accordance with the plans and specifications then the contract collateral, the contract balances, has been wrongfully dissipated by virtue of its having been paid to the contractor for poor workmanship. Under these circumstances a surety is discharged because the courts recognize that the payment clause in the underlying bonded contract, which requires payment only for good work, is for the benefit of the surety as well as the obligee. The legal basis of the discharge for premature payment or overpayment varies is that it is material alteration to the contract. This condition ultimately impairs the right of contractual subrogation.

Under the equitable doctrine of subrogation, a surety which

performs is equitably subrogated to the owner’s rights to withhold the contract balances for improper or untimely performance. If the owner has wasted the contract balances in contravention of the contract’s terms and its own rights, then the surety’s right of


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subrogation is impaired. (Remmen, 1987; Crewdson, 2000; Clore, 1995; Bruner, 1998). The effectiveness of the overpayment or prepayment defense depends heavily upon the factual circumstances of each case. For example, if the owner has properly managed contract balances, the mere fact that an excess payment has occurred will not discharge the surety. This result occurs because a periodic pay request is an estimate of earned value to date and both industry custom and the contract documents do not intend that the payment process for percentage of completion be exact. Central Towers v. Martin, 453 S.W. 2d 789 (1969). Accordingly, reasonable leeway is given owners in the payment process. The courts examine the owners good faith in making the overpayment and take into account whether the owner had a reasonable basis to believe the bonded principal would complete. In addition, the court will closely examine whether periodic payment which is not in accordance with the contract documents caused actual harm to the surety. This is a matter of close examination of the facts in each case, thus the outcome is on a case by case basis. For example, a premature release of retainage does not discharge the surety if the payments were made by joint check to the general contractor and a materialman and subcontractor. The logic of such a holding is that the security in the form of the retainage was expended to discharge the surety’s obligations under the payment bond, thereby assuring that the surety’s overall contractual obligation was reduced because payment went to those who had provided labor and material. Under this analysis, a payment by joint check, even if not expressly permitted in the general contract, would be unlikely to discharge the surety as a departure from the terms of payment. (Milana, 1976). An


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

example of this approach appears in Ramada Development Company v. United States Fidelity & Guaranty Company. The general contractor (obligee) knowingly made payments which were not due to the subcontractor (principal). The surety claimed discharge because of departure from the contract’s payment terms. However, the payments went to pay the principal’s employees. The court found that the payment to the subcontractor’s employees served a benefit to the project, and thus did not increase the surety’s financial risk. Accordingly, the surety was held not to be discharged. Generally, an obligee can avert the surety’s discharge by demonstrating that the contract funds, although not paid in accordance with the contract, did pay for the completion of the contract work and hence ultimately benefited both surety and principal. In essence, the obligee’s demonstration that the contract funds paid to complete construction negates the surety’s claim that same has been harmed through dissipation of bond collateral. Central Towers v. Martin, 453 S.W. 2d 789 (1969). The role of the architect in the payment process also has a significant effect regarding the overpayment defense by the surety. The A1A 201 general conditions document stipulates that the owner make payment according to the architect’s certification of progress payment. Accordingly, the court system has held that the owner is obligated to pay upon the certificate of the architect, the surety is not entitled to a discharge for overpayment by the owner. A surety’s claim, if any, under these circumstances is against the architect, but the surety is deprived bond defense and discharge. There does exact several court decisions however whereby the architect as the owner’s representative, as is clearly set out in the A1A 201 general conditions document, is the owner’s agent and thus


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

negligent over payment by the architect is attributed to the owner and thus over certification by the architect results in discharge. This is a particularly appropriate outcome when the over certification occurs because the work paid for is defective. Finally, there occurs the circumstance, despite contractual terms and conditions, where an architect has not managed periodic progress payment process. If the failure to use an architect as required by the contract documents has resulted in overpayment, it has been held that this constitutes a discharge of the surety to the extent of overpayment. An example of this outcome is Southwood Builders, Inc. v. Peerless Insurance Company, which involved a performance bond given by a subcontractor, which named the general contractor as obligee. The general contractor had made substantial payments to the subcontractor before they were due, the court found that the surety was discharged. While the court recognized that the old rule of strict construction no longer applied to a compensated surety in Virginia, the court examined the subcontract requirement that an architect certify the progress payment amount due to the subcontractor, and found that a departure from this requirement by the obligee was a material variation from the original contract’s terms and conditions, thereby establishing a prejudicial effect to the surety. Discharge through overpayment or premature payment is normally a defense on which the surety bears the burden of proof. This applies not only to proving the fact of overpayment, but also, for a compensated surety, to proving the harm occasioned by overpayment. However, a significant line of case authority has held that if the premature payment is a material contractual alteration in the contract terms, then the discharge will be total unless the obligee can show the extent of harm. The burden thus shifts back to the


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

obligee to demonstrate that despite a material deviation from the payment terms, actual harm either did not inure, or that the harm is only to a certain amount. It has been held, for example, that if there is a subsequent material written change to the payment process between the principal and the owner, then it is the obligee who must show that the discharge should only be pro tanto, as opposed to total. Absent an ability by the obligee to measure the extent of prejudice, a complete discharge would be permitted. An example of a pro tanto discharge is found in Airtrol Engineering Company, Inc. v. United States Fidelity and Guaranty Company in which $24,400.00 in advance payments to a subcontractor were made in violation of the express terms of the contract. The Louisiana Court of Appeals relieved the surety of its obligation by permitting a pro tanto discharge arising from the overpayment. Importantly, premature payment is a defense only for the surety. The principal cannot complain that the owner violated a term which was for the owner’s benefit. On the other hand, the courts recognize that the term is also for the surety’s benefit and thus, under appropriate circumstances, permit a discharge. Occasionally, the overpayment to the principal is characterized by the obligee as a loan. This is sometimes formalized through the execution of promissory notes and the like. The courts examine closely the form of the transaction in order to determine whether it was, in fact, a legitimate loan. Others look to the substance of what is occurring and recognize that the obligee is not in the business of making loans, but rather is, as a matter of substance, paying contract balances early with the hopes of completion. Accordingly, under these circumstances, the surety is still discharged. Hamilton v. Republic Casualty Co., 235 S.E. 259 (1926).


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CONCLUSION A surety payment bond is a tripartite agreement between the owner, the principal, and the surety. If a loss impends owing to the principals technical default, then the surety will pay for the financial obligation up to the amount of the penal sum. The purpose of a performance bond is to minimize financial risk to those individuals supplying labor and material to a construction project from nonpayment by a defaulting contractor debtor. In this instance, the surety assumes responsibility for the principal’s ability to financially perform the contractual obligations set forth in the signature agreement between the parties. Thus, in essence the performance bond is a credit risk. A performance bond is a contractual agreement, whereby the surety thereto provides financial guarantee to answer for the debt of the contractor up to the penal sum of the bond. In return for this extension of financial guarantee, the contractor executes a general indemnity agreement with the surety. In essence, the general indemnity agreement creates a secured credit line between the surety and contractor for which the surety charges a premium. Therefore, performance bond capacity is a secured transaction evidenced by the general indemnity agreement, and thus does not function as insurance or as a hold harmless agreement. Within the general indemnity agreement are two important provisions creating security to the surety.

Each provision supplements the surety’s common law entitlement to

reimbursement. These provisions are known as the indemnity clause, and collateral clause.

In essence, this clause and others like it, stipulate that the contractor is

fundamentally liable to the surety for all payments made by surety in satisfying the


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underlying construction contract. As security, the collateral clause requires the contractor to pledge its asset to secure to surety’s commitment to answer for its debt under the payment bond requirements. A surety bond is not an insurance policy. Rather, a surety bond is a financial guarantee. The surety guarantees that the principal in the bond will perform the obligation stated in the bond. For example, the obligation in a performance bond is that the principal will complete the project. Bonds sometimes state, as a condition, that if the principal fully performs the stated obligation, then the bond is void; otherwise the bond remains in full force and effect. If the principal fails to perform the obligation stated in the bond, both the principal and the surety are liable on the bond, and their liability is joint and several. That is, either the principal, surety, or both may be sued on the bond, and the entire liability may be collected from either principal or the surety. The amount in which a bond is issued is the penal sum or the penalty amount of the bond. Except in very limited set of circumstances, the penal sum or the penalty amount is the upward limit of liability on the bond. Notice to a surety of a principal’s default is extremely important, for it gives the surety the opportunity to act to mitigate the losses, and to select the most appropriate course of action at the critical time of claimed default. Upon being notified of a default, the surety may choose to engage a completion contractor, or elect to place its financial resources behind the owner’s completion efforts. However, in the latter situation, the surety’s liability upon default is generally held to be limited to the penal sum (face amount) of its bond. As with payment bonds, the surety possesses all defenses available to the principal. Stated another way, the surety’s liability for the principal’s defaults cannot be greater than the principal’s liability. Similarly, a defense normally available to the principal,


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

but which the principal is barred from asserting, is likewise unavailable to the surety. The surety may have independent defense, arising out of the language of the performance bond itself or the circumstances which give rise to the litigation. Material alteration or increase in risk provide examples of such defense. Where the surety does not consent to a material change to the endeavor which it has financially guaranteed, the surety may be discharged, either in whole or to the extent of injury caused by this material alteration, on the theory that the bond only binds the surety to certain risks, and consent of the surety is necessary in order to expand its liability beyond the terms of the bond. In recognition of this doctrine, most bond forms permit the owner and the principal to alter the terms of the underlying construction contract by change orders, by providing that the surety consents in advance to such modifications. The surety may also be released from liability under performance bonds where the owner makes unauthorized or premature payments, or fails to withhold retainage. The courts reason that the surety has relied upon these provisions in the contract in executing the bond. Provisions such as payment according to schedule and retainage requirements in certain percentages benefit the surety. Overpayment by the owner to the contractor may be a discharge of the surety’s obligations, because such an event reduces the contract balance available to the surety for completion of the project after a default. This is clearly true where the architect/owner fraudulently certifies progress payments beyond the defaulting principal’s actual progress. Overpayments made in good faith, however, may not discharge the surety. Moreover, unauthorized prepayments made by an owner may not discharge a compensated surety so long as the funds were used in actual construction of the project, and the surety was not prejudiced by the prepayments.


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REFERENCES

Backman, J., Surety Rate Making, 2d McGraw-Hill, New York, (1948).

Bruner, Phillip L., Managing and Litigating the Complex Surety Case, American Bar Association 1st ed., 1998.

Clore, Duncan L., Bond Default Manual, 2d ed. American Bar Association, 1995.

Conors, W.J., California Surety & Fidelity Bond Practice, 3 (1983).

Crewdson, Robert L., “Understanding the Fundamentals of Payment & Performance Bonds,”

Public Owners Seminar, Alston and Bird Law Firm, 2000.

Cross, J. “Suretyship is not Insurance,” 30 Ins. Counsel J. 253, (1963).

Cushman, E., “Surety Bonds on Public and Private Construction Projects,” 46 American Bar

Association Journal, 649, (1960).

Foster, C.A., “Construction Management and Design-Build/Fast Track Construction: A Solution

Which Uncovers A Problem for the Surety,” 46 Law & Contempt. Probs., 95,

96-97 (1983). Freedman, W., Richards on the Law of Insurance, § 3, 5th ed., McGraw-Hill, New York,


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(1952).

Milana, J. “The Performance Bond and the Underlying Contract; the Bond Obligations Do Not

Include All of the Contract Obligations,” 12 Forum, 187,188 (1976).

Remmen, Albert, The Contract Bond Book, National Underwriter Company, United States of

America, 1987.

Tasker, Richard E., Murphy, G. Wayne Sr., Schwartzkopf, William, Practical Guide to Construction Contract Surety Claims, Aspen Law & Business Publication, United States,

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Welch, John W., Morelewicz, James F., Ruck, Andrew J., Trecker, Stephen J., Contract Surety

Vol. I & II, 1st ed., Insurance Institute of America, 1992.

CASE CITATIONS

Allied Fidelity Insurance Co. v. Pico, 656 P.2d 849, (1983).

Airtrol Engineering Co. v. U.S. Fidelity & Guaranty Co., 345 So. 2d 1271, (1977).

American Surety Co. v. Wheeling Structural Steel Co., 114 F.2d 237, (1940).

Argonaut Ins. Co. v. Town of Cloverdale, 699 F.2d 417, (1983).

Armstrong Transfer & Storage Co. v. Mann Constr., Inc., 458 S.E. 2d 481, (1995).

Balboa Insurance Co. v. Fulton County, 251 S.E. 2d 123, (1978).


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

Balboa Insurance Co. v. U.S., 775 F.2d 1158, (1985).

Basic Asphalt & Construction Corp. v. Parliament Insurance Co., 531 F.2d 702, (1976).

Bob Davis Masonry, Inc. v. Safeco Ins. Co. Of Am., 883 P.2d 144, (1994).

Brunswick Nursery & Convalescent Center, Inc. v. Great American Ins. Co., 308 F. Supp. 297,

(1970).

Caroline Nursing Home v. Dix Constr. Corp., 285 N.E. 2d 904, (1972).

Carrier Corp. v. Glassman Constr. Co., 225 A.2d 448, (1967).

Central Towers v. Martin, 453 S.W., 2d 789, (1969).

Chicago College of Osteopathic Medicine v. George A. Fuller Co., 719 F.2d 1335, (1983).

City of Medina v. Holdridge, 346 N.E. 2d 339, (1970).

Continental Realty Corp. v. Andrew J. Crevolin Co., 380 F. Supp. 246, (1974).

Consolidated Elec. Supply, Inc. v. Bishop Contr’g. Co., 423 S.E. 2d 415, (1992).

Continental Bank & Trust Co. v. American Bonding Co., 605 F.2d 571, (1980). Coyne-Delaney Co., Inc. v. Capital Development of Ill., 717 F.2d 385, 393, (1983).

Detroit Fidelity & Surety Co. v. Bushong, 175 N.E. 683, (1931).


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

Duncanson-Harrelson Co. v. Travelers Indem. Co., 25 Cal. Rptr. 718, (1962).

Employer’s Insurance of Wausau v. Construction Management Engineers,

Employer’s Mutual Cas. Co. v. General Service Administration, 93-1, ¶ 25,482, (1992).

Four Seasons Envtl., Ins. v. Westfield Cos., 638 N.E. 2d 91, (1994).

General Elec. Co. v. Dole Co., 202 A. 2d 486, (1994).

Gibbs v. Hartford Accident and Indemnity Co., 62 So. 2d 599, (1953).

Glassman Constr. Co., Inc. v. Fidelity and Casualty Co., 356 F. 2d 340, (1966).

Haddock Constr. Co. v. Wilbur, 169 P. 2d 599, (1946).

Hamilton v. Republic Casualty Co., 235 S.E. 259, (1926).

Hamilton & Spiegel, Inc. v. Board of Educ., 195 A.2d 710, (1963).

Hardaway v. National Surety Co., 211 U.S. 552, (1908).

Hayes Livestk. Com’n Co., Inc. v. Maley Livestk. Com’n Co., Inc., 498 F.2d 925, 932, (1974).

Heglar v. McAdoo Constr., 487 S.W. 2d 312, (1972).

Hoskin, et al v. Aetna Life Insurance Company, 117 P.2d 80, (1941).


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

Hub Elec. Co. v. Gust Constr. Co., 585 F.2d 183, (1797).

In vonLusch v. Hoffmaster, 253 F. Supp. 633, (1966).

Indemnity Insurance Co. v. United States, 74 F.2d 22, (1943).

Indemnity Insurance Co. Of North America v. U.S., 74 F.2d 22, (1941).

J.T. Morgan Fin. Corp., 124 B.R. 293, 930 Bankr. S.D.N.Y., (1991).

Kalfountzos v. Hartford Fire Ins. Co., 44 Cal. Rptr. 2d 714, (1995).

Keene Corp. v. International Fidelity Ins. Co., 736 F.2d 388, (1984). King Bros. v. Utah Dry Kiln Co., 374 P.2d 254, (1962).

L&A Contracting Co. v. Southern Concrete Servs., 17 F.3d 106, 109, (1994).

Lemon & Assoc. V. Johnson Serv. Co., 440 P.2d 386, (1968).

Lumbermens Mutual Casualty Co. v. Agency Rent-A-Car, Inc., 128 Cal. App. 3d 764, 180 Cal.

Rptr. 546, (1982).

Madison County Farmer’s Assn. v. American Employer’s Ins. Co., 209 F.2d 581, (1954).

Mai Steel Serv. v. Blake Constr. Co., 981 F.2d 414, (1992).

Main Supply, Inc. v. United Bonding Ins. Co., 263 N.E. 2d 314, (1970).

Marshall Contractors, Inc. v. Peerless Ins. Co., 827 F. Supp. 91, 94, (1993).


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Maryland Casualty Co. v. City of South Norfolk, 54 F.2d 1032, (1932).

Massachusetts Bonding & Ins. Co. v. John R. Thompson Co., 88 F.2d 825, (1937).

Massachusetts Bonding Ins. v. U.S., 71 Supp. 36, (1947).

Moore v. Continental Cas. Co., 353 F. Supp. 105, (1973).

National Sur. Corp. v. United States, 31 Fed. Cl. 565, (1994).

Peerless Insurance Co. v. Board of City Comm’rs. Ex rel. Ben Dyer Assoc., 273 A.2d 15, (1968). Peerless Insurance Co. v. Cerny & Associates, Inc., 199 F. Supp 951, (1961).

Pennex Alum. Co. v. International Fid. Ins. Co., 818 F. Supp. 772, (1993).

Prairie State National Bank v. United States, 164 U.S. 227, (1986).

Ramada Development Co. v. United States Fidelity and Guaranty Co., 626 F.2d 571, (1980).

Rexroth & Rexroth, Inc. v. General Cas. Co., 51 Cal. Rptr 505, (1966).

Rio Grande Lumber Co. v. Darke, 167 P.241, (1917).

Sanitary Systems, Inc. v. Am. Surety Co. Of New York, 331 F.2d 438, (1964).

Simmons, Inc. v. Pinkerton’s, Inc., 762 F.2d 6591, 608 (1985).


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Southern Contr’g Inc. v. H.C. Brown Constr. Co., 450 S.E. 2d 602, (1994).

Southwood Builders, Inc. v. Peerless Insurance Company

State of Florida v. Welsley Constr. Co., 316 F.Supp. 490, 497, (1970).

Sykes v. Everrett, 83 S.E. 585, (1914).

Texas Refining & Marketing v. Aetna Cas. & Sur., 895 F.2d 637, (1990).

Town of Clarkstown v. North River Ins. Co., 803 F.Supp. 827, (1992).

Tri-State Ins. Co. v. U.S., 340 F.2d 542, 545, (1965).

Trinity Universal Insurance Co. v. Gould, 358 F.2d 883, (1958).

Triple Cities Constr. Co. v. Dan Bar Contr’g. Co., 285 A.D. 299, (1954).

Trustees of Bricklayers Local No. 3 v. Reeco, 747 F. Supp. 606, 614, (1990).

Tudor Dev. Group, Inc. v. U.S. Fidelity and Guaranty, 692 F. Supp. 461, 463, (1988).

U.S. v. Freel, 186 U.S. 309, 22 S. Ct. 875, (1981).

U.S. for the Of H.O. Kilsby v. George, 325 F.2d 54, (1963).

U.S. for the Use of Gibson v. Harmon, 192 F.2d 999, (1951).


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United States v. Fisk, 675 F.2d 1079, (1982).

United States v. Reliance Ins. Co., 799 F.2d 1382, (1986).

United States v. Spearin, 248 U.S. 132, (1918).

United States ex rel. Blue Circle West, Inc. v. Tucson Mech. Contr’g. Inc., 921 F. 2d 911, (1990). United States ex rel. James Simon Co. v. Avdelt Constr. Co., 446 F.2d 820, (1971).

United States Fidelity and Guaranty Co. v. Gulf Florida Development Corp., 365 So. 2d 748,

(1978).

United Structures of Am., Inc. v. G.R.G. Eng’g, 9 F.3d 996, (1993).

Westinghouse Elec Corp. v. Minnix, 269 x A. 2d 580, (1970).

Don Jensen, JD, PhD, recently received a Legal Law Masters in Real Estate and Construction Law from the University of Miami. Dr. Jensen also has advanced degrees in Construction Management and Finance. He is a professor of construction law and project management at the University of North Florida and serves as a claims consultant.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

SELECTING A PROJECT DELIVERY SYSTEM: CONSIDERATIONS FOR DECISION MAKERS Francis M. Eubanks and Philip B. Copare

ABSTRACT This paper will provide an overview of the major project delivery systems and will summarize the advantages and disadvantages of each major system. Figures depicting each of the major project delivery systems will be presented and discussed.

Key Words Construction Management; Design-Build; Linear Design-Bid-Build; Negotiated Design-Bid-Build

INTRODUCTION This paper will examine the primary project delivery systems so that practitioners and academics will be able to examine the roles of the key players. Since there is no single best system applicable in all cases, the advantages and disadvantages of each system will be considered. The need to accurately predict and control both cost and schedule in the face of ever increasing technical demands required of our buildings, litigation, environmental regulations, and safety requirements, as well as a decline in the availability of skilled workers make the design and construction process more complex and challenging than


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ever before. Thus, more efficient project delivery systems must continue to emerge. The three fundamental participants in all project delivery systems are the owner, the designer, and the constructor. The owner’s primary duties are to determine the scope and program, budget and raise the funds, monitor progress and quality, make payments to designers and constructors during construction, and operate and maintain the completed project. The designer’s primary duties are to guide the programming process, advise the owner on spatial and aesthetic issues, generate graphic solutions to problems, and assist the owner in selecting products to fit the program and budget. The constructor’s primary duties are to serve the owner in determining and controlling cost, time, and quality of the project as well as to secure and direct the labor, materials, equipment, and services required to complete the project. Cost and schedule often become key considerations in selecting a project delivery system. Cost and schedule can generally be improved by: •

Setting clear scope of work responsibility for each of the participants,

Carefully making design decisions,

Carefully making material selections,

Using standard contract forms,

Correctly deciding the size, scope, and complexity of work packages and/or individual contracts,

Allowing fast-tracking (phased construction and prepurchase of long lead items),


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Securing early schedule input from the contractor and the major subcontractors,

Conducting value engineering and constructability reviews, and securing sound cost reduction advice, from consultants/constructors during the design phase.

OVERVIEW OF PROJECT DELIVERY SYSTEMS Through the 1950’s, most projects were completed under lump sum contracts, now referred to as the Traditional, Linear Design-Bid-Build system. Exceptions developed in both the private sector and the public sector to reduce cost and to improve schedules. Construction Management first emerged in the 1960’s and Design-Build evolved in the 1970’s, as owners sought more efficient ways to complete complex projects. Certain basic responsibilities are required under each project delivery system. It is the distribution of those responsibilities that becomes the identifying characteristic of each system. This system involves competitively bid lump-sum (stipulated sum) construction contracts based on complete prescriptive contract documents, prepared by architects and their consulting engineers. For most of the twentieth century, public work was routinely built under this system using general contractors, performance bonds, and liquidated damages clauses in the belief that the free marketplace yields the best combination of quality and price. Many private owners still utilize this system. Figure 1 shows this system using multiple prime contracts, a refinement often used by highly sophisticated owners.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

FIGURE 1. TRADITIONAL, LINEAR DESIGN-BID-BUILD

In private industry, owners frequently employ some level of negotiation with contractors they have identified earlier on the basis of past price, performance, schedule, quality, safety record, or working relationships. The negotiation frequently takes place prior to completion of the design and allows the contractor to serve in an advisory role in terms of cost and/or schedule matters. Negotiated contracts are often based on cost, plus a fixed or percentage fee. Or the fee might be based on a multiple of direct project personnel and supervisory staff cost. At some point, a guaranteed maximum price (GMP) often becomes a part of the previously negotiated contract. The distinguishing


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characteristics are the negotiated fee and, more importantly, the early-on advisory role served by the contractor as shown in Figure 2.

Figure 2. Non-Linear, Negotiated, Cost Plus & Guaranteed Maximum Price

Relationships in a non-linear, negotiated general contract project delivery system. The negation process frequently entails some preconstruction dynamics between the design team and a general contractor for value engineering and constructability. The contract may be for a lump sum or cost-plus fee, the latter usually having a guaranteed a maximum price.

In Figure 1 we saw that the owner might call directly on outside consultants. The owner might call on outside cost control or schedule consultants. Or the owner might call directly on an independent construction manager (Figure 3, top), to represent him, as an administrator, in dealing with a general contractor who self performs some of the work and controls the trade contractors. The owner might desire to use a construction manager to represent him as an administrator in dealing with separate prime contractors who, in turn, perform the work (Figure 3, middle). If the owner holds the contracts, this arrangement is called “agency construction management.” The construction manager usually does not perform any of the work with his own forces. This is the usual case with public owners. If the construction manager holds the contracts (Figure 3, bottom), this is called “at risk construction management.”


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This arrangement often occurs in private industry where the construction manager, who may or may not self perform some of the work, may initially serve as an early-on cost and schedule consultant to the owner, and may later assume a negotiated contract with a guaranteed maximum price.

Figure 3. Construction Management


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What sets design-build apart from other delivery systems is that both design and building are carried out under a single contract as shown in Figure 4. It reduces document preparation time, bid time, change orders, and close out time and is almost always a quicker delivery system than the traditional linear system. The design-builder usually provides feasibility information as well as construction financing and may include long term financing (build and lease back and/or build and start-up).

In-House Design-Build usually means that the

designer is employed by the contractor. This system is usually used to perform small, routine, or repetitive projects. Consultative Design-Build means that the designer(s) contract with the design-builder on a project-by-project basis. This system is usually used on major projects requiring specialized experience.

Criteria for Selecting a Project Delivery System In any given case, criteria for determining the best Project Delivery System may include: Total time available for the design and construction of the project. Scope and complexity of the project. Possibility of phased construction and prepurchase of long lead items. Ability of the owner’s staff to administer the project. Availability of qualified designers, contractors, subcontractors, suppliers, and tradespersons. Legal requirements, particularly in the public sector. Financial strength, budget, and cash-flow capabilities of the owner. Design expectations of the owner. Owner’s desire to involve preconstruction services by contractors or outside consultants. Owner’s risk tolerance.


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Figure 4. Design-Build

Relationships in two basic types of design-build: “In-house” above and “consultative” below. Inhouse Design-Build means that the design team is in the direct employment of the contractor. Consultative means that the design team is a separate entity, contracting with the contractor on a project-by-project basis. In consultative Design-Build, the design team usually has an administrative relationship with the owner. Either of the contractual models shown can employ other Design-Build iterations, such a turnkey or design-build-lease.

Regardless of the project delivery system chosen or the agents an owner might employ, there are certain steps owners can take to improve the quality of services they receive. Those steps include: (1)

Decide on project scope, program, budget, funding source, time allowed for design, and time allowed for construction as soon as possible.

(2)

Decide what activities to outsource and assign qualified in-house personnel the responsibility for oversight and quick decision making as soon as possible.


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(3)

Predetermine desired qualifications and prequalify all designers, agents, and constructors.

(4)

Select the project delivery system through consultation with design and construction experts.

(5)

Use standard contracts such as those prepared by the American Institute of Architects, the Associated General Contractors of America, or other trade associations.

(6)

Decide uniformly and in advance what insurance and risks are to be assigned to designers and constructors so that all parties will secure the right insurance.

(7)

Assign personnel, or an agent, to continuously monitor the progress of all parties.

(8)

Stay involved and informed, but do not obstruct the professional processes.

(9)

Pay adequate fees to assure designers and constructors can place a sufficient number of highly qualified personnel on the project.

(10)

Have a formal dispute resolution or partnering process in place to assure all players keep the owner’s best interest at heart.

(11)

Establish a clear and consistent payment process.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

TRADITIONAL, LINEAR DESIGN-BID-BUILD

Advantages of the Traditional Linear Process (1) It is the most widely understood system, particularly for public owners. (2) All parties agree on all details of the finished product prior to the start of construction. Thus all the important decisions are made well in advance. (3) Complete

drawings

and

prescriptive

specifications

result

in

clear

communications and clear expectations of quality. (4) The lowest bid provides a reliable market price for the project. (5) Owners have a good idea of the final cost of the project prior to committing to construction. (6) Procedures are well established and broadly documented. (7) Designers have better control of design decisions, document control, and contractor selection. (8) A good number of contractors are available to bid the work. (9) Favoritism is avoided, allowing all qualified contractors to bid the work.

Disadvantages of the Traditional Linear Process (1) The linear sequencing of activities often requires a great deal of time. Phased construction and prepurchase of long lead items is rarely possible. This system does not allow early schedule input from the contractor and the major subcontractors


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

(2) Pressures on time allowed for completion of the project, increasing complexity of the approval process, and downward pressures on design fees frequently make it difficult to secure a fully completed set of detailed contract documents prior to starting the project. (3) There will be delays due to redesign if all the bids exceed the owner’s budget. Rebidding, even possible cancellation of the project is possible. This system does not allow for value engineering, constructability review, cost reduction advice, or advice regarding schedule from constructors during the design phase (4) Adversarial relationships develop readily between the three principal parties since they have different goals: The owner wants the best possible quality at the least possible cost. The designer, functioning as the owner’s agent, wants to satisfy the owner, yet satisfy his own aesthetic goals. The contractor is atrisk financially and wants to complete the work within the allotted time and cost estimate. Differences in interpretation of the documents are frequent and often lead to legal disputes.

NON-LINEAR NEGOTIATED GENERAL CONTRACTING Advantages of Non-Linear, Negotiated General Contracts (1) The contractor can be brought in early to perform preliminary scheduling. (2) The contractor can be brought in early to provide value engineering, constructability review, and cost reduction analysis as design decisions are being formulated.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

(3) Work can be started earlier and/or “phased construction” is possible. (4) Input from key subcontractors can be available early in the process. (5) Many questions, issues, and problems can be resolved early in the process. Team dynamics can become strong and productive over several projects. (6) Once documents are completed, there are typically fewer changes, disputes, claims, and delays than in the traditional linear design-bid-build process. (7) Contractors are motivated to provide excellent service because of the importance of repeat business. (8) The process saves time by eliminating advertising for bidders, qualifying previously unknown contractors, and formally bidding the project.

Disadvantages of Non-Linear, Negotiated General Contracting (1) Final costs are not known, and will not be known, until the project is completed. (2) It may be difficult to define “cost” or to verify that all items claimed as “costs” are legitimate. (3) If multiple bidders are involved, comparative evaluation of proposals can be difficult. (4) Selection of contractors and negotiations with them will be a more detailed process. (5) With guaranteed maximum price contracts, it may be difficult to verify that the contractor will be able to complete the project within the agreed price.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

(6) With a guaranteed maximum price contract, the contractor may begin to focus on his profit rather than on serving the owner’s needs. (7) Over the long term, complacency can develop and performance can decline. (8) If the intention of a GMP is to stabilize the price, there must be a system in place to protect the contractor from owner driven changes that alter the contractor’s cost. (9) If disagreements and differences in interpreting the intent of GMP are to be avoided, a standard form of agreement must be used.

CONSTRUCTION MANAGEMENT Advantages of Construction Management

Advantages of Agency CM With a Single General Contractor This model offers the advantage of providing the owner with expert third party preconstruction services including: scheduling, value engineering, constructability review, and cost reduction analysis before an actual contractor is selected. (1) Many questions, issues, and problems can be discovered and resolved early in the process, often before contractors are involved. (2) Prepurchase of long lead materials is possible. (3) The owner holds the general contract with the general contractor. (4) The general contractor continues to self perform work as in traditional delivery systems.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

(5) Trade contractors continue to operate as traditional subcontractors. (6) This model is most often used when the ability of the owner’s staff to administer the project is limited, and fast track (phased) construction is not warranted. (7) Construction managers are motivated to provide excellent service because of the importance of repeat business.

Additional Advantages of Agency CM With Multiple Trade Contractors Owners may prefer this model when: (1) Projects are large in scope or complexity. (2) Overall time available for design and construction is limited. (3) The ability of the owner’s staff to administer the project is limited. (4) Services of outside consultants, such as real estate or financial advisers, are needed and the CM is required to secure and/or manage services of design professionals. (5) Phased construction (and prepurchase of long lead items) is desirable or a series of projects are to be completed. (6) The owner desires to retain a strong role in contract administration in areas such as: Monitoring the contractor(s) overall cost and/or schedule performance; reviewing quality control test results and documentation; reviewing shop drawings. approving material samples and making color and finish selections; resolving disputes and potential claims; negotiating changes and processing change orders; reviewing contractors’ pay requests; providing


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

coordination when two or more separate prime contractors are performing simultaneously; determining when substantial completion and final completion have been achieved. (7) Legal requirements prevent the owner from self-performing the work and/or from negotiating the work with contractors.

Advantages of At-Risk Construction Management: This model is popular in private industry where: (1) The construction manager provides preconstruction services such as scheduling, value engineering, constructability review, cost reduction studies. (2) The construction manager then takes on the role of an “at risk” general contractor during the construction phase. (3) The construction manager subcontracts and issues purchase orders directly. He may be compensated on a cost plus fee basis or a negotiated fee schedule and may have a guaranteed maximum contract with the owner.

Disadvantages Associated with Construction Management (1) Final costs are not known until the project is completed. All final decisions are not made before work begins. Invariably, something will crop up that affects cost or schedule. (2) Control over trade contracts or separate prime contracts may be reduced. As owner’s agent, a CM may have less control than a traditional general contractor.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

(3) Some loss of objectivity may be perceived as construction managers are selected on their qualifications rather than price. (4) When selection of a CM is based on fee schedule, the CM with the lowest fee may not be able to provide adequate numbers of personnel or sufficiently experienced managers. (5) Over the long term, complacency can develop and performance can decline. (6) It may be difficult to define “cost” or to verify that all items claimed as “costs” in the construction manager’s billings are legitimate. (7) Selection of construction managers and negotiations with them can be a demanding process. (8) The construction manager may begin to focus on his profit rather than on serving the owner as an agent. (9) Poor performance on the part of the construction manager can result in increased cost.

DESIGN-BUILD

Advantages of Design-Build (1) The owner deals with a single source provider for both design and construction. (2) Design-build is almost always quicker than the traditional linear design-bidbuild system and is often quicker than non-linear (negotiated) general contracts.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

(3) Design-build reduces demands made on the owner’s staff in terms of: a. Selecting designers and contractors. b. Maintaining communications with those parties during the document preparation and bidding period. c. Maintaining communications with those parties during the construction period, in terms change orders, controlling cost and schedule, and in project close out. (4) Overall project cost can be determined early in the process because budgeted cost, based on schematic drawings and outline specifications, often becomes the basis for a guaranteed maximum price. (5) Project cost can be competitive if the owner asks for competitive proposals from several prequalified design-build firms who, in turn, seek competitive bids from design-build specialty subcontractors, structural fabricators, and equipment providers. (6) Design-build has the potential of overcoming the reluctance of designers to assume jobsite decision-making roles in terms of directing the means and methods of construction and in directing the flow of activity. (7) Design-build has the potential of reducing the growing number of disputes and litigation often associated with construction. (8) Project close out is usually smoother.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

Disadvantages of Design-Build Contractors will continue to lead in this field because they have the ability to guarantee cost, buy the necessary insurance, and obtain surety bonds. But in the design-build project delivery system, design-build contractors absorb more risk than contractors in the other delivery systems. Design-Build entities are responsible for: (1) Zoning compliance, (2) Building code compliance, (3) Complete and accurate designs and design liability, (4) Construction office and field supervision, (5) Safety of all parties on the site, (6) Quality of all work, (7) Completion of the work within cost estimates, (8) Completion of the work within schedule estimates, (9) Liability exposure of both designer and builder, and probably the owner as well, (10)

Additionally, turnkey builders are responsible for:

a) Construction financing, b) Site acquisition, in some cases, c) Long-term financing, in the case of design-build-lease, d) Casualty and liability insurance, in the case of design-build-lease, e) Utilities and maintenance, in the case of design-build-lease,


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

CONCLUSIONS The traditional, linear design-bid-build system will remain popular for public work for the foreseeable future. This system functions well for projects that have clear parameters and sufficient time exists to prepare good documents prior to bidding. It is the tried and true way for public agencies to let most of their construction work. The traditional design-bid-build project delivery system is a linear arrangement. This paper also discussed non-linear, negotiated general contracts. What actually delineates the two project delivery systems is the nonlinear characteristic of negotiated contracts. In each case, a general contractor, who self performs much of the work, is a central figure. But, in the non-linear system, involvement of the contractor begins while design decisions are still being formulated. As designers gradually retreated from jobsite decision making to reduce liability and general contractors gradually turned to subcontracting most of the work, Construction management became the logical outcome. However, trade contractors

(subcontractors)

often

do

not

understand

the

contractual

responsibilities they must bear as separate prime contractors in terms of bonding, insurance, and payment applications. The selection process must be objective, fair, and qualifications-based as are other contracts for professional services. Design-Build places much of the burden for cost and schedule on the design-builder, but owners must be prepared to accept their new role as well.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

Owners must be quick decision-makers. A program manager or other qualified advisor to the owner often must be assigned the responsibility for managing the project and dealing with the design-build entity. Owners must develop clear statements of requirements. Contractors often are not the best managers of the quality assurance process. Designers generally prefer not to work in joint ventures with, or as subcontractors to, contractors.

Francis M. Eubanks is a professor of Construction Science and Management at Clemson University. He is a registered professional engineer, a member of the Chartered Institute of Building headquartered in the United Kingdom, and is a Certified Professional Constructor.

Philip B. Copare is President of Construction Services Enterprise, Incorporated of Zellwood, Florida.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

The Dangers of Mold Peter D. Fowler

ABSTRACT You have probably seen it on TV, and read about in newspapers and magazines. You can find more information on the Internet than you could ever read, even if you quit your job to do it. If your business is related in any way to building construction, real estate or insurance, mold is probably a scary subject for you. Contractor and construction consultant’s business in the last few years has been dominated by problems in construction, including insurance claims and litigation. In 1999, mold claims only came along with a small percentage of projects; now Southern California claims without allegations of mold are equally rare. Has the natural or built environment changed, causing a spike in the amount of mold growing in California, or is the interest in mold due to changes in the insurance and legal environment? The health issues that have been widely reported in the media are a real concern, but it does not stop there. The “dangers of mold” also include: expenses for expert inspection and testing, remediation, alternative living expenses, legal costs, business interruption, insurance coverage with skyrocketing costs or a lack of availability, bad publicity, and the ambiguity in all of the above due to a lack of standards, and more. There is an enormous volume of confusing and contradictory information available on the topic of mold and a rapidly growing population of folks claiming to be “mold experts”. Hopefully, by the end of this article, you will be able to tell if the “experts” you face are giving you the straight story or using the complexity and media hype as scare tactics. If you end up


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

with a mold problem, this information should help you cut through the haze, give you an idea of who you should have on your team, and tell you where to find reliable information.

Key Words Mold, Inspection, Testing, Remediation, Prevention

WHY NOW AND HOW BAD IS THE SITUATION? Americans seem to be expecting higher quality, less maintenance, increased service life and lower cost in all of the products they purchase. Since most courts consider a building a “product”, those of us in the building and real estate industry are not immune from this trend. If the product does not work the way consumers expect, they are going to be mad. Combine these increasing expectations with sensational and pervasive media coverage, 681,000 lawyers in this country (more than 140,000 in California alone), peculiarities in insurance coverage and the law, rapid evolution in building practices, scientific uncertainty and expert disagreement as to the effects of mold on humans, a lack of definitive standards for dealing with mold contamination in buildings, and we now have ourselves a mess. As with any problem, the best thing to do is first take a good, long look in the mirror to see what role we have played in getting into the situation. Most projects involved in a legal battle are there for a good reason. People generally realize the difficulties of litigation and consider it only as a last resort.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

Our building codes and construction methods are evolving to have us construct buildings tighter and tighter, which can trap moisture and facilitate the growth of mold, allowing a smaller margin for error in design and construction. We commonly use new materials like EIFS, MDF, “greenboard”, and other products and assemblies that have not been timetested in our rapidly evolving and interconnected building environment. Add a not-so-healthy dose of poor workmanship, lack of adherence to manufacturers recommendations and the absence of adequate training, and here we are in an uncomfortable and expensive situation. There is a serious epidemic under way, and these claims have caused an insurance crisis. In 2001, mold claims in Texas totaled $843 million for 14,700 claims vs. $153 million for 2,500 claims in 2000. The media introduced many Americans to the subject with celebrity mold claims, including those by Erin Brockovich and Ed McMahon. It was reported that the former Tonight Show co-host is asking for $20 million in damages for mold in his home that killed Muffin, the family dog. As a result of the increased risk, it is likely that most commercial insurance policies will have a “mold exclusion” soon; that means your policy will not pay for mold related expenses. Farmers Insurance has instituted a non-renewal of all Texas homeowner policies affecting 700,000 residents. Florida insurers asked for a mold exclusion from the state. State Farm Insurance is no longer writing new homeowners policies in California. Experts are divided as to the effects of mold, and courts have not ruled on the validity of the claims. Regardless, numerous verdicts have come down on the side of the owners in mold cases. Most of the large awards have been cases of “bad faith” or similar problems with the handling of the insurance claim, where the substance of the scientific evidence has not weighed heavily. A Texas family was awarded $32.1 million in 2001 because a mold


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

claim was mishandled, most of which was punitive, expert and legal costs. A California jury awarded $18.5 million (reduced to $3 million) in 2000 for a mishandled claim. Litigation of a Florida courthouse building fetched a $14 million trial verdict based on mold damage. And a Delaware woman was awarded $1 million in 1999 for permanent impairment due to mold. In addition to the lawyers, criminals are catching on to the “Mold Is Gold” craze: seven Texans were found guilty of $5 million mold insurance fraud. In California the legislature has passed the Toxic Mold Act of 2001 that requires a group of interested parties to develop a body of standards to dispel the confusion, but this work is not complete.

WHAT IS MOLD & HOW DOES IT EFFECT US? Mold is any form of multi-cellular fungi that lives on plant or animal (organic) matter. There are more than 100,000 different molds in the world. To grow, mold requires food, moisture and time, and can flourish in temperatures between 40 and 100-degrees Fahrenheit. Even in the absence of ideal conditions, mold can lay dormant for years and “reactivate” if living conditions improve. “Toxic Molds” (a term many experts and the American Industrial Hygiene Association do not accept) are those that can produce mycotoxins and include Aspergillus, Penicillium, Stachybotrys and others. These are the molds that you hear about on television, and some experts say they can cause severe and permanent damage to humans. Health effects of mold are at the heart of the debate. It is agreed that all molds can cause “allergic” type reactions in humans, i.e. coughing, wheezing, sneezing, irritated eyes and throat, and runny nose. More severe effects may include flu-like symptoms such as fever, fatigue, respiratory dysfunction, excessive regular nosebleeds, dizziness, headaches,


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

diarrhea, vomiting, and impaired or altered immune function. Reports of these more severe symptoms are very rare and only occur in a small percentage of the population. Other frightening claims include a loss of balance, cognitive impairment, memory loss, pulmonary hemorrhage, liver damage and near blindness, some of which are claimed to be permanent. Various scientific groups and agencies are in the midst of research to determine if there is a link between mold exposure and permanent damage to humans, but there is no scientific certainty that is widely agreed upon at this time. Most recently, the American College of Occupational and Environmental Medicine (ACOEM) published a position statement that concludes that current evidence does not support the proposition that human health has been adversely affected by inhaled mycotoxins in home, school or office environments. We don’t even know how much mold is too much. There are no standards yet for acceptable exposure. There are also no tests for verifying human exposure to mold, in contrast to lead and asbestos, where physical testing of the victim can prove exposure. There is agreement as to who among us is most vulnerable to the effects of mold exposure: infants, children 6 years and younger, pregnant women, elderly, asthmatics, allergic individuals, and immune compromised individuals including those with HIV.

INSPECTION AND TESTING As discussed, one of the “dangers of mold” is ambiguity due to a lack of definitive standards. The ambiguity is reduced when a genuinely qualified professional assesses a contaminated site and makes recommendations based on professional judgment; but it can get ugly when another party disagrees with that assessment, because the differences in costs can vary wildly and there is often a question of who is paying the bills. These


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

differences of opinion occur more often now that attorneys and “Johnny-come-lately mold experts” are a more common part of the equation. The guidelines commonly used come from the New York City Department of Health & Mental Hygiene (NYC), the Environmental Protection Agency (EPA), the U.S. National Center for Disease Control (CDC), Texas Department of Health and Texas Department of Insurance, the American Industrial Hygiene Association (AIHA), and the American Conference of Governmental Industrial Hygienists (ACGIH), among others (see list of Resources at the end of this article). The information for standards mentioned in this article is from one or more of these listed sources. Visual Inspection is the most important initial step in assessing a situation. The amount of mold observed will determine the extent of the remediation, level of containment and the type of personal protective equipment (PPE) required for the workers. There are two reasons for the inspection and testing: (1) determine the source of the moisture and collect enough information so a repair plan can be developed to make sure the problem does not recur, and (2) to determine the extent of contamination so a method of containment and remediation can be developed to safely rid the building of mold. Bulk or surface sampling is performed by using cellophane tape or a cotton swab to collect the mold. The sample is later analyzed in a laboratory by microscopic (visual) observation. Various authorities note that identification of the spores/colonies requires considerable expertise. The NYC standard says bulk or surface sampling is not required to undertake remediation, and that visual observation is adequate for assessment.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

When the quantitative analysis of “how much mold is here” begins, the heart of the difficulty is found: Unlike lead or asbestos, the question of mold does not have a “yes or no” answer. There are usually some molds in the indoor environment. As an example, we can easily understand that all things being equal, mold counts in a well kept home could be less than mold counts of inferior housekeepers. This is just one of the many possible examples of an issue which has nothing to do with building construction, but could be an important variable. Air sampling is usually performed with the use of a small pump to draw a known volume of air through a small collection device, which catches mold spores. This sample is analyzed in the lab to determine what types of mold are airborne. It is important to also collect samples of outdoor air to serve as a comparison to the indoor samples. As mentioned previously, there are no standards for determining how much mold is too much, so comparison to the outdoor and/or noneffected indoor environment is critical to assessing the effect of the building and the environment on the indoor air quality (IAQ). The interpretation of this data is inherently complex and problematic. So much so that NYC says air sampling for fungi should not be part of a routine assessment since air sampling methods for some fungi are prone to false negative results and cannot be used to rule out contamination. According to the AIHA, microbial problems in buildings have shown that perhaps 50% of microbial problems are not visible. Thus destructive testing (tearing into the walls to see what is happening) is often warranted, if there is other evidence suggesting hidden problems.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

If enough mold is found to warrant negative air containment, relocation of the occupants, or when an occupant has complained of health susceptibility to mold, that an independent Certified Industrial Hygienist (CIH) or similarly qualified individual should be hired. That is, a professional not associated with the business of the contractor performing remediation, who is paid by or on behalf of the building owner, but not by the contractor. This professional should perform inspections before work begins, write remediation specifications and observe the remediation at defined hold points, including clearance inspections after the work is complete. This serves as a check-and-balance mechanism that experience tells me is always worth the expense. Many professionals who commonly investigate moisture problems in buildings believe that projects suffering distress often have many sources contributing to the situation. Be warned that just because you found a problem, it does not mean you found the problem. Since mold claims often end up in the hands of insurance agents and attorneys, documentation of all observations, conclusions, recommendations and work performed is crucial.

REMEDIATION Here, remediation means getting rid of mold. There is no definitive authority or standard, and the sources of information are the same as previously noted (NYC, EPA, CDC, AIHA, ACGIH). Some of the information sources refer to U. S. Department of Labor Occupational Safety & Health Administration (OSHA) hazardous work standards, which mandate the level of protection and qualification of workers, and hazard communication


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

requirements. These OSHA standards traditionally relate to hazardous clean up for chemicals or asbestos. All authorities stress the importance of repairing the source of the moisture before beginning remediation. A lack of attention to this critical activity may cause many current mold claims to return in the future. If the only professional hired is a CIH or other mold expert, he might not know enough about leak and moisture detection and repair to specify and over see an effective, durable fix. For this reason, it is often necessary to have a building consultant on the team to find the moisture source, specify a repair and make sure repairs are performed correctly. The professional who writes the remediation specification should indicate the level of containment required. Containment means keeping the moldy areas separated from those not impacted, and is often accomplished by sealing doors, ducts and other means of escape for contaminated air, or by encapsulating the area with sheet plastic and sealing all of the seams. Most standards call for increasing levels of protection based on the surface area of mold that is found. See Table 1 for NYC requirements for containment and personal protective equipment (PPE). At level I, no containment is required. Compare this to Level IV where a complete isolation of the work area from occupied spaces, use of negative air equipment with High-Efficiency Particulate Air (HEPA) filtration, inclusion of airlocks and a decontamination chamber in the containment structure, are required.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1 Table 1. NYC Remediation Recommendations Contamination

Size /

Level

Description

Level I

Small isolated areas

Area < 10 SF

Level II

Mid-sized Isolated areas

10-30 SF

Personal Protective Containment No containment

Isolating the work area from occupied spaces

Level III

Level IV

Large isolated areas

Extensive Contamination

30-100 SF

> 100 SF

II plus use of negative pressure with HEPA filtration III plus airlocks and a decontamination room

Level Va

HVAC – small isolated

< 10 SF

No containment

> 10 SF

III, plus airlocks and a

areas Level Vb

HVAC – Larger areas

decontamination room if contamination is greater than 30 square feet.

Equipment (PPE) N-95 disposable respirator, gloves, and eye protection N-95 disposable respirator, gloves, and eye protection N-95 disposable respirator, gloves, and eye protection Full-face respirators with HEPA cartridges, disposable protective clothing covering both head and shoes, gloves N-95 disposable respirator, gloves, and eye protection Full-face respirators with HEPA cartridges, disposable protective clothing covering both head and shoes, gloves

The referenced standards do not take into consideration the hidden mold often found in the course of remediation. When additional mold is found, it is important for the contractor or specifier to re-evaluate the level of protection required. When containment is required, it is important to notify those who might be affected by the contamination, including building occupants and remediation workers. In the worst of situations, evacuation of buildings might be required. The NYC standards recommend that


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

people who experience adverse health effects associated with exposure to fungal materials should be evacuated immediately from a building undergoing remediation, and they should remain out until the work has been completed. Other criteria for evacuation decisions include the size of the contaminated area, extent of health effects reported by building occupants and the amount of disruption likely to be caused by the remediation activities. Remediation workers and anyone entering the remediation area may require Personal Protective Equipment (PPE) based on the corresponding level of contamination. At Level I, workers should wear rubber gloves and wear N-95 rated masks (less than $5 each). At level IV, PPE could include a full-face, powered air-purifying respirator, moldimpervious head and foot coverings, and a body suit made of a breathable material, with all gaps (e.g., at wrists and ankles) sealed. Treatment of damaged building components is different for various material types. Non-porous hard surfaces can be wiped clean. Soft materials that suffer contamination, such as wallpaper, wallboard, carpet and padding, are often removed and discarded. Wood framing requires evaluation based on the condition and extent of the mold or deterioration and the ease or difficulty of replacement. Remediation can require removal of the mold with power tools like grinders and sanders, then thorough cleaning with scouring pads and HEPA vacuum cleaners. This is a very labor-intensive process, especially when the workers are wearing “moon-suits”. If building contents are analyzed and found contaminated, they need to be meticulously cleaned or discarded. The value of the contents should be considered when making these recommendations, as it is sometimes found that cleaning will cost more than they are worth.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

It was not long ago when contractors simply filled the old Hudson-sprayer with a mild bleach solution and sprayed away if they found mold. In this use, the bleach solution is technically called a biocide. There are other biocides that were specifically formulated for the same purpose, but most authorities are no longer calling for their use since repair of the moisture source and removal of the mold will suffice for remediation, and the odors and residual toxicity of biocides is thereby avoided. If there is mold floating around in the air, it stands to reason there might be some in the HVAC (Heating, Ventilation & Air Conditioning) System. Guidance on remediation of contaminated HVAC systems is sparse. NYC recommends that the HVAC system be shut down during remediation activities. For Level V-b (see Table 1), air monitoring is recommended prior to reoccupancy with the HVAC system in operation. EPA and ACGIH refer to the EPA guide Should You Have the Air Ducts in Your Home Cleaned? The guide suggests having the air ducts in a home cleaned if there is substantial visible mold growth inside hard surface ducts or on other components of the heating and cooling system. The service provider should agree to clean all components of the system and should be qualified to do so. Improper duct cleaning can cause indoor air problems or damage ducts. Clearance Criteria (the standards used for “final inspection” by the mold experts), as you might now expect, has no hard and fast rules. AIHA, ACGIH, and EPA say a remediation can be judged successful when two criteria are met: (1) the problem that led to the mold contamination is fixed, and (2) affected areas have been inspected and visible mold and mold-damaged materials have been removed. If air sampling is performed, the types and concentrations of molds measured indoors should be similar to what is measured outdoors. ACGIH adds that concentrations of biological agents in any surface samples


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

taken should be similar to what is observed in well-maintained buildings or on construction and finishing building materials. Training and qualifications of contractors and remediation workers is another hazy subject where the authorities refer to existing OSHA standards that deal with toxic clean-up work and hazard communication. The OSHA references are mentioned only briefly, probably because there are no national standards specific to mold. These OSHA standards call for workers in heavy contamination areas to be trained to protect themselves and to be fitted with respiratory protection by a trained professional; unfortunately the type of “trained professional” is not specified.

PREVENTION Build it right! But how, you ask? Training is the answer. Sources of information are abundant, but a single source pulling the information together remains absent. There are several groups trying to help (see Whole Building Design Guide www.wbdg.org), but they are probably a couple of years from seeing their visions complete, especially for residential construction. For now, start your training program by contacting the National Association of Home Builders Research Center (NAHB-RC www.nahbrc.org), reviewing their materials with your staff, making a list of the biggest risks you face, and starting to document and share your company’s best practices with your entire organization. Be sure you save this knowledge base in a structured way so that as new people join the organization, they too can share the accumulated wisdom. Who needs training: Designers, builders (supervisors as well as workmen), suppliers, manufacturers, and all building industry personnel.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

We need training in: •

Civil: Move water away from structures, adhere to building code requirements and good civil design practices.

Roofing: Use manufacturer’s installation guidelines or trade publications such as NRCA Roofing and Waterproofing Manual (www.nrca.net).

Walls: Upcoming ASTM standard “Design and Construction of Low-Rise Frame Building Wall Systems To Resist Damage Caused by Intrusion of Water Originating as Precipitation”. Others.

Fenestration: Use ASTM E 2112 – Standard Guide for the Installation of Doors, Windows and Skylights (www.astm.org), AAMA Installation Masters training & certification program (www.aamanet.org).

Mechanicals: American Society of Heating, Refrigerating and Air-Conditioning Engineers, Inc. (ASHRAE) (www.ashrae.org) which has too much excellent information to list here, but you might start with the Handbook of Fundamentals sections on moisture in buildings.

Another critical element of building construction, often overlooked by residential builders, is testing. Assemblies that are not time tested need to be thoughtfully designed, carefully installed and rigorously tested. Finally, education of consumers on what to expect from a home, and how to maintain it is crucial; in fact, it has now been legislated in California. A State Senate bill requires all builders to notify new homeowners of their maintenance obligations in writing. If the builder does not tell the owner maintenance of an assembly is required, then that assembly better


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) â&#x20AC;&#x201C; April 2004, Volume 28. Number 1

last past the statute of limitations, or the builder could be on the hook. Owners also need to be taught to keep houses dry, identify leaks immediately, and only allow qualified professionals to make repairs. Keeping relative humidity in a home or other building well below 60% is important. Builders need to make this easier with design of the assemblies and training of the owners.

REFERENCES For a list of mold related information, including links to most of the information references in this article, see http://www.petefowler.com/moldresources.html.

Pete Fowler is active as a California General Contractor, Certified Professional Cost Estimator, Certified Inspector, Construction Consultant, author and speaker regarding construction topics. Focusing on construction projects and buildings suffering distress, Mr. Fowler has analyzed damage, performed testing, specified and overseen repairs, performed repairs as a contractor and testified on a wide variety of construction issues.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) â&#x20AC;&#x201C; April 2004, Volume 28. Number 1

MANUFACTURED HOUSING TRENDS AND CODES IN MICHIGAN Namita Mehrotra, Matt Syal, and Makarand Hastak

ABSTRACT According to the Census Bureau, in 1999, 21.4 million Americans (about 7.6 percent of the U.S. population) lived year-round in 8.9 million manufactured homes. Eighty-eight percent (88%) of the owners of manufactured homes were very satisfied with their lifestyle (MHI-1). Homeownership, which is one of the greatest dreams of Americans, is also one of the biggest investments a family or individual will make. Manufactured housing, like any other type of home, offers quality, value, and the most up-to-date features that any homebuyer can ask for. This paper provides an overview of the manufactured housing industry at both national and state level. The trends are divided into six major parts including overall housing statistics, overview of factory built housing including terminology, cost of manufactured housing, manufactured housing installations, top industrialized producers, and summary of Michigan trends. Secondly, it describes the HUD code and compares it with the IRC (International Residential Code) for single-family dwelling.

Key Words Manufactured housing, Housing Trends, HUD code, International Building Code (IBC), International Residential Code (IRC)


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) â&#x20AC;&#x201C; April 2004, Volume 28. Number 1

INTRODUCTION Manufactured homes have evolved from the pre World war II trailers and have come a long way during the past several years bearing little semblance to the â&#x20AC;&#x153;mobile homeâ&#x20AC;? of the olden days. The manufactured homes are constructed to meet the Federal Manufactured Home Construction and Safety Standards Act (HUD Code), which has been in effect since June 15, 1976. The Federal standards regulate manufactured housing design, construction, strength, durability, transportability, fire resistance, energy efficiency, and quality (HUDMHCSS, 1999). Research in the manufactured housing area mainly centers on the house as a product, quality related issues, production process related issues, and community development issues. In a research study conducted at the University of Michigan issues related to quality, costs and finance, values, impacts on adjacent property values, manufactured housing and the senior population, and alternative ownership and innovative uses were discussed. The major findings were that the quality of manufactured housing has become equivalent to that of conventional housing and that this form of housing did not have any impact on the appreciation rates of the surrounding properties, discarding the notion of negative property value impacts (Warner and Johnson 1993, MHI 2001). This paper provides an overview as well as the recent trends in the manufactured housing industry at both national and state level. The trends are divided into six major parts including overall housing statistics, factory built housing, cost of manufactured housing, manufactured housing installations, top industrialized producers, and summary


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of Michigan trends. Secondly, it describes the HUD code and compares it with the IRC (International Residential Code) for single-family dwelling.

OVERVIEW OF MANUFACTURED HOUSING

Factory built housing consists of many types of housing. These include, manufactured, modular, mobile, panelized and pre-cut housing (MHI-2). Homes built entirely in a factory under a federal building code administered by the Department of Housing and Urban Development (HUD) are classified as "manufactured homes". These homes are constructed to meet the Federal Manufactured Home Construction and Safety Standards Act (HUD Code), which has been in effect since June 15, 1976. The Federal standards regulate manufactured housing design, construction, strength, durability, transportability, fire resistance, energy efficiency, and quality. The HUD Code also sets performance standards for heating, plumbing, air-conditioning, thermal, and electrical systems. Manufactured homes may be factory constructed as either singlesection or multiple-sections. The section(s) is (are) then transported to the site, installed, and connected to the required utilities. The house is transportable in one or more sections and built on a permanent chassis. They are designed to be used as a dwelling with or without a permanent foundation. The HUD code applies to all manufactured homes throughout the United States (HUDMHCSS, 1999).

Factory-built homes constructed to state, local or regional codes where the home will be located are called Modular Homes. Just like the manufactured homes, modular homes are multi-section units, which are transported to the site and installed. A Mobile


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) â&#x20AC;&#x201C; April 2004, Volume 28. Number 1

Home is a term applied to homes built prior to June 15, 1976, when the HUD Code went into effect. Panelized Homes are defined as homes consisting of factory-built panels such as walls with windows, doors, wiring and exterior siding, which are transported to the site and assembled. Panelized homes must meet state or local building codes. PreCut Homes are another type of factory-built housing. Materials for this type of home are factory-cut (pre-cut) to design specifications, transported to the site and then assembled. Pre-cut Homes include kit, log and dome homes. These homes are built to meet either local or state building code requirements.

In the manufactured housing sector, following are the major parties involved in the overall production, sales, and installation process (Mehrotra and Syal, 2002). Dealer is any person engaged in the sale, leasing, or distribution of new manufactured homes primarily to persons who in good faith purchase or lease a manufactured home for purposes other than resale. Distributor is any person engaged in the sale and distribution of manufactured homes for resale. Installer is any person, including but not limited to a dealer or mechanic, who installs or sets up manufactured housing for a buyer. Manufacturer is any person engaged in manufacturing or assembling manufactured homes, including any person engaged in importing manufactured homes for resale. Purchaser is the first person purchasing a manufactured home in good faith for purposes other than resale.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

Retailer is a licensed, professional seller of manufactured houses. He/she assists in arrangement for financing, has the home installed on home site and prepared for movein. Manufactured home contractor is a person or entity, other than an employee of a licensed manufactured home retail dealer or person performing a function which the person is licensed to perform, who for valuable consideration engages in the installation, modification, alteration, or repair to the structural, mechanical, or electrical systems of a manufactured home. Consumer is a person who purchases a manufactured home, mobile home for his own use and who does not intend to resell it.

MANUFACTURED HOUSING AS AN AFFORDABLE HOUSING OPTION The manufactured housing sector has a profoundly different economic structure and way of doing business than the site-built sector of the industry. It has grown substantially in 1980’s and 1990’s reaching an annual production level of about 300,000 – 400,000 housing units. Production is much more concentrated in fewer firms than sitebuilt home construction. Producers of manufactured homes have historically focused on the production process itself and left land development and retailing activities to others, but vertical integration into retailing and operation of manufactured home parks or rental communities is becoming more common (AHB, 1998).

The construction of new on-site homes through sequential fabrication and assembly of products, materials, and systems into finished homes has historically


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) â&#x20AC;&#x201C; April 2004, Volume 28. Number 1

dominated the home building business by using skilled tradesmen and general laborers. Activities are planned and coordinated by professionals with regulatory oversight at the local or state government level. As a result the "site-built" sector of the home building industry is large with around 1 â&#x20AC;&#x201C; 1.5 million housing starts in 2000 (NAHB, 1998).

Four factors seem to motivate consumers to purchase Manufactured Homes. They feel that (1) it is the most affordable housing alternative, (2) they can occupy the house faster than compared to site built house, (3) their homes will be easy to maintain, and (4) living in a manufactured home will provide more flexibility and freedom especially if the home is located in a manufactured housing community (Burkhart et al., 1996).

According to the US. Department of Commerce, in 1995, the average cost per square foot (exclusive of land cost) for a single-section and a double-section manufactured home was $ 23.95 and $ 28.96, respectively, as compared to an average cost (exclusive of land costs) of $ 56.28 for site-built single-family home. The comparison of costs of a site built, modular, and a manufactured home is presented in Table 1. The affordability of manufactured housing is attributed to the efficiencies of the factory process. The controlled environment and assembly line techniques remove many of the problems of the site-built sector. Manufactured home producers also benefit from the economies of scale that result from being able to purchase large quantities of building materials and products. As a result they are able to negotiate the lowest


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) â&#x20AC;&#x201C; April 2004, Volume 28. Number 1

possible price for items that are invariably more expensive in the site-built housing sector (MHI-2). Table 2 presents few of the major benefits of manufactured housing.

MANUFACTURED HOUSING TRENDS According to the Census Bureau, 1999 figures show that sixty-eight percent (68 %) of new manufactured homes were installed on private property, and 32 % of new manufactured homes were installed in land lease manufactured housing communities [MHI-3]. The trends are divided into six sections including, (1) overall housing statistics, (2) factory built housing, (3) cost of manufactured housing, (4) manufactured housing installations, (5) top industrialized producers, and (6) summary of Michigan trends. This paper presents some of the major trends under each section. For complete and detailed trends readers are directed to Mehrotra and Syal (2002).


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) â&#x20AC;&#x201C; April 2004, Volume 28. Number 1 COST CATEGORY OF HOMES

Site-Built

Modular

Private Land

Manufactured Private Land

Land Lease Community

Individual Lot:

Double-

Single-

Double-section*

Section*

Section*

Construction Costs

$77,140

$65,560

$47,277

$47,277

$26,350

Structure

$71,123

$59,543

$41,260

$41,260

$20,850

Foundation

$6,017

$6,017

$6,017

$6,017

$5,550

Cost per square foot

$38.57

$32.78

$23.64

$23.64

$21.69

Land Costs

$35,314

$35,314

$35,314

$1,201

$1,000

Improved lot

$34,113

$34,113

$34,113

--

--

Site preparation

$1,201

$1,201

$1,201

$1,201

$1,000

--

--

--

$250

$200

Overhead/Administration

$29,380

$27,652

$14,644

$14,932

$8,232

Overhead & gen. exp.

$8,394

$6,491

$2,441

$2,489

$1,372

Marketing

$3,039

$2,596

$1,220

$1,244

$686

Sales commission

$4,776

$4,284

$1,831

$1,867

$1,029

Profit

$13,170

$14,280

$9,153

$9,333

$5,145

Financing Costs

$2,895

$1,298

$610

$622

$343

Construction financing

$2,895

$1,298

--

--

--

--

--

$610

$622

$343

$144,728

$129,822

$97,845

$64,032

$35,925

Monthly land rent

Inventory financing TOTAL SALES PRICE

* Square footage is 2,000 for site-built, modular, and double-section and 1,215 for single-section manufactured home

Table 1. Comparison of "Identical" Homes [NAHB 1998]


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) â&#x20AC;&#x201C; April 2004, Volume 28. Number 1

Table 2. Benefits of Manufactured Housing [HOMEBASE 1999] The workflow is predictable with a stable labor force

Ov

working in shifts, doing simple, repetitive tasks. In

era

STABLE

contrast, many site-built construction crews are may not

WORKFLOW

be as well-trained and may not know the scope of workâ&#x20AC;&#x201D;

ll

one of the biggest problems for site-built contractors is the

ho

fluctuating nature in the amount and type of work.

usi

MATERIAL

Materials can either be stockpiled under one roof or

AVAILABILITY

ordered for just-in-time delivery.

ng

On-going training, quality control, and inspection are more

stat

easily accomplished in a controlled factory setting.

isti

Regulatory costs are low because independent inspectors EASE OF QUALITY

can examine many homes in various stages of production

IMPROVEMENTS

continuously in one location, rather than showing up

cs

sporadically. Site-built supervisors are often weighed down by the increasing demands of quality control, building officials, and consumers.

LESS WASTE

e 3

waste. In contrast, site builders often discover large

pre

discrepancies between plans and reality when they do the

Labor costs range from 8 to 12 percent of total costs in factory production, which are about 40 percent less than site-built construction. Because construction techniques

COSTS

abl

Factory production is more exacting, resulting in less

rough-ins to accommodate mechanicals.

LOWER LABOR

T

sen ts the ove

focus on efficiency and repetition, manufacturers can pull from the semiskilled segment of the labor force, and pay them well (about $20 an hour). Moreover, workers with the same intellectual, educational, and physical capacity may prefer the controlled and comfortable environment of the factory over site construction.

rall hou sin


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) â&#x20AC;&#x201C; April 2004, Volume 28. Number 1

g trends in U.S. and Michigan. It mainly describes general trends such as population, land area, number of households, persons per household and average incomes. Table 4 presents the specific details of the urban housing scenario in the country. Details of both site-built and manufactured housing are depicted. In addition, the regional classification is shown. Table 3. General USA and Michigan Characteristics [Census 2000] CHARACTERISTICS Population, 2000 estimates

MICHIGAN

USA

9,938,444

281,421,906

6.9%

13.1%

Land area, 1990(square miles)

56,809

3,536,278

Persons per square mile, 1999

175.6

79.6

Homeownership rate, 1990

71.0%

64.2%

Single-family homes, 1990

2,803,767

65,761,652

Households, 1990

3,424,122

91,993,582

2.65

2.63

2,458,481

65,049,428

$ 38,883

$ 37,005

54,257

1,663,533

Population percent change, 1990-2000 estimates

Persons per households, 1990 Family households, 1990 Median household income, 1995 Building permits, 1999


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) â&#x20AC;&#x201C; April 2004, Volume 28. Number 1

Table 4. U.S. Housing In Urban Areas (Numbers in 1000â&#x20AC;&#x2122;s) [AHS 1997] Occupied Units Location

Total Units

Total

Owner

Renter

Manufactured

Inside metropolitan Statistical Areas

85466

77417

48998

28418

4093

In central cities

34062

30533

14938

15595

422

Suburbs

51404

46884

34061

12823

3671

Outside metro Statistical areas

26891

22070

16489

5582

4207

Northeast

21776

19484

12241

7242

705

Midwest

26580

7050

1911

620

1479

South

40403

34808

11157

4489

8551

1627

Region

West

23599

21245

23650 12694

Factory-built housing This section deals with the statistics relating to different types of factory built housing. These types include: manufactured homes, modular homes, panelized homes, and precut homes. A description of each of the four types of homes has been presented previously. As shown in Table 5, manufactured homes formed the largest share (18.9%) of factory built housing in 2001 followed by panelized homes (6.2%). Overall, factorybuilt housing accounted for approximately one-third of all housing starts in the United


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) â&#x20AC;&#x201C; April 2004, Volume 28. Number 1

States. Although, the share of manufactured housing has decreased in recent years, factory-built housing still forms a major part of the housing starts in the nation.

Table 5. Share of Factory-Built Housing as Percentage of New Housing Starts [Willenbrock 1998 and Mehrotra & Syal 2002] Housing Type

1986

1993

1998

2001

Precut

3.00%

3.30%

3.30

N.A.

Panelized

7.0%

6.7%

%

6.2%

Modular

2.4%

3.3%

6.3%

2.9%

Manufactured

16.3%

18%

3.4%

18.9%

22.7 %

Comparisons of costs of homes Table 6 presents the average sales price of the manufactured homes in U.S. and in the Midwest. A double-section home costs more in the Midwest region as compared to the overall United States. As shown in Table 1, the construction cost of a doublesection 2000 sqft manufactured home on private land is $47,277, as compared to $77,140 for a 2000 sqft site-built home on a private land. Overhead and administration costs, which include overhead, general expenses, marketing, sales commission and profits are $29,380 for a site-built home as compared to $14,644 for a manufactured home. The total sales price of a 2000 sqft site-built home on a private land totals


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) â&#x20AC;&#x201C; April 2004, Volume 28. Number 1

$144,728 whereas; a double-section 2000 sqft manufactured home on a private land costs $97,845. Table 6. Average Sales Price of Manufactured Homes [Census 2000] Year

Total*

Single wide

Double wide

USA 1994

$32,900

$23,900

$41,800

1999

$43,600

$31,800

$50,200

2000

$46,500

$30,400

$53,900

MIDWEST 1994

$34,100

$26,000

$42,700

1999

$44,800

$32,700

$50,900

2000

$48,400

$31,700

$55,200

* Includes manufactured homes with more than two sections.

Manufactured Housing Installations Table 7 describes nationwide and Midwest manufactured housing installation trends. It can be seen from Table 7 that substantially more double-wide manufactured homes are installed than the single-wide homes. This table also shows that a large number of manufactured homes are titled as personal property than being titled as real estate. A higher percentage of manufactured homes are secured in-place with tie-down straps rather than permanent masonry foundation. The average square feet of floor area of a single-wide home is 1135 square feet, whereas, it is 1675 square feet for a double-wide home (Census, 2000).


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Table 7. Manufactured Homes Placed/Installed - 2000 [Census 2000] Numbers in 1000's NATIONWIDE Total Placed/Installed Location: Inside manufactured home Communities Inside parks or courts In subdivisions Titled as: Personal property Real estate Not titled Number of bedrooms: 2 or less 3 or more Secured in place with: Tie down straps Permanent masonry foundation Not secured Average square feet of floor area MIDWEST Total Placed/ Installed Location: Inside manufactured home Communities Inside parks or courts In subdivisions Titled as: Personal property Real estate Not titled Number of bedrooms: 2 or less 3 or more Secured in place with: Tie down straps (3) Permanent masonry foundation Not secured Average square feet of floor area

Total 273

Single wide 87

Double wide 184

84

31

53

59 26

25 6

34 19

205 59 9

71 14 3

133 45 6

25 248

19 68

6 178

79 7 1 1,135

141 40 3 1,675

Single wide

Double wide

222 47 3 1,505 Total 46

14

32

20

8

12

16 3

7 1

10 3

32 13 2

11 2 1

21 10 1

3 43

3 11

1 32

12 2 0 1,165

20 12 0 1,690

32 14 0 1,540


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Top Industrialized Producers Large companies tend to dominate the factory-built housing industry. Table 8 shows the top four producers of factory built homes, amongst the top 100 producers in the factory built housing sector. Table 8. Top Four Industrialized Producers-1999 [AutoB 2000]

1999 GROSS NUMBER SALES VOL. OF NUMBER OF TYPE OF (IN MILLIONS) PLANTS EMPLOYEES PRODUCT

RANK

COMPANY

1

Champion Enterprises

$1,900

66

15,000

Manufactured, Modular

2

Oakwood Homes

$1,490

NA

11,315

Manufactured

3 4

Fleetwood Enterprises Clayton Homes

$1,450 $624

29 20

20,000 4,300

Manufactured Manufactured

Summary of Michigan Trends Michigan is one of the largest importers of manufactured homes. Table 9 summarizes the general manufactured housing trends in Michigan.

SUMMARY OF MANUFACTURED HOUSING TRENDS Based on the current trends in the industry, it can be concluded that, factory built housing has not only evolved as an affordable option but also a very popular and welladopted option for housing. Though there is an increase in the overall prices of both single-section and multi-section homes in 1990â&#x20AC;&#x2122;s, Michigan trends show advancement


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

in the choice of manufactured homes as an up coming option of housing. This is a very good indication for both the industry and the future consumers of manufactured homes.

Table 9. Summary of Michigan Trends [DATACOMP MI]

1 Sales of new homes for the last three years have grown at an annual rate of 8%. • In 1991 equal number of manufactured homes were sold, where as in 1996 the demand of multi section homes as compared to single section homes grew by 40%. 2 Sales of existing homes have been flat for the last three years. 3 Homes are getting larger. • Of all new homes sold, 69% were multi-section compared to 50% in 1990. • The average new multi-section home was 1,576 square feet, an increase of 11% since 1990. • The average new single-section home was 1,091 square feet, an increase of 13% since 1990. 4 The average price per square foot of a manufactured home has increased an average of 3.2% per year over the last five years and continues to be well below the cost of site-built construction. • The price per sq.ft. for multi section homes has uniformly risen from $24 to $28 in the years from 1991 to 1996 • The price per sq.ft. for single section homes has risen from $ 22 to $26 the years from 1991 to 1996 5 An increasing percentage of new homes are being sited on private residential lots and financed on a mortgage rather than being sited in a manufactured home community and being financed on an installment loan. • Of all new homes sold, 48% were listed on private residential lots. 6 More mainstream homebuyers are purchasing manufactured homes. • 61% of manufactured home owners in 1993 were between 30 and 59 years old. This compares to 46% five years prior. (Based on a market research study completed by Foremost Insurance Company.) 7 More lenders are becoming involved in financing manufactured homes. • In 1996 there were 471 lenders involved in financing manufactured homes in Michigan. This compares to 327 in 1991.


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MANUFACTURED HOUSING (HUD) CODE

All manufactured homes are constructed in accordance with the Federal Manufactured Home Construction and Safety Standards, in effect since June 15, 1976 (as revised through July, 1999). This building code is administered by the U.S. Department of Housing and Urban Development (HUD) and is known as the HUD Code. There are two parts to the HUD Code. The first, "Part 3280, Manufactured Home Construction and Safety Standards," deals with the standards to which the home must perform and conform. This is the construction part of the code. "Part 3282, Manufactured Home Procedural and Enforcement Regulations" explains who is in charge of ensuring compliance with Part 3280 (HUDMHCSS, 1999).

Prior to the advent of the HUD Code, states were not able to effectively and uniformly regulate manufactured home construction and safety issues. Hence it was important to design a code, which could be used uniformly for the construction of manufactured homes. (MHI-1). For the convenience of the reader a detailed description of the HUD code is available in Mehrotra and Syal (2002).

SCOPE OF MANUFACTURED HOUSING (HUD) CODE

The HUD code is divided into 10 parts. The scope of HUD code can be better understood by describing the scope of each subpart. The scope of each of the subparts is as follows [HUDMHCSS 1999]:


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) â&#x20AC;&#x201C; April 2004, Volume 28. Number 1

General: This subpart covers all equipment and installations in the design, construction, transportation, fire safety, plumbing, heat producing, and electrical systems of manufactured homes. This standard establishes performance requirements, but the use of specific requirements is necessary in certain instances.

Planning Considerations: This subpart states the planning requirements for manufactured homes. It assures the adequacy of architectural planning required for safe and healthful environment.

Fire Safety: This subpart sets forth requirements that will assure fire safety to the occupants by reducing fire hazards and by providing measures for early detection.

Body and Frame Construction Requirements: The minimum requirements for materials, products, equipment, and workmanship are covered in this part. This part also assures that the manufactured home will provide (a) structural strength and rigidity, (b) protection against corrosion, decay, insects and other similar destructive forces, (c) protection against hazards of windstorm, (d) resistance to the elements, and (e) durability and economy of maintenance.

Testing Requirements: This subpart sets forth the requirements for material testing and installation. It also covers the standards to which the materials should adhere.

Thermal Protection: The requirements for condensation control, air infiltration, thermal insulation, and certification for heating and comfort cooling are set forth in this part of the code.


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Plumbing Systems: This part of the standard covers the plumbing materials, fixtures, and equipment installed in manufactured homes. This subpart also essures that the water supply, drain, waste, and vent systems will meet the functioning and health requirements.

Heating cooling and fuel burning systems: This part covers the heating, cooling, and fuel burning equipment installations in a manufactured home.

Electrical Systems: The electric systems part of the standard covers the electrical conductors and equipment installed within or on manufactured homes, and the conductors that connect manufactured homes to a supply of electricity.

Transportation: This subpart covers the general requirement for designing the structure of the manufactured home to fully withstand the adverse effects of transportation shock and vibration without degradation of the integrated structure or of its component parts.

INTRODUCTION OF THE INTERNATIONAL RESIDENTIAL CODE (IRC)

The International Code Council (ICC) is an organization created in 1994 to assist common code development. The International Residential Code (IRC) is an effort to bring national uniformity to building codes related to one- and two-family dwellings. Representatives of the three national model code bodies developed drafts of the IRC code [IRC 2000].


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) â&#x20AC;&#x201C; April 2004, Volume 28. Number 1

The IRC presents minimum standards for public safety, health, and welfare as they are affected by building construction. Compliance with the IRC is not required unless adopted by reference by a jurisdiction's board, or other authoritative governing body. The provisions of the International Residential Code apply to the construction, alteration, movement,

enlargement,

replacement,

repair,

equipment, use and

occupancy, location, maintenance, removal, and demolition of structures attached to residential buildings [IRC 2000].

COMPARISON BETWEEN HUD AND IRC CODES The following section identifies the major features under each section of the Manufactured Housing Code and compares it with the International Residential Code. There are many similarities in these codes, along with some differences of minor consequence, and some differences of notable consequence. Tables 10, 11, and 12 summarize the notable differences between the codes that were identified as part of the comprehensive comparison (Mehrotra and Syal, 2002).

Sections from where

International Residential Code information is taken, as shown against each item, e.g., (IRC, 1204.2) indicates that the information is available in section 1204.2 of the International Residential Code. Table 10 presents the comparisons of the planning considerations for HUD code with that of the IRC. These requirements are fairly comparable in both codes. Table 11 compares the fire safety conditions in both codes. It was determined that the HUD code is more stringent than the IRC in this area. These tables show the comparisons between HUD and IRC codes in selected areas. A complete comparison is available in Mehrotra and Syal (2002). Generally, the


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

comparison showed that the HUD code was more stringent in areas like fire safety (flame spread ratings) and body and frame construction requirements (fastening of structural systems) whereas, the IRC is more stringent in terms of planning requirements (ceiling heights and hallway widths). In authors’ opinion, the two codes provide overall similar housing construction and safety standards. PLANNING CONSIDERATIONS

HOUSING AND URBAN DEVELOPMENT CODE

INTERNATIONAL RESIDENTIAL CODE

Lighting and ventilation The minimum glazed area

Should be not less than 8% of gross floor area [HUD 3280.101]

Should be not less than 8% of gross floor area. [IRC R303.1]

The minimum openable floor area

Not less than 4% of the total floor area [HUD 3280.101]

Not less than 4% of the total area

Artificial lighting

Required in all rooms kitchens, laundry rooms and utility rooms and toilets [HUD 3280.101]

[IRC R303.1]

The minimum number of air changes

Mechanical ventilation in -

Kitchen

-

Bathroom

Minimum ceiling heights Living room and bedroom

Hallways and foyers

0.35 air changes per hour (continuous) [HUD 3280.101] Capable of exhausting 100cfm to outside of home Capable of exhausting 50cfm to outside of home [HUD 3280.101] Should not be less than 7’0” for a minimum of 50% of the room floor area. The remaining area may have a ceiling minimum height of 5’0” [HUD 3280.104] Should not be less than 6'6" [HUD 3280.104] Should not be less than 6'6" [HUD 3280.104]

Required in bathrooms, it is adequate to provide an average illumination of 107 lux in a room. 0.35 air changes per hour (continuous) [IRC R303.1] Not specified Minimum intermittent ventilation rate50cfm and continuous ventilation-20cfm [IRC R303.2] 50% of the room floor area is permitted to have a sloped ceiling less than 7’ (2134mm) with no portion less than 5’ (1524mm). [IRC R305.1]


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

PLANNING CONSIDERATIONS Exit facilities • •

Number of exterior doors Exit door size

HOUSING AND URBAN DEVELOPMENT CODE Minimum 2 required [HUD 3280.105] 28" wide by 74" high [HUD 3280.105]

INTERNATIONAL RESIDENTIAL CODE Minimum 1 required. [IRC R311.1] 3’ (914mm) wide by 6’8” (2032) high. [IRC R311.3]

Bottom of windows openings should not be less than 36" above the floor [HUD 3280.106]

Egress windows and devices Every bedroom should have atleast one outside window which meets "Standard of egress windows and devices for use in manufactured housing [HUD3280.106]"

Room requirements • Living room • Bedroom • •

Bathroom Kitchens

Minimum hallway width No clear horizontal dimension should be less than Toilet compartment

The performance characteristics of the exterior windows should meet with AAMA/NWWDA 101/I.S.2 [IRC R613.1]

150 sq.ft. gross floor area [HUD 3280.109] 70 sq.ft. floor area for two people [HUD 3280.109] NA NA

120sq.ft. [11.2 m²] of gross area 70 sq.ft. [6.5m²] of floor area [IRC R304.1] Not specified Should be not less than 50 sq.ft. of gross area. [IRC R304.2] 3’ (914 mm) [IRC R311.4]

28” [HUD 3280.109]

7’ (2134mm) [IRC R304.3]

5’0” [HUD 3280.109]

21” clearance in front of the commode [IRC R311.3]

Should have a minimum 30" width and 21" clearance in front of the toilet. [HUD 3280.109] Should have a minimum 30" width and 21" clearance in front of the toilet. [HUD 3280.109]

21” clearance in front of the commode [IRC R311.3]

Table 10. Planning Considerations Comparison

SUMMARY This paper compiles the current trends and code-related regulations in the field of manufactured housing. It summarizes the terminology related to this form of factory built housing and also defines the key participants involved in this industry. It then explains the reasons behind manufactured housing being one of the attractive options of affordable housing. The paper then summarizes the major trends both at national and state (Michigan) level. Overall statistics, share of factory built housing, cost of manufactured housing, top industrialized producers, and summary of Michigan trends are covered. Finally this paper compares the International Residential Codes (IRC) with


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

the HUD code, the code in accordance with which manufactured homes are constructed.

ACKNOWLEDGEMENTS The authors would like to acknowledge Vice President of University Projects at Michigan State University for providing Michigan Public Policy funds for this research.

In addition, parts of this study were supported by the National Science

Foundation (NSF) and the Partnership for Advancing Technologies for Housing (PATH). The opinions and findings expressed here, however, are those of the authors alone and not necessarily the views or positions of NSF and PATH.

REFERENCES American Housing Survey (1997). U.S. Census Bureau, http://www.census.gov/hhes/www/housing/ahs/ahs97/tab1a1.html (Viewed in March 2001) Automated Builder (December 2000). Survey Report: Top 100 Industrialized Builders Report $10.5 Billion GSV for 1999, Automated Builder, December 2000 Burkhart T.H., Mireley, S.L., and Syal. M. (1996). “Manufactured Housing Research Project” Michigan State University, E. Lansing Census Bureau (2000). http://www.census.gov/pub/const/mhs/ (Viewed in March 2001) DATACOMP MI, http://www.datacompusa.com/trends/MISummary.html (Viewed in March 2001) Homebase News, Volume 4, Issue 4, Summer 1999. NAHB Research Center, Upper Marlboro, MD.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

HUDMHCSS (1999). Chapter XX--Office of Assistant Secretary for Housing, Federal Housing Commissioner, Department of Housing and Urban Development. Part 3280— Manufactured Home Construction and Safety Standards www.access.gpo.gov/nara/cfr/waisidx_99/24cfr3280_99.html (Viewed in March 2001) IRC (2000). International Residential Code 2000, International Code Council, BOCA International Inc, ICBO, SBCCI Inc. Mehrotra. N., Syal. M., (2002). “Manufactured Housing Trends and Regulations in Michigan,” vol. 1: Industry Trends & Codes, Michigan State University, E. Lansing, MI. Michigan Manufactured Housing Association (MMHA). www.michhome.org/definitions.html

(Viewed in March 2001)

Manufactured Housing Institute (MHI-1). http://manufacturedhousing.org/DR_understanding/HUD_Code.html (Viewed in March 2001) Manufactured Housing Institute (MHI-2). http://manufacturedhousing.org/DR_understanding/Cost_Size_Comparison.html (Viewed in March 2001) Manufactured Housing Institute (MHI-3). http://www.mfghome.org/fast_facts.html (Viewed in March 2001) Manufactured Housing Institute (MHI 2001). http://www.manufacturedhousing.org/DR_abstracts.html (Viewed in March 2001) (NAHB 1998). “Factory and Site-Built Housing: A Comparison for the 21st Century,” NAHB Research Center Inc., October 1998, Upper Marlboro, MD Warner, K & Johnson (1993). “Manufactured Housing Research Project,” University of Michigan, Ann Arbor, MI Willenbrock. J. H. (1998), Residential Design and Construction, Prentice Hall, New Jersey


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – April 2004, Volume 28. Number 1

Table 11. Fire Safety Considerations Comparison (Mehrotra & Syal 2002

FIRE SAFETY CONSIDERATIONS Flame spread rating requirement • Interior finishes of walls, columns and partitions • Ceiling interior finishes • Walls adjacent or enclosing cooking range • Kitchen cabinets doors, countertops, backsplashes, exposed bottom and end panels, plastic bathtubs, and shower units

HOUSING AND URBAN DEVELOPMENT CODE Should not exceed 200. [HUD 3280.203]

INTERNATIONAL RESIDENTIAL CODE Should not exceed 200 [IRC R319.1] Should not exceed 200 [IRC R319.1]

Should not exceed 75. [HUD 3280.203]

Should not exceed 200 [IRC R319.1]

Should not exceed 25. [HUD 3280.203]

Should not exceed 200 [IRC R319.1]

Should not exceed 200. [HUD 3280.203]

Not specified

Firestopping

Should not be used in compartments for furnace and water heaters. [HUD 3280.205]

Atleast 2” lumber or ½” thick gypsum board should be provided between concealed spaces to prevent spreading of fire. [IRC R602.8]

Foam plastic thermal insulating material

Atleast 1” lumber or 5/16” thick gypsum board should be provided between concealed spaces to prevent spreading of fire. [HUD 3280.206]

Carpeting

Flame spread Maximum smoke index

Not exceeding 75. [HUD 3280.207] 450 [HUD 3280.207]

Fire detection equipment Smoke detectors/alarm should be placed Automatic/residential sprinkler system Portable fire extinguishers

One in each bedroom. [HUD 3280.304] Not specified Not specified

Not exceeding 75. 450. [IRC R319.1]

One in each bedroom area, also out side, in its vicinity. [IRC R317.1] Not specified Not specified


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) â&#x20AC;&#x201C; April 2004, Volume 28. Number 1

Namita Mehrotra is a former graduate research assistant in the Construction Management program at Michigan State University.

She is currently working as

construction estimator for Centex Homes, Detroit division.

Ms. Mehrotra can be

reached at mehrotr1@msu.edu. Dr. Matt Syal is a Professor and Graduate Program Director in the Construction Management Program at Michigan State University, East Lansing, MI 48823. He can be reached at syalm@egr.msu.edu. Dr. Makarand Hastak is an Assistant Professor in the Division of Construction Engineering and Management at Purdue University. Hastak@ecn.purdue.edu.

He can be reached at

The American Professional Constructor April 2004, Volume 28 Number 1  

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