Month: February 2014

Secrets of Bonding #33: Good Alternatives to a Bond?

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Sometimes contractors cannot qualify for the bonds they need.  Or maybe the bond cost, or underwriting terms are unacceptable. What are some of the alternative methods project owners can employ to assure the completion of their projects and the correct handling of money?

Standby Letter of Credit – This instrument is issued by a commercial bank and is available for draft by the project owner.  Typically these are very difficult for a contractor to obtain, especially for 100% of a large contract amount.

Drawbacks: There is no pre-qualification of the contractor’s ability to perform the work.  In the event of default, the project owner must manage the process of assessing the contract status and acquiring a completion contractor.  This method does not prevent liens against the project or provide the process to resolve them. (Lien: Suppliers and subcontractors can place a lien against the title of the property to secure their claim that they are owed money by the contractor.)

References – The project owner can contact previous clients of the contractor who had similar projects. This may give some assurance regarding the ability to perform the work.

Drawbacks: It provides no safety net for completion in the event of default, or for failure to pay bills and the resulting liens – the latter being exposures covered by a Payment Bond.

Tripartite Agreement or Funds Control – All the project funds are handled by the project administrator who acts as the paymaster, paying everyone including the contractor.  The purpose is to assure the money stays in the project and that all the bills are properly paid.

Drawbacks: This addresses a large part of the Payment Bond exposure but does not prevent all liens (*why not?)  The Performance exposure is also left uncovered.

Joint Checks – Obligee writes individual checks each month in the name of the contractor plus each sub or supplier.  This is intended to address the payment exposure by assuring the money actually reaches such payees and thus prevent liens.

Drawbacks: This procedure does not necessarily prevent all liens, nor does it facilitate resolving them if they do occur. There is no protection for the Performance Bond exposures.

Retainage – When each monthly invoice is generated by the contractor, the project owner deducts (retains) a percentage of the payment and holds those funds until 100% satisfactory completion of the project. This is intended to keep the contractor motivated.

Drawbacks: It will not prevent or resolve a default, and does not prevent liens.

Sub Guard – Subcontract Default Insurance obtained by general contractors in lieu of a Subcontract P&P Bond – covers failure to perform.

Drawbacks: Does not cover the Payment Bond exposures.  There is no pre-qualification the subcontractor’s expertise or financial condition.  The default insurance does not arrange for the completion of the failed subcontract, it only reimburses the costs.

Lien Releases – They are executed by subs and suppliers to confirm they received the last payment owed them.  Requiring these monthly from the contractor is a step toward assuring such payments were made.

Drawbacks: It does not prevent all liens (* why not?)  This procedure also does nothing in regard to the Performance obligation.

Conclusion

So what we have here is a box of band aides.  ALL these procedures are less effective than a P&P bond.  None of them address both the Performance and Payment exposures.  They all fail to pre-qualify the contractors the way a surety does.  This is the first service the surety provides and it is one that sureties are uniquely qualified to perform.

The second important deficiency is that in the event of default, none of them facilitate the efficient completion of the project.  Performance Bond claims can result in the surety taking all the steps needed to complete the project.  This is a great benefit for the project owner.

Now you know the real truth: There is no good alternative to a P&P bond!  That’s why they are routinely required by statute on public work.  They are the most efficient means of obtaining a qualified contractor. They assure the work will be performed in accordance with all aspects of the written contract, and they protect the owner from liens or the need to “pay twice” to resolve unpaid subs and suppliers.

Public owners are usually required to bond their projects and private owners are wise to do so.

* Funds Control and Lien Releases do not prevent liens from claimants who were project payees known only to the contractor.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

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Secrets of Bonding #32: Bond Definitions – Take the Quiz!

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Answers appear at the end of the article – good luck!

“You may begin.”

1. Bid Bond

a. Required by Auctioneers
b. A very small bond
c. Bond that accompanies a construction proposal

2. Surety Consent (to accompany bid)

a. Promises to provide the related Performance and Payment Bond
b. Agrees to all conditions in the related contract
c. Agrees that bond claims will be paid within 30 days

3. Bid Bond Percentage

a. Ratio of successful bid proposals
b. Portion of bid bonds used in one calendar year
c. Determines the dollar value of the bid bond

4. Performance Bond

a. Always makes reference to a written contract
b. May not be cancelled by the surety
c. Both a. and b.

5. Balance of Contract Amount

a. The point at which a contract becomes profitable
b. The unpaid portion of the contract
c. Relationship between labor and material costs

6. Payment Bond

a. Used to guarantee loans and leases
b. Guarantees payment of proper union wages
c. Guarantees suppliers of labor and material will be paid

7. Third Tier Sub

a. A class of subcontractors not covered by the Payment Bond
b. Submarines that go very, very deep
c. Low quality subcontractors

8. Subdivision Bonds

a. Similar to Submultiplication and Subaddition bonds
b. Similar to Site Bonds
c. Similar to submarines that go very, very deep

9. Penal Sum

a. Dollar value of a bond
b. Often a source of envy
c. When two penals are added together

10. Site Bonds

a. Guarantees improved vision after Lasik eye surgery
b. Guarantees the construction of public improvements
c. Guarantees a construction contract

11. Single Job Limit

a. The largest job a contractor ever performed
b. The largest job a contractor is interested in undertaking
c. The largest job a surety is willing to bond

12. Work on Hand

a. Remaining “cost to complete” for open projects
b. Underbillings
c. Costs relating to labor performed by hand

Extra Credit:

13. “Full” Indemnity

a. The indemnity of the applicant company including all of its assets
b. The indemnity of the applicant company, all owners and spouses, plus other owned/controlled companies
c. Indemnity equal to the full value of the bond amount in question

Answers:

1: Bid Bond – Bond that accompanies a construction proposal (C)

2: Surety Consent – Promises to provide the related Performance and Payment Bond (A)

3: Bid Bond Percentage – Determines the dollar value of the bid bond (C)

4: Performance Bond – Always makes reference to a written contract AND may not be cancelled by the surety (C)

5: Balance of Contract Amount – The unpaid portion of the contract (B)

6: Payment Bond – Guarantees suppliers of labor and material will be paid (C)

7: Third Tier Sub – A class of subcontractors not covered by the Payment Bond (A)

8: Subdivision Bonds – Similar to Site Bonds (B)

9: Penal Sum – Dollar value of a bond (A)

10: Site Bonds – Guarantees the construction of public improvements (B)

11: Single Job Limit – The largest job a surety is willing to bond (C)

12: Work on Hand – Remaining “cost to complete” for open projects (A)

Extra Credit: “Full” Indemnity – The indemnity of the applicant company, all owners and spouses, plus other owned/controlled companies (B)

Congratulations: You passed!

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

Secrets of Bonding #31: When Receivables are Not Receivable

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Surety bond underwriting involves many elements, and financial analysis is always one of them.  In this newsletter, let’s look at a single element, an important one, and how you can influence the effect it has on bonding decisions.

Accounts Receivable “A/R” are the funds owed by outside parties to the company for work it has performed.  This is a Current Asset and is part of Net Worth.   Active contractors always have such money due them.  The number can be significant for firms in a growth mode.  Problem: Sometimes bond underwriters discount, or disallow part of this figure, thus reducing the applicants recognized financial strength and bond worthiness.   Why does this happen and how can you influence the outcome?

One reason for such assets to be disallowed is the age of the individual receivable on the fiscal year-end (FYE) financial statement date.   In order to be conservative, A/Rs that are 90 days old or more “over 90” are assumed to be uncollectable, and therefore are disallowed.  (Key word: Assumed)

Same with receivables arising from change orders that are unapproved or in dispute.  Projects with performance problems may have all payments held up by the owner, and therefore related A/Rs may be disallowed.  In fact, receivables may be discounted if there is a dramatic increase over historic levels, even if there is no apparent reason to doubt the collectability of the funds.

When A/Rs are disallowed the Working Capital calculation suffers as well as the ratio analysis.

This can reduce or eliminate the contractors bonding line.

Here are some possible cures. 

Retainages – A/Rs over 90 days old may be acceptable if they are actually Retainage which is slightly different from a true “trade receivable.” Identify if any of the A/Rs are actually Retainages.  They should be separated from the A/R analysis and “allowed.”

Over 90s – Older A/Rs are allowable if they were subsequently collected (no matter how old they became.)  Ask the client or accountant for an update regarding the collection of year-end receivables.  All collected items are included in the financial strength analysis.  The underwriter should be updated if they are eventually collected at a future date.   The client will be penalized for a disallowed A/Rs for 12-15 months after the fiscal date.  Updating the file when funds come in could help achieve a bond approval any time during this period.

Change Orders – The same concept applies to COs no longer in dispute or project issues that are resolved.  All A/Rs that are ultimately collected are allowed, regardless of how late they occur.

Payment Bond – If our client is a subcontractor, there may be a Payment Bond “above them” available for claim.  An over 90 A/R might be allowed based on the existence of this safety net.

Caution: If an aged schedule of year-end A/Rs is produced at a subsequent date, items that were not over 90 at FYE (but remain open) may now may be old and therefore disallowed!  It works both ways.

Conclusion

The financial analysis associated with surety bond underwriting is primarily focused on the fiscal year-end financial condition of the company.  These numbers drive the bond line until the next FS is issued – normally about 15 months.

The receivable collection is an ongoing process that warrants interpretation and monitoring because of its changing nature.

Call us with you next Contract, Site or Subdivision Bond.

FIA Surety / First Indemnity of America Insurance Company
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
Office: 973-541-3417

An “A Rated” Carrier

Visit our Free CE school.

Secrets of Bonding #30: The Greatest Danger

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Bid Bonds, Performance Bonds, Payment Bonds. They each have a different purpose and include certain risks. So which one is the Greatest Danger for the surety and agent, and why?

Performance Bonds are an obvious choice.  We may think of Performance Bonds as the main reason a project is bonded – they protect against contractor default and assure completion of the work.

While this is certainly significant, it is not the Greatest Danger. Performance claims are usually preceded by events that give the surety a chance to respond.  A “Cure Notice” may be sent by the obligee alerting the contractor and surety that a deficiency exists and if left uncorrected, a bond claim may result.  Another event preceding claim is the declaration of default by the obligee.  (The contractor is thrown off the project.) This would be a major event and all interested parties would receive notification.

If the surety cannot help remediate the performance problem and a claim results, the unpaid portion of the contract amount is a financial resource that always helps the surety in addition to potential recovery via the General Indemnity Agreement.

The Payment Bond is actually the most common source of bond claims. There may be disputes about the performance of subcontract work or materials supplied.  Unjustified claims will be declined and for valid claims, the contract funds and Indemnity Agreement are resources for the surety.  Even though they have claim frequency, Payment Bonds are not the Greatest Danger.

So that leaves the lowly Bid Bond.  Some think of them as just incidental, like ordering a Builders Risk policy.  Their dollar amounts are smaller than Performance Bonds.  They are issued for free or for a small service charge.  Once produced, they are quickly forgotten like they were hardly valuable in the first place.  Nothing glamorous here.  But what are the dangers with Bid Bonds?

The first unique thing is that you get once chance to issue them correctly. On competitively bid work, such as government projects, the bid bond accompanies contractor’s proposal.  The bids are stamped for date and time when submitted, and if your proposal is late, it is rejected!  The bids are opened and examined by the contract administrators.  The bid bond and accompanying proposal can be rejected for technical errors such as the wrong project number, missing signatures, or any other details.  On the other hand, mistakes on Performance Bonds can normally be corrected without penalty.  The contractor already has the project, so there is no harm in allowing the bond to be adjusted. With bid bonds in a competitive situation, there is no chance to make a correction – the other bidders will not allow it! A bid protest or lawsuit would likely result.

In addition to accuracy and timely delivery, bid bond documents can result in a rejection if mishandled.  For example, the failure to use a mandatory bid bond form or the absence of a Surety Consent could result in proposal rejection.

Proposal Rejection – let’s talk about that.  The surety or agent makes one of the errors we described, the bid bond is deemed insufficient, and the contractor’s proposal is rejected. On public work the bid results are normally published, so the client will know if their rejected proposal would have been the winning number, and they would have acquired the contract.

In addition to the embarrassment of making an error, the loss of revenues, and maybe losing a customer, here’s the worst part: There have been cases where the contractor sued the surety for lost profits – the profits they expected to acquire from the project.  This is a constant threat on Bid Bonds, and the indemnity agreement doesn’t help if the error was solely on the part of the surety or agent.  A lawsuit like this could be for millions of dollars.

 

Bid Bonds are the winners!  They are the Greatest Risk for sureties and the agents who execute them.  We have one chance to get them right.  They must be perfect every time.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it! Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

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Secrets of Bonding #29: When Federal Contracts Are Not

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In bonding, like insurance, we are always careful to review specifications and requirements when bonding a new contract.  The specs will state if a bond is required, the amount, and other relevant aspects such as acceptable credentials for the surety, and the bond form.

When it comes to contract documents, it is immediately evident if a project is federal. The solicitation or award letter will identify it as such, and an entity like the Army Corps of Engineers, will be named. It would be clear that the Federal Acquisition Regulations (FAR) apply and that you must have a 100% P&P bond on the federal bond form, issued by an acceptable T-Listed Corporate Surety.

So what are the bonding requirements on federally funded contracts? An example would be a local housing association project that has state and federal grant money. Is that a federal contract?  Do all the federal bonding requirements apply?

For the answer, we must review the solicitation or award and determine who is offering the work. A local housing association contract is just that – a local project, not federal. This is an important distinction because, at least partially, it answers the question about the bonding requirements.

  • True federal projects must follow the FAR. http://www.acquisition.gov/far/
  • Local or private contracts may follow aspects of the FAR if the obligee so choses, however it is voluntary.

This is an important distinction for agents to appreciate because it determines which sureties can be called upon to issue the bond.

For Federal, Corporate Sureties that appear on Circular 570 (the T-List) may be acceptable.

On non-federal projects, such as local contracts that include federal funding, the specs may vary – so no assumptions can be made. Chances are they will differ from the federal guidelines.  Only a review of the documents will reveal the answer.

Non-federal contracts can be local public work, such as a state or municipal job, or they could be private. Private contracts are all unique and as a long established surety, we have bonded many of them.  We have the flexibility to support a wide variety of special bond forms and other challenging aspects such as dual obligee riders that name lenders.  For more info about bonding private contracts, review Secret #18.

Summary:

So when are federal contracts not?

You now know merely having federal funds does not make the contract “federal.”  It is only required to follow the FAR if offered by a direct branch of the federal government.

For non-federal contracts, you will not know the bonding requirements until you review the written requirements – and there is no predicting what you may find.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

Secrets of Bonding #28: Size Does Matter

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In the world of Bid and Performance Bonds, size matters.  Underwriters want to know about the contractor’s largest successfully completed project.  The agent and contractor ask about the single job limit (largest available bond size.) Size is a subject of constant interest.

So what do you do when an unusually large project comes along?  Let’s assume it is more than the single job limit.  For example, the surety set a bonding line of $1 million single (per project) and $2 million aggregate (the maximum one day total for incomplete bonded and unbonded work).  The new project is for $1.5 million.  Does the contractor pass up the opportunity to acquire a desirable project? Will the agent and surety risk losing a client because of their failure to deliver the bond?

There are three possible outcomes to this situation:

  1. Decline the bond
  2. Restructure the contract so it fits the existing bond line
  3. Grant an exception (a bond approval) to the line

Let’s look at each one in detail:

Decline

  • Contractor fails to obtain the project.  Agent and surety may lose the account.

Restructure – Reduce the risk, and the bond amount, by restructuring the contract into a dollar amount that falls the bond line.

  • A contract for multiple buildings can be broken into a smaller contract for each building.  The idea would be to NOT issue all the bonds at once.
  • The scope of work can be reduced (smaller bond) or broken into phases (bite sized pieces).
  • The obligee can purchase the materials directly, thus removing them from the contract price (smaller contract and bond).
  • Multiple primes: Instead of one General Construction contract and a big bond, individual smaller contracts are issued for each trade.

An Exception is granted – The bond is issued even though it is beyond the current line.  How do you get to that point?

  • The contractor may be uniquely well-suited for the project based on prior experience such as working for the obligee and / or architect before, done “the same job” previously or some other special advantage.  Examples of this would be a job the contractor helped design, a project located close to their office or maybe they have special equipment, materials or skills.
  • The project may be exceptionally low risk. Example: a project that is repetitive in nature (four identical buildings at the same site) or simple in design (a large building, only one story.)
  • Reduce the risk: Hire a major subcontractor and bond back the work.
  • Individuals in the construction company may personally have special skills or prior experience playing a key role on a similar project.
  • Mentoring – a larger more experienced firm may provide expertise to help the contractor through the project.

Teaming: This technique is in the same family as Mentoring and Subcontracting, but is different.  Structural arrangements in this area are more complicated than we can cover in this brief article.  Suffice to say, as a Surety, we have a great deal of experience in this area.  Despite operating in the “hard to place” niche, our outstanding underwriting results arise from knowing how to put these transactions together properly for our agents and contractors.

The following are incorrect solutions to the size problem:

  • Issue more than one bond on the contract. Unacceptable because reinsurance limitations require only one bond per contract.  This is referred to as “stacking.”
  • Breaking the contract in an unnatural manner.  For example a GC dividing the construction of a single building.
  • Stipulating a bond for less than 100% of the contract amount.  The surety bases the underwriting decision on the contractor’s obligation, which is the contract amount.
  • Issue a smaller contract (and bond), then follow it with a huge increase change order. This doesn’t work because the bond may say it does not automatically cover large increases in the contract amount.
  • Reduce or eliminate the contractor’s profit margin.

    Call us with you next Contract, Site or Subdivision Bond.

    FIA Surety / First Indemnity of America Insurance Company
    2740 Rt. 10 West, Suite 205
    Morris Plains, NJ 07950
    Office: 973-541-3417

    An “A Rated” Carrier

    Visit our Free CE school.

Secrets of Bonding #27: Beneficiaries of a Bond

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The process starts simply: A construction company needs a bond in order to acquire a new project.  So they contact their agent who surveys the market and seeks a surety that will support the account and provide favorable terms. There are a number of beneficiaries of this transaction:

Bond Agent

The bond agent and agency earn a commission on the transaction.  These revenues not only provide the basis to pay the agency’s sales and administrative staff, they also form a production base that enables the agency to attract more sureties and additional bond clients.  It is a key to their current and future prosperity.

Contractor

Bonds enable contractors to acquire new work – the lifeblood of their business.  The newly issued bond not only provides a profit making opportunity, it also helps build the company’s track record of projects completed under bond.  This is a higher standard of performance than unbonded work because of the additional scrutiny by the surety, paperwork and reporting requirements, and related activity such as accounting and legal requirements.

Having a surety and performing bonded work helps the contractor acquire future work and additional bonds. It is a building process and an important part of the company’s credentials.

Obligee

Some obligees, such as public bodies (city, state and federal contracts), are required to obtain bonds because of their beneficial effect.  They are an effective way to protect the public interests. Other obligees such as owners of commercial property or general contractors may choose to bond their projects. The advantages are numerous.

From the outset, the obligee has a pre-qualified contractor on the project, a better contractor.  Sureties only issue bonds after making a thorough evaluation.  The bond protects the obligee from the contractor’s failure to perform and from non-payment of subs and suppliers – and those potential claimants are equally protected.  Bonds are required on public work because they are such a great means of assuring the correct performance of the project.

Surety

For the surety, issuing the bond means incurring a risk and earning a fee. This is, of course, the surety’s business.  It is the purpose of the company to identify and issue bonds that meet with their underwriting requirements.

Call us with you next Contract, Site or Subdivision Bond.

FIA Surety / First Indemnity of America Insurance Company
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
Office: 973-541-3417

An “A Rated” Carrier

Visit our Free CE school.

Secrets of Bonding #26: Bond Request Forms (The Gift That Keeps Giving)

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For the agent and client, there is plenty of paper to handle on contract surety bonds.  So just when you get through the questionnaire, business plan, resumes, references, WIPs, and financials there is STILL ONE MORE DOCUMENT THAT WE NEED!

Yes, it is true.  Bond Request Forms are the gift that keeps giving because you get the opportunity to do one as each bond comes up.  So, considering these forms are not going away, let’s get comfortable with them.

Why Needed

The Bond Request Form is a summary of key factors concerning the specific contract and bond in question. The form is used for both Bids and “Final” bonds (Performance & Payment). It covers basics such as the name of the contractor and obligee, description of the work and the specific bonding requirements.

The form is used for underwriting and administrative purposes.  The underwriters review the details and may literally sign their approval on the form.  The admin staff will type the bond based on the Request Form – so completeness and accuracy are crucial.

Let’s break it down and go over some key areas:

  • The Principal is the contractor and the Obligee is the party paying for the work.  Sometimes the word “Owner” is used interchangeably with Obligee. If you see Owner on the Bond Request, it is not asking for the name of the owner of the construction company; it means “Obligee.”
  • The description of the work should read as stated on the related contract or bid invitation.  If you are bonding a roofing contract, the description should not be “4th Avenue Elementary School.” It should say “…roofing…”  On a final bond such errors are embarrassing. In a bid situation an incorrect job description could result in a bid protest (by the second bidder) and loss of an award.
  • For Bid Bonds, show the estimated contract price (ECP), not the actual bid amount.  This is to protect the bid confidentiality.  Sometimes we bond more than one contractor on the same bid.
  • Always submit a sufficiently high ECP to allow room for a last minute bid increase. (See Secret # 8.)
  • Show the actual bid date, not the day before for “safety.”
  • Bid results are important to show if they are available.  Typically they are on public work.
  • When indicating the final bond requirements, do not indicate “100% P&P” unless the spec actually calls for this.  Some projects require a Performance Bond but no Payment.  It would be important to not automatically issue a Payment Bond, since they are the most frequent source of surety claims. The Principal and Surety should never voluntarily assume this risk.
  • Work On Hand: The current WOH figure is comprised of the “estimated cost to complete” of all open work – excluding the project in question.
  • Be sure to fully complete the form, include required attachments and sign if necessary.
  • Points of interest:
    • Sureties are usually reluctant to provide a 125% P&P Bond.
    • If the bond is for less than 100% of the contract amount, there may be no reduction in the bond cost.

Bond Request Forms: We love them and you should too!  Every one is a chance to serve your client and  make money. 

Call us with you next Contract, Site or Subdivision Bond.

Steve Golia

FIA Surety / First Indemnity of America Insurance Company
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
Office: 973-541-3417

An “A Rated” Carrier

Visit our Free CE school.

Secrets of Bonding #25: World’s Cheapest Audit

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When it comes to financial statements prepared by a CPA (Certified Public Accountant), there are three levels of presentation:

Compilation – This is the lowest level and does not include any checking or verification of the numbers by the accounting firm. The numbers are merely “compiled” by the CPA.

Review – Some checking and “review” by the CPA.

Audit – The CPA performs analysis and verifications to authenticate the numbers.

Bond underwriters expect better prepared financials for higher amounts of surety credit.  This means contractors that have large bonding lines must provide Audited company financial statements (FSs).  Sureties and bankers are more confident when analyzing an audited FS – we assume everyone would have these high quality financial reports if it wasn’t for the cost.

Because of the time and human resources involved, a Review is less expensive than an Audit, and a Compilation is the least expensive of the three.

So in comes your contractor client who, for a number of reasons, decided to have a Compilation at the last fiscal year-end.  Now a large project needs to be bonded, and from a size standpoint, the underwriter normally expects a Reviewed FS.  If it is not practical to go back and upgrade the Compilation to a Review, what are your options?

The underwriter may be willing to work with the Compilation FS if some key elements are documented and / or verified.  Such an analysis is the heart of the difference between a Compilation and a Review.

At the minimum the underwriter is likely to ask for proof of cash, aged receivables (A/R) and payables (A/P), and a Work in Process (WIP) Schedule.  Let’s go over each one briefly.

Cash: If the FS date is 12/31, the idea would be to provide proof of the cash amount shown on the FS on that date.  If the FS shows $52,125 cash, you need bank or brokerage statements adding up to that figure for 12/31.

A/R & A/P: These reports should be as of the FS date and add up to the receivable and payables listed on the FS.  The A/R should be broken down by age showing how much is current, 60, 90, and over 90 days old. Retainages should be identified since they are not regular “trade receivables.” It is also beneficial to indicate which receivables were subsequently collected after the fiscal date. Payables should also be aged.

WIP Schedule: Needed as of the fiscal date to support the analysis of the company balance sheet.

This strategy is not as good as actually having a CPA Review, but the analysis performed by the underwriter could substitute for a Review and justify issuance of a bond. Plus, such services performed by the underwriter are free!  So, even though this is not really an Audit or Review, you can think of it as the “World’s Cheapest Audit.”  It can be just what you need to get a bond and keep moving forward with the file.

For the future, if similar sized bonds are likely, the client should plan on having a Review performed at the next fiscal year-end – it will help with surety and bank credit.  Added bonus: The company will have better documents for management review and the accountants will provide professional guidance that is not included with a Compilation.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

Secrets of Bonding #24: Manage the Bond Manager

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Q. Who is your bonding company?

A. Jimmy at the Smertz Agency

Am I the only one who thinks this is a strange answer? It always amazes me when contractors have no idea who their bonding company is.  It could mean that the agency is doing a fantastic job of managing the account.  But it is more likely that the contractor is doing a bad job of managing the relationship with the surety.

Who’s on first?

The bond agency plays a vital role in guiding the process forward, advising the client and supporting the underwriting process.  But for the most part, the Bond Manager controls the underwriting decisions – even if some measure of discretionary authority has been granted to the agent.

To put it simply, the Bond Manager has life or death control over the bond account. If there is a bond the manager is not interested in supporting, the contractor can kiss those revenues and profits goodbye. 

For major accounts that produce significant annual premiums and require substantial capacity, the surety will probably make themselves known.  They may ask for an annual meeting to discuss fiscal year-end results and plans for the new year.

For smaller accounts, the contractor is just a name in a computer record.  Flat.  No personality or rapport.  So when that stretch or exceptional bonding need comes up, they have nothing extra going for them.  The gate keeper doesn’t know the contractor from Adam, and there will be no special consideration.  How do you prevent this?

Manage the Bond Manager

The first step toward a good rapport is to establish open communications.  The contractor’s file should make it obvious that full disclosure is provided and the surety is appreciated as a partner – not just a vendor.  Answer all the written questions completely and candidly.  It makes the reader confident that everything relevant (the good and the bad) is all being laid out for review.

During the initial evaluation, the underwriter should visit the contractor’s business.  It is a chance to kick the tires and see the company in action.  Hey, they’re not just a file, they’re real people!

A periodic underwriting meeting with the bonding company is appropriate.  At IBCS, we like to meet with the contractors when a draft of the year-end data is available.  This is a great opportunity to provide guidance before the final version of the financial statements is produced.

Summary

The point is that bonding is based on information and the underwriter’s confidence.  Building a rapport with the decision maker is as important as any piece of information. With the help of the agent, Manage the Bond Manager and maximize the bond account for everyone’s benefit.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

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