Case Study 2 — Six Weeks of Not Writing It Down: A Subcontractor Default
All people, companies, and projects in this book are Tier-3 illustrative composites. The numbers are internally consistent and realistic; they are not a real project. Bond forms, notice requirements, retention rules, and prompt-payment obligations vary by jurisdiction and by contract form — verify yours.
Setup
Different job, different delivery method, different failure, different time scale. Where Case Study 1 is forty minutes on a well-run negotiated project, this one is six weeks of drift on a hard-bid public school.
Project: Rivermont Elementary School #12 — $22,400,000, design-bid-build lump sum, public owner (Rivermont Unified School District), prevailing wage, 100 percent payment and performance bonds. Substantial completion required by August 15 because school opens. Liquidated damages $2,400 per calendar day.
Kestrel's project manager: Curtis Boone. Curtis is genuinely good at parts of this job. He wins work, he is liked by owners, he can talk a difficult architect down off a ledge, and he runs a lean staff. He also buys his subcontracts hard, documents almost nothing, and manages by force of personality. He is not a villain. He is wrong about the model, and this case study is what being wrong about the model costs.
The subcontractor: Ballard Masonry & Restoration — CMU and brick veneer, $1,840,000 subcontract, bonded back to Kestrel at 100 percent because the scope exceeded Kestrel's $500,000 bond-back threshold. Kestrel and Ballard had done four previous jobs together. Curtis liked Ballard's owner personally.
The critical path: exterior veneer → window installation → building dry-in → interior finishes → substantial completion by August 15. Masonry was on it from February onward.
What Happens
Weeks 1 through 6: the signals
Every one of these was visible. Every one was in somebody's file. None generated a letter.
| Week | Signal | Where it showed up | What Curtis did |
|---|---|---|---|
| 1 | Crew drops from 14 to 6 with no notice | Daily reports | Asked the foreman; was told "a guy quit" |
| 2 | Crew still 6 | Daily reports | Mentioned it in the coordination meeting |
| 2 | A block supplier calls Kestrel's accounting office asking about payment status | Lorena Vasquez's voicemail | Forwarded to Curtis; no action |
| 3 | Crew spikes to 12 for one week, then back to 5 | Daily reports | Took it as evidence the problem was solved |
| 3 | Preliminary notice from a mortar and reinforcing supplier | Project file | Filed. No entry in the waiver matrix |
| 4 | Foreman stops committing in the coordination meeting — "we'll try to get there" three weeks running | Meeting minutes | Not noted in the minutes as a missed commitment |
| 4 | Ballard's project manager misses the third consecutive coordination meeting | Attendance | Called; got voicemail; did not follow up |
| 5 | The scaffold rental company pulls its equipment off the site for nonpayment | Superintendent's daily report | Kestrel rented replacement scaffold to keep the work moving; no backcharge notice sent |
| 5 | Ballard requests payment outside the normal cycle | Pay application | Curtis approved it |
| 6 | Ballard requests $96,000 for stored material — block and brick claimed to be at a yard off site | Pay application 7 | Curtis approved it without verification, without a bill of sale, and without an off-site storage endorsement |
Then, in week 7, they stopped showing up.
Why Curtis did what he did. This is worth taking seriously rather than mocking. He had four good jobs with this firm. He believed a formal notice would embarrass an owner he respected and might cause Ballard to walk off, which would be worse than a slow crew. He believed the schedule still had room. And he believed — this is the important one — that giving them money would fix a cash problem and get the crew back.
Every one of those beliefs is a reasonable-sounding thing that a decent person thinks. Together they cost half a million dollars.
Week 7: the default
Kestrel's superintendent walks the elevation Monday morning: no crew, no tools, no material. Curtis calls the office; the phone rings. He drives to the yard where the $96,000 of stored material is supposed to be. There is no material.
He calls Nadia Haddad, Kestrel's vice president of operations, at 11:20 a.m. Her first question is the right one, and it is not "what happened."
Nadia: "What have you sent them in writing?"
Curtis: "We've talked a lot."
Nadia: "That's not what I asked."
Curtis: "Nothing formal."
Nadia: "Then before you do anything else today, call the surety and call our lawyer. In that order."
Weeks 7 through 12: the bond process
| Step | Timing | What happened |
|---|---|---|
| Notice to surety of potential claim | Week 7, day 1 | Sent same day, with what documentation existed |
| Formal cure notice to Ballard | Week 7, day 2 | Certified to the corporate address per the subcontract; 72-hour cure period |
| Cure period expires; declaration of default | Week 7, day 6 | Ballard did not respond |
| Surety acknowledges and opens investigation | Week 8 | Requests the complete file — subcontract, pay applications, daily reports, correspondence |
| Surety's investigation | Weeks 8–11 | Focused heavily on Kestrel's payment history, not Ballard's performance |
| Surety tenders a completing contractor | Week 11 | Replacement's price to complete: $842,000 |
| Replacement mobilizes | Week 12 | 34 calendar days after the default declaration |
Read the fifth row again. The surety investigated Kestrel. That is standard, and it is the part that surprises people. A surety's first question is always whether the obligee — Kestrel — did anything that prejudiced the surety's position, because a surety's obligations can be reduced by the obligee's own conduct.
Kestrel had done exactly that. The $96,000 stored-material payment was made without verification, without a bill of sale, without an off-site storage endorsement, and for material that did not exist. That money was supposed to be available to complete the work. It was gone.
The money
| Line | Amount |
|---|---|
| Ballard subcontract | $1,840,000 |
| Paid to Ballard at default (including the $96,000) | $1,214,000 | |
| Value of work actually in place at default | $1,058,000 |
| Overpayment | $156,000 |
| Remaining subcontract balance ($1,840,000 − $1,214,000) | $626,000 |
| Replacement contractor's price to complete | $842,000 |
| Excess cost of completion ($842,000 − $626,000) | $216,000 |
The surety accepted the claim in principle and then asserted that Kestrel's improper stored-material payment prejudiced its position. After four months of negotiation it paid $155,000 of the $216,000.
Kestrel absorbed $61,000.
The schedule, which is the real story
| Component | Calendar days |
|---|---|
| Six weeks of drift before Curtis acted | 42 |
| Default declaration to replacement mobilization | 34 |
| Replacement's ramp-up and relearning a building somebody else started | ~21 |
| Recovered through acceleration (added crews, premium time, overlapping window installation) | (59) |
| Net slip to substantial completion | 38 |
Total cost to Kestrel:
| Item | Amount |
|---|---|
| Absorbed portion of the excess completion cost | $61,000 |
| Acceleration to recover schedule | $214,000 |
| Liquidated damages, 38 CD × $2,500/CD | $95,000 | |
| Extended general conditions, 38 CD × $2,100/CD | $79,800 | |
| Kestrel staff time managing the default (est. 340 hours) | $38,000 |
| Total | $487,800 |
The school opened 38 days late. The district ran the first six weeks of the year with four grades in portable classrooms.
Analysis
The bond paid the money. The bond did not pay the schedule.
This is the sentence to carry out of this case study. The performance bond did what it was designed to do: it made Kestrel substantially whole on the excess cost of completion. It did nothing about the 38 days, the $91,200 in liquidated damages, the $117,800 of extended general conditions, or the district's portable classrooms.
A performance bond is a money instrument, not a schedule instrument. If you are relying on a bond to protect your project, you have already misunderstood what you bought. What actually protects your schedule is noticing in week one and acting in week two.
The counterfactual, priced
Suppose Curtis had sent a rung-3 written notice in week 2 and a notice to the surety in week 3 — six weeks earlier than he did.
| What happened | If notice had gone out in week 2 | |
|---|---|---|
| Drift before action | 42 CD | 14 CD |
| Default to replacement on site | 34 CD | 34 CD |
| Ramp-up | 21 CD | 21 CD |
| Recovered by acceleration | (59) CD | (55) CD |
| Net slip | 38 CD | 14 CD |
| Liquidated damages | $95,000 | $35,000 | |
| Extended general conditions | $79,800 | $29,400 | |
| Overpayment (the $96,000 would not have been made) | $61,000 absorbed | $0 | |
| Acceleration | $214,000 | ~$185,000 | |
| Staff time | $38,000 | $38,000 | |
| Total | $487,800 | ≈ $287,000 |
The six weeks Curtis spent not writing anything down cost roughly $222,000 — more than the default's own excess cost. And notice the third row from the bottom: the single most expensive individual decision was approving $96,000 for stored material he had not verified, which is a decision that took about ninety seconds.
What each warning sign actually meant
| Signal | What Curtis heard | What it meant |
|---|---|---|
| Crew 14 → 6 | "A guy quit" | People leave firms that miss payroll |
| Supplier calls accounting | A billing question | The supplier is protecting itself |
| One-week spike to 12 | Problem solved | A borrowed crew, timed to a pay application |
| "We'll try to get there" | Normal field hedging | A foreman told not to promise anything |
| Missed meetings | Busy | The office is triaging creditors |
| Scaffold repossessed | An equipment issue | Nonpayment on a rental account |
| Off-cycle payment request | Cash-flow timing | A cash emergency |
| Stored material off site | Normal practice | The last thing a failing firm bills for |
Any two of these in a month is a conversation. Curtis had eight in six weeks.
The Kestrel-versus-Curtis contrast
On Northgate, Ray and Margo had a shortfall too — Halcyon at 70 percent of committed manpower for four weeks. Ray was also slow to write. The difference is not that Kestrel is virtuous and Curtis is not. The difference is the system underneath the judgment: manpower rolled up weekly against a committed curve, thresholds set at buyout, daily reports with crew counts by trade, a coordination meeting that reads last week's commitments aloud, a waiver matrix that logs every preliminary notice, and an accountant who will not process an unverified stored-material payment.
Curtis had none of those, so every signal reached him as an isolated anecdote he had to judge on the spot, with a relationship on one side of the scale and a hunch on the other. Judgment is not a substitute for a system. It is what a system frees you to spend on the hard cases.
Discussion Questions
-
Curtis's reasons for not sending a notice — a four-job relationship, fear the sub would walk, belief that cash would fix it — are the reasons decent people give. Which of the three is most defensible, and at what specific point did each stop being defensible?
-
The surety paid $155,000 of a $216,000 claim, reducing it because of Kestrel's unverified stored-material payment. Explain in your own words why a surety's exposure can be reduced by the obligee's conduct, and name three payment practices that protect a bond claim.
-
Reconstruct the week-2 rung-3 letter Curtis should have written. Ballard was at 6 workers against a committed 14. What facts would you cite, what would you demand, by when, and what would you have to verify about Kestrel's own performance before sending it?
-
The bond made Kestrel roughly whole on money and did nothing about 38 days. If you were Nadia Haddad rewriting Kestrel's subcontractor risk policy after this job, what would you change — and be specific about which changes cost money and how much.
-
Compare this case to Case Study 1. Both involve a subcontractor failing to staff to a committed curve. Why did one cost $310 and the other $487,800? List every structural difference you can find, and mark which are about the projects and which are about the managers.
Your Turn
You are Kestrel's project manager on a $19,000,000 municipal library. Your masonry subcontractor, on a $1,600,000 bonded subcontract, has in the last four weeks: dropped from 12 to 7 workers, generated one supplier preliminary notice, missed two coordination meetings, and submitted a request for $70,000 of stored material at an off-site yard.
Produce three things.
-
A one-page decision memo to your operations vice president: what you believe is happening, the evidence, your recommended action this week, and what it costs if you are wrong in either direction.
-
The notice to the surety. Keep it factual and mild. It must preserve the claim without declaring a default, list the enclosures, and commit to an update interval.
-
A five-item verification checklist you will require before approving any stored-material payment, on this job or any other, for the rest of your career.