Construction Bond
Categories: Real Estate, Insurance
Construction.
It's the hallmark of American Greatness. Tall buildings. Big bridges. And sports stadiums that would make the Greek Gods envious. All of those construction projects take money (and occasionally a large bribe to a foreman…but that's a different definition; See: Corruption).
If you know anything about how common it is for delays to plague that sector, you’d know it comes with a fair amount of financial risk. Which is why construction bonds exist.
Construction bonds are used to ensure that construction is completed, and are typically required by local governments for public bids. Certain bonds are required before any work can begin. A variety of bonds that are needed on public projects and by some private developers as well.
Should the contractor fail to complete the project according to the terms of the bond, a developer can claim the bonds and recoup any losses.
Example:
Bid bonds ensure that contractors bring developers a serious bid and have the necessary capital and credentials to complete the project. Should a developer select a job, but the contract declines the gig or retracts their bid, the developer can claim this bond and collect any difference between the withdrawn bid and the second highest project bid.
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Finance: What are Carrying Charges?19 Views
Finance a la shmoop what are carrying charges? all right you're a luxury home
real estate developer you built this awesome house with the entry waterslide [Person riding a waterslide]
the underground Batcave style freeway connection and of course the chopper pad [Man stood on a chopper pad]
on top it costs you four million bucks to build okay you built it in like
Guatemala or somewhere you took out three million bucks in loans at 10%
interest to do so and if you sold the home for five million dollars well,
you'd make bank unfortunately some brainless realtor who is actually a [Realtor with green face appears]
genius at working your ego convinced you to list the home at 8.888
million he said uh it would be a lucky number really trust me yeah
it was a high number you'd been hoping to sell for more like a little more than
half that number but at eight mil in change you would be a financial genius
hugely profitable and a baller of real estate so you list the home in a huge [Man sitting while covered in cash]
bull market strong economy people come to the open house which proffer sushi
and caviar and you know XY and Z and well they laugh the price is crazy high
unfortunately by the time you fire the realtor a year later the market has gone [Realtor falls to the floor outside house]
completely into the crapper so you re-list the home at seven million
crickets and then six more crickets and then
finally three years later you sell it for five million bucks like right about
where you wanted to sell in the beginning so everything would have been
great except for your carrying charges you owed 300 grand a year to rent that
three million bucks you borrowed to build the home in the first place so
that's nine hundred thousand dollars just to rent the money for those three [Interest on 3 million bucks highlighted]
extra years on top of the four million bucks you spent to build the place then
you had real estate tax heat water maintenance gardener and like 18 other
carrying costs that go with just maintaining a house in shipshape to you
know be sold well all in those carrying costs beyond just the rent of
the money were another six hundred thousand bucks
so the home cost four million to build but then carrying costs for another
million and a half dollars leaving your all-in cost to build it at five and a
half million and you sold at five all that time and work for well nothing
other than a tax loss of five hundred thousand dollars well guess what
carrying costs worked this way albeit less dramatically in corporate land as [Man discussing carrying costs]
well and the most common carrying cost charge is inventory like when Ford has
gone ahead and built a thousand four cylinder you know cars featuring [Car with one wheel appears]
best-in-class one wheel drive which doesn't exactly
fly off the shelves or even drive off of them those thousand cars cost them some
thirty million bucks to build and they pay seven percent interest on the money
they borrowed to you know build them and that's 2.1 million dollars a year just
to rent the money to have a whole lot of inventory sitting there
well those cars are a low margin business to begin with like maybe 15
percent operating margins so on thirty million bucks of revenue Ford would hope
to make four and a half million in operating profits so if they carry the
cars for an average of a year before they sell well half of their operating
profits are chewed up just in the inventory cash carrying cost there so no [Man eating operating profits]
matter how sweet that water slide entry might sound in theory well you might
want to just save the cash for a rainy day