Month: February 2014

Secrets of Bonding #23: Myth Busting the T-List

Steve GoliaLeave a comment

Technically the correct name is “Circular 570.”  The federal Treasury Department produces this list, thus the nickname “T” list. Website: “fms.treas.gov/c570/c570.html”

It is re-issued each July first and contains all the corporate sureties reviewed and approved by the Treasury Department.  It also states the largest single bond amount they may provide on a federal contract. Let’s look at some common assumptions about the T-list.

Myth: The IRS tried to withhold tax exempt status from the Tea-List.

Finding: False! (Just wanted to see if you’re paying attention.)

 

Myth: The government somehow “backs” the sureties on the T-List.

Finding: False! The companies on the list are merely pre-approved for the convenience of the government when administering contracts. The purpose is not to benefit anyone outside the government.

 

Myth: T-listed sureties are the best in the industry.

Finding: False! Acceptance on the T-List indicates that

1. The surety chose to apply for approval, and…

2. They obtained it.

Being T-listed does not indicate the relative strength of one surety compared to another.  For example, there are excellent surety companies that have never sought T-List approval – so they’re not on Circular 570.

 

Myth: It is illegal and / or impossible to waive a T-listed requirement if it is stated in a project specification.

Finding: False! Private obligees, such as a General Contractor offering a subcontract, have complete discretion and can modify the requirements if they so choose.  It is common to reserve the right to waive any technicalities if the obligee feels it is in their best interests.

 

Myth: When projects include federal funding (such as a local housing contract), federal bonding requirements automatically apply.

Finding: False! The party offering the contract may set their own requirements.  They could chose to follow some portion of the federal requirements or simply use their own. Federal requirements (as stated in the Federal Acquisition Regulations) only apply to direct federal contracts such as the Army Corps of Engineers, etc.

 

Myth: When it comes to corporate surety bonds, only the federal government is obligated to use Circular 570 sureties.

Finding: False! If other jurisdictions choose to adopt such a requirement, it would then be mandatory.

Conclusion: The T-list is a convenient tool for federal contracting officers when administering government projects.  It is also helpful for outsiders when evaluating a corporate surety bond.  Circular 570 is easy to access online and it provides a list of sureties accepted by the federal government.

However… NOT being on the list does not necessarily mean anything negative.  Not all sureties find it beneficial to seek approval on the list, so they just don’t do it.  They could still be great companies with strong bonds worth taking.  In fact, they could be the best surety in the country, and still not be on the list.  

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 #22: Bonding Started Projects – Adverse Selection or Awesome Opportunity?

Steve GoliaLeave a comment

On Performance Bonds (not proceeded by the surety’s bid bond), underwriters commonly ask if the project has started. Why is this relevant and what are the implications?

On private contracts where the performance bond may be optional, there is a concern that the bond is being required retroactively because some performance or payment concern has arisen.  This is where the Adverse Selection comes in. No surety wants to write a bond and immediately have a claim: “No premium is worth a claim.”

However, such bonds can be successfully produced.  It helps if the bond was always a written requirement.  This can be proven by reviewing the project specifications.  The underwriter will also review the financial condition of the project such as a WIP schedule, obtain current lien releases, the last pay application and an All’s Right letter from the obligee (confirming the work is satisfactory thus far.)

What about the Awesome Opportunity? There could be legitimate reasons for requesting the bond late.  Perhaps the contract start date was critical.  The contractor was given notice to proceed even though the bonds was not yet filed.  When this happens, the obligee may insist on the bond prior to paying of the first requisition (monthly payment to the contractor.)  This situation is not that unusual, especially for subcontractors.

Do we like these circumstances? Think of what the bond guarantees: Performance of the contract and Payment of the related bills for suppliers of labor and material.  If part of the performance obligation is completed, that extinguishes a portion of the risk – and the bond fee is still the same!  Bond fees are normally based on the contract amount, not the bond amount nor the uncompleted project amount. So it makes sense that underwriters should embrace these projects assuming they can get past the issues we discussed.

Unfortunately not all do.  But producers who know the red flags, have a fighting chance to address them and gain underwriting support from the surety.

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 #21: Church Projects

Steve GoliaLeave a comment

Think about it – what could be better than writing a bond to build a church?  What could possibly go wrong?

The sad truth is that these projects can be high risk for the contractor and surety.

Here’s why:

Unique Risk #1

Church construction contracts include obligations for both parties.  The builder must perform the construction correctly, on time, and for the agreed price.  The church (the “owner”) must pay for the work as it progresses.  When compared to public work such as for the city or state, church work (and other non-profits) can be more hazardous if the owner does not have all the funding in place.

Suppose they are depending on a successful fund drive?  If the contractor performs work, incurs costs, and is then not properly paid it could be detrimental to both the contractor and surety.

Unique Risk #2

An additional threat arises from the design and administration of the contract.  If there is no architect, or if the architect is terminated or withdraws during the project, the contractor may be answering to the church building committee.  This is likely to be a loosely organized group of non-professionals with no construction design experience, each with their own ideas on how to proceed – bad for the contractor!

Summary

To assure a reasonable level of professionalism and predictability on church work, it is important to confirm full funding in advance (prudent on ALL private contracts).  This could be in the form of an approved building loan or funds on deposit in an escrow account.

It is also necessary to have an architect engaged throughout the process.  Note: Design / Build contracts present more risk, not less. (Projects where the contractor is responsible for both design and construction.)

Church projects can be a heavenly experience if the proper safeguards are followed.

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 #20: Subordination Agreements

Steve GoliaLeave a comment

“Instant Net Worth!”

Here is another gem for your tool box.  A Subordination Agreement can solve a Net Worth deficiency problem easily – in some cases.

Why is Net Worth (NW) Important?

Net Worth is the value of the company if all its bills are paid and it is liquidated.  It is a measure of strength and staying power, and therefore is relevant to surety bond underwriters.

In a corporation, NW (aka Stockholders Equity) is typically comprised of the money initially put in to start the company (Capital Stock) plus all the net profits earned over its lifetime and retained in the company.

Sometimes the NW is insufficient to support the current bonding needs.  This problem cannot be fixed by instantly earning more net profits.  It could be addressed by adding additional capital stock, but this is heavily taxed (capital gains) upon withdrawal – so this may not be a good solution, especially if the need is viewed as temporary.  So in comes our Subordination Agreement.

Here’s how it works:

Let’s assume that an owner who originally put money into the company by purchasing capital stock has now loaned funds to the corporation.  Both are debts of the company. Here is the important difference: Capital Stock is considered Equity, and a permanent debt (because of the tax penalty assessed upon withdrawal) whereas a loan is called a Liability and is temporary since it may have periodic payback terms and there is no capital gains tax assessed.

When making bonding decisions, does an underwriter consider loaned money as valuable as capital stock?  Is money the company has temporarily as valuable as funds it holds permanently? No, of course not. The purpose of the Subordination Agreement is to make the loaned funds just as valuable, by allowing them to be viewed as permanent.  From an analysis viewpoint, this moves the loaned money from debt to equity.

The Subordination Agreement is executed by the creditor (lender of the money) for the benefit of the Surety.  It states that the creditor will not demand payment without the written consent of the surety in advance. It locks the money in.  Having this degree of control can allow a surety to treat the subordinated loan as Instant Net Worth!

Two words of caution:

  • Not all sureties are willing to rely on this strategy or may not do so for a major portion of the total NW.  We will!
  • Also, it is important to inform the CPA regarding the subordination so it can be memorialized in the financial statement notes.  The subordination only works if the creditor remembers to observe it.

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 #19: Indemnity Agreements Tips and Tricks

Steve GoliaLeave a comment

This may be one of the most challenging aspects when you’re dealing with Surety Bonds.

  • “What’s the point of having a bond if I have to give personal indemnity?”
  • “How come I pay a bond fee and sign personally?”
  • “There is no reason for my spouse to sign – (s)he isn’t active in the business and (s)he didn’t have to sign for the bank.”

These are some of the questions and objections.  But the fact remains: Sureties require indemnity, and routinely require “full personal indemnity.”  So let’s look briefly at why this is the case, and then move on to the Tips and Tricks.

“Secret #1” explained that Bonds Are Not Insurance.  They are more like a lending relationship with a bank.  Unlike insurance, there is no risk transfer and the surety expects to be protected from financial loss (like a bank on a loan).  The General Indemnity Agreement (GIA) accomplishes all of this.

The company indemnity of the firm that has applied for the bond is needed, and the personal indemnity of the company’s owners and spouses.  When we say “full indemnity” we mean the applicant company (the “Principal”), its affiliates and subsidiaries, plus all owners and spouses.

Why do sureties demand this? It is because the parties that own / control the Principal benefit from the issuance of the bond, and are expected to complete the project without causing a bond loss.  The surety’s loss ratio, and very survival, depends on this. The first effect of personal indemnity is that it impresses upon the indemnitors the importance of completing the bonded work and avoiding a bond loss.  Ultimately, the GIA gives the surety the right to seek recovery if a loss does occur.

Tips

GIAs are generally similar from one surety to the next.  It is also common for the language in the document to not be negotiable. Keep in mind, the document is intended to be one-sided, so don’t expect the Principal’s attorney to like it.

In addition to the Principal, the indemnity of companies owned / controlled by the people will be expected.  Such companies (Affiliates) are identified by reviewing financial statements, tax returns, the Contractors Questionnaire, and the prior surety’s GIA.

The indemnity of foreign companies and non-U.S. citizens carries little weight with sureties. Can you guess why? (Answer at the end *)

The General Indemnity Agreement must be executed before the first bid or performance bond. It is called “general” because it automatically applied to all bonds issued after execution of the GIA, without naming them specifically.

A Corporate Resolution is needed when a company indemnifies on behalf of another. It reaffirms that the indemnity was intentionally / properly given and signed by a duly authorized person.

Spousal Indemnity is required, even if the person is not active in the business.  The ownership in the company is usually considered marital property – owned equally by the spouse.  Therefore both spouses benefit equally from the issuance of the bonds.  Being active in the company has nothing to do with the need for spousal indemnity!  Also note, if the active spouse dies, the inactive spouse automatically becomes the new active company owner whose decisions will directly affect the surety.

Regarding personal signatures, a “signature guarantee” by a bank is stronger (for the benefit of the surety) than a notary public.

“Obviously,” signers of the GIA cannot witness or notarize their own signatures.  It is also expected that the witness to a signature will not also act as notary.

Tricks

Indemnity can be terminated at any time by following the notification procedure stated in the GIA.  However, it remains in effect for bonds issued while the indemnity was in force.

When open or silent Joint Venture Partners and affiliates indemnify, they can help the Principal qualify for a bond. To accomplish this, their financial info will be needed.

Major subcontractors / suppliers that cannot bond their work can instead provide indemnity and financial info. (Keep the next point in mind.)

Company and personal indemnity can have a maximum dollar value stated which caps the liability.  This would not be available, however, for the Principal.

Non-profit organizations may offer indemnity of limited value since they are not intended to accumulate profits or net worth. However, in some cases there may be individuals who personally will support the case – such as a church elder / benefactor who gives personal indemnity on behalf of the entity.

Trusts can give their indemnity if you obtain proof that the trust document allows this, and that an authorized person is signing the GIA.

Trigger Indemnity is only activated if stated circumstances occur, such as company net worth falling below a certain level or ratios that have declined.

Personal indemnity may be waived in the following cases:

  1. For owners with a very low percentage of ownership, such as less than 10% depending on the surety.  (We use such a 10% guideline)
  2. Publicly owned companies (traded on the stock exchange) as stated in reason #1.
  3. Spouses who have no ownership in the Principal due to a pre-nuptial agreement.
  4. Spouses who maintain a separate balance sheet (assets exclusively belonging to them) may be waived if they sign a Non-transfer of Assets Agreement. This prevents the transfer of assets to escape the reach of the GIA.

Painful as they are, one good thing about GIA’s is that they may not need re-execution for years unless the Principal has changes in ownership or entities.  Back in the year “1” when I started in the business, we obtained a specific indemnity agreement for every P&P bond.  What a pain!  Eventually everyone moved over to the “once and done,” GIA.

You love GIAs even more – now that you know some of the Tips and Tricks!

FIA Surety is a bonding company that has specialized in Site, Subdivision, Performance and Payment bonds since 1979. We get them done!

Call us with your next Surety Bond.

Steve Golia, Marketing Mgr. 856-304-7348

FIA Surety / First Indemnity of America Insurance Company, Morris Plains, NJ

*Subrogation by the claims department is unlikely in a foreign jurisdiction

Secrets of Bonding #18: Private Owners

Steve GoliaLeave a comment

This is a study in motivation.  “What’s in it for me?”  When it comes to Performance Bonds for Private Owners, you need to understand the odds and pick your spots carefully in order to maximize your effectivity.

Understand the Basics

A Private Owner is an entity that is not funded by public money.  If it was, we’d call it a Public Body.  Examples of Public Bodies include the federal government, your state, city or school district.

A Private Owner could be a company that is renovating their office building.  Another example would be any subcontract regardless of whether the overall project is public or private (Note: ALL subcontracts are Private Contracts).

There are some distinct differences between public and private work:

  • Legal Basis: Public bodies must comply with a variety of regulatory requirements and statutes.  Private contracts are made based on business decisions. They are governed by the Uniform Commercial Code and state common laws.
  • Funding: On Public work the source is known and presumed to be dependable.  On Private each situation is different.  It is possible that the Owner signing a contract may not have adequate funding in place to pay for the work.
  • Specifications and Bond Forms: With Public contracts this tends to be consistent and predictable.  Insurance and contractual requirements are standardized.  A 100% Performance and Payment Bond (P&P) typically is required.  The approach to the bond forms is known in advance.  For example, the federal government has their own mandatory bond forms.  With Private, the owner can make any requirements they want, including the use of mandatory, unique, bond forms or no bond at all.  (Review Secrets #7 for more insights on this subject)

Now we’ll talk about motivation.

  • The Insurance / Bond Agent: Wants to serve the client and earn a commission.
  • The Surety: Wants to earn the bond fee or premium.
  • Contractor: Wants to acquire the contract and maximize their profits.
  • Owner: Wants the work performed correctly by a capable contractor for the lowest reasonable price.

Picking your spots on Private Contracts

Our point of view is obviously that of the Surety.  We have been an active writer of Subcontract Bonds and other Private Contracts for many years and here’s what we’ve learned.  Private owners know that the first service the surety provides is pre-qualifying the contractor for the work.  The surety wants to avoid a loss so there is an extensive review of all the contractors’ capabilities.  If there are weaknesses or a likelihood of failure, the surety will refuse to support the project.  So a P&P bond is like the Good Housekeeping Seal of Approval for a contractor.  The Private Owner knows that a bonded contractor has been thoroughly checked out.

Now bear in mind that the bond cost is included in the contract.  The Private Owner that requires a bond, pays the bond cost in the contract amount.  Since the bond may be optional on a private contract, some owners use the surety to screen the contractor, but then they do not actually pay to bond the project.

The losers in such cases are the surety and the agent as well as the Private Owner.  The surety and agent performed services and incurred expenses – but then don’t get paid. If there is any kind of problem on the project, failing to obtain a P&P bond could cost the Owner dearly. Bonds are an effective and economical way to prevent significant problems down the road.

Bottom line: When private contract specifications do not indicate a MANDATORY P&P bond requirement, agents should be cautioned that the bond could be waived. It is true that there is no substitute for actually having a bond in place  (guarantees good workmanship and materials, on time completion, no cost overruns, no liens against the property).  But for some private owners, the chance to save a few dollars is irresistible – even if it means engaging the surety’s services under false pretenses.

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 #17: Dual Obligees & Additional Insureds

Steve GoliaLeave a comment

Contractors are often required to name an architect, building owner or lender as an additional insured on their insurance.  The insurer will do so, and assume the additional risk for a minimal or no charge.  While there are some potential consequences for the contractor, most favor this extension of coverage without hesitation.  Why shouldn’t they? After all, the point of the insurance is to transfer risk away from the insured.

With a Performance Bond, there is a similar situation with the Dual Obligee rider.  This rider modifies the bond to include a party that was not named on the contract.  An example of such a party is a lender to a borrower who owns property. The borrower has hired a contractor to work on the property.  The Performance Bond that guarantees the contract has the property owner as the natural Obligee (the “owner” on the contract).  The lender has an interest in the project and may therefore ask to be named as a Dual Obligee.  Sureties will normally do this (and for no additional charge), but it is not without consequences for the contractor.

The Dual Obligee rider enables the lender to make a performance bond claim directly against the Surety – and thus creates additional risk for a potential loss on the bond. So why should the contractor care?  (See Secret #1)  Bonds are not insurance.

A surety relationship is more like banking than insurance.  Like a lender not expecting a loan to result in a loss, a surety does not expect any bond claims or losses.  Similar to a bank’s promissory note, a surety requires a General Indemnity Agreement (GIA) which is a hold harmless intended to prevent any financial loss to the surety if a claim occurs.  Read this as “no risk transfer.”

So let’s go back to the Dual Obligee rider.  All contractors are required to provide a GIA for their surety.  So if the bond is extended to include the lender, and the risk for a bond claim or loss in increased, who assumes this risk?  The answer, of course, is the surety plus the contractor.  The nature of a Performance Bond is that the contractor, the “Principal,” always shares in the bond risk – both in their company and personally.

Summary: Adding additional insureds may seem like a freebie, but contractors should be cautious when adding Dual Obligees to a bond.  Each obligee is another master they must please on their contract.  Each one is a risk and a financial threat.  Some entities must be added when requested such as a lender, the city or other entitled parties.  Other times there is a feeding frenzy: “Let’s add everybody.” 

If the surety fails to object or at least ask for justification as to why such parties must be added, the contractor should… because unlike insurance, on a bond the contractor assumes risk.

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 #16: Bid Spreads

Steve Golia1 Comment

They can be full of fat or skinny. Sometimes they’re yummy, but they never go on crackers.

Spread

A Bid Spread is important to contractors and their surety.  Let’s find out why.

What is bid spread? 

When a contractor is pursuing a new project, they may be required to submit a written proposal which the project owner then compares to offers made by other firms.  It is a competition based on capabilities, credentials and price.  In the case of public projects such as federal, state or municipal, the bid results are normally published – meaning everyone gets to see the full list of bidders and their amounts.  These dollar figures are the prices the contractors will charge to perform the work.

The bid spread is the difference in dollars and percentage between two of the bidders.  The “apparent low bidder” is the company with the least expensive price on bid day.  The bid spread for the low bid is based on the difference between bids # 1 and 2.  It is an evaluation of the potential inadequacy of the low bid amount.  

How to calculate the bid spread

Suppose the low bid is $100,000 and the second bid is $150,000. In this case it may be obvious that the low bid is 33.3% below the second.  But what is the calculation method?  You subtract the difference between the bids and divide the number into the second bid:

150,000 – 100,000 = 50,000

50,000 / 150,000 = 33.3%

Therefore the bid spread is 33.3%.  (The difference in bids equals 33.3% of the second bid amount.)

Another way of calculating is to divide the 1st bid into the second, such as 100,000 / 150,000 = .66 or 66%. This indicates that the first bid is 66% of the second, and therefore the second is 33% larger.

What does the bid spread tell us?

The purpose of determining the bid spread is to evaluate the potential inadequacy of the low bid.  For example, if the 2nd, 3rd and 4th bids are all clustered together with the 1st bid far below, one may conclude that the low bid is inadequate.  Maybe they left out an element, misread the plans or miscalculated.  All the bidders wanted the work, so how could one be significantly less?

For the low bidder, a large bid spread demands an immediate review.  If an error or omission is found, usually the bid can be withdrawn with no penalty if acted upon promptly.

For the surety, there is a reluctance to bond an inadequately priced project.  The absence of profit could cause the contractor to abandon the work or they could be forced into default by the financial pressure – with the surety left to complete the project.  They may be tempted to cut corners resulting in a performance claim.  Slow payments to subs and suppliers could result in payment claims.

The only thing worse than a bond claim is a defaulted project requiring completion by the surety where the remaining funds are insufficient to complete the work.

How low is too low?

The rule of thumb is 10%.  If the low bid is $100,000 and the second is more than $111,000, the spread is over 10% and warrants evaluation before a performance bond is issued. ($11,000 / 110,000 = 10%)

The surety will ask if the bid estimate has been double checked.  What was included for profit and overhead? Are subcontractors dependable at their prices – and bonded? Did the low bidder have some advantage over the other contractors that enables them to perform the work profitably for a lower price?

Alternative calculation method

When faced with a spread of more than 10%, analysts will also calculate the bid spread to the average of the second and third.  In this case they hope to find a spread not in excess of 15%.

Try the analysis on these numbers: 1st: $100,000, 2nd: $112,000, 3rd: $114,000.

(Answer: 11.5%)

Other facts about bid spreads

In most cases, the surety that provides a bid bond is not obligated to provide the Performance and Payment bond.  An exception to this would be situations in which a Consent of Surety was required with the bid bond.  Such consent does promise to issue the P&P bond.

With no consent in play, a large bid spread could cause the surety to refuse the P&P bond, even though it could result in a bid bond claim – if the contractor cannot quickly locate a replacement surety or withdraw the bid.  (Refer to Secrets #8: Bid Bonds).  A bid bond claim is a much smaller problem to deal with than a defaulted contract.

A new surety that is offered the P&P bond will naturally ask for details if they know a bid phase was involved.  They know the incumbent surety must have had good reason to forego the P&P premium and face a possible bid bond claim. Producers can expect this to be a difficult placement.

Bid spreads are revealing! A tight bid spread validates the low bidder’s amount.  Large spreads require further scrutiny.

In cases where bid results and bid spreads are not known, such as on private contracts (or in cases where the contract amount is negotiated) it makes approval of the P&P bond a bit harder for the surety.

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 #15: How to Submit a Contractor’s Bond Account

Steve GoliaLeave a comment

In this post we will talk about the key elements when sending a contractors account to the surety for evaluation.

Think of the underwriters mind as a blank canvas.  (Some more blank than others!)  Presenting a bond account is an opportunity to paint the picture.  The underwriter knows no more than you tell them. It is up to the sender to describe the key points and explain why the account deserves support.

Let’s go over the primary elements:

Introductory Letter: This letter should state how well the applicant is known.  Can the sender vouch for the applicant’s honesty, good character and capabilities?  The letter (which is typically just an email) should describe what’s needed – if it is a bonding program and / or a specific bond.  There should also be comments about any significant underwriting points such as “The account has been declined elsewhere because…” or “The incumbent surety cannot provide the bond in question because…”

The author may also talk about any known underwriting issues and how they may be effectively addressed.

Contractors Questionnaire: All sureties have some version of this form which asks all the basic questions such as “Who owns the company?” “What kind of work do you do?” “What are the largest projects completed in the past?”

This document should be filled out completely, signed by the applicant and dated. If there is uncertainty on how to answer, don’t leave a blank.  It gives the reader an uncertain feeling – which is not the picture you want to paint.

Financial Statements: These are needed for the company and its owners and should be provided in a complete form. Underwriters normally want to see 3 fiscal year-end company financials plus a current interim FS if the recent year-end is more than 6 months ago. If CPA prepared financials are not available, provide whatever info is.  It may be financials prepared by a bookkeeping service or just produced from QuickBooks.  Some companies only have tax returns if they have never pursued bonding in the past.

The personal financial statements are less formal.  Most underwriters will accept self-prepared financial states if well-presented, signed and dated by the owners and spouses.  Note: Typically, spouses are included in everything when it comes to bonds.  Their names appear on the Questionnaire and personal financial statements, and they sign the General Indemnity Agreement (hold harmless for the surety) even if they are not active in the business.  Underwriters take this approach because the company is jointly owned marital property.

Work In Process Schedule: Referred to as a “WIP Schedule,” this describes the financial condition of their uncompleted contracts.  It indicates how much work the company has on hand and if it will be profitable.  Other important info is gleaned from this document so treat it with care!  CPAs normally do a good job presenting such data. But if it is being prepared by the contractor, be careful to follow the exact meaning of the column headings and fill out the form completely.

Specific Bond Needed: Provide a Bond Request Form.  This document tells key details about the project and bond needed.  Fill out completely and include attachments as indicated.

Optional: Include other info that may help paint the picture such as a company brochure, web site link, reference letters and resumes of key people.

When submitting an account, keep the underwriters point of view in mind.  Sureties only provide bonds for applicants that present no likelihood of claim or default.  It is important to show the company’s expertise, capabilities and financial strength.

Once the paperwork is moving, an “in person” meeting with the underwriter is always beneficial.  Contract surety bonds have a human element that is not part of the paperwork. The underwriter must be personally convinced that the account deserves support.

If a real meeting is not possible, consider a teleconference such as Skype or Go To Meeting, or even send jpg pictures of the people, premises and some key projects.

Seize the opportunity to paint a convincing picture and gain the enthusiastic support of your surety underwriters.

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 #14: Financial Statements – Timing

Steve GoliaLeave a comment

When it comes to financial statements, no news is bad news.  Let’s talk about the timely delivery of annual financial statements.

Many construction companies have a 12/31 fiscal year-end (FYE).  This means their most important Financial Statement (FS) are based on this date each year.

By the end of March, bond underwriters and bankers are expecting to see the financial statements for the FYE.  90 days after the date is normally the time allowed for this info.  Beginning on April 1st (or 90 after the FYE, whenever that is), the contractor enters the tap dancing zone.

Q. “When will we see the 12/31 FS?”

A. “There is a slight delay due to…” (choose one)

  • My CPA was ill and got a late start
  • Our software crashed and it delayed the accounting process
  • The dog ate it

While it’s true there are outside or uncontrollable factors, sometimes contractors intentionally hold back the info.  One example we’re seen involves loan covenants.  The company may have fallen out of compliance with their lender and now is attempting to obtain a waiver from the bank.  Having such a waiver will enable the CPA to comment that the FYE non-compliance has been resolved.  That sounds a lot better!

Here is the downside: We have seen construction clients hold back the FS for 10 months in some cases.  Obviously the delay itself can become an even bigger problem.  At some point underwriters say to themselves “If the FS was good, the contractor would want us to see it…”

So the point is that timely financial reporting is beneficial to bonds and banking.  It shows that the company is well organized and professional.  There is no hiding from the financials.  If there are issues, prepare an intelligent explanation,  describe the corrective actions management is taking and provide projections for the current year.

Producing financial info on time is as important as the numbers themselves!

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.)