There is a glass ceiling in contractor’s surety bonding. This is both an obstacle and an opportunity. Let’s look at both.
We offer expedited bid and performance bond programs to cover contracts that are not excessively large, complicated or difficult. A size example would be a contract for $500,000. In this discussion we will assume that this is the maximum size bond available in the program.
If the contractor is bidding a job for approximately $500,000, there may be instances where the final estimate comes in higher. However, if the program has a $500,000 maximum contract amount it cannot be used for a dollar more. How can the contractor solve this dilemma? If their estimating produces a bid amount of $525,000, do they pass up the opportunity or reduce their price to $500,000 in order to obtain the bond?
Failing to bid the project gives the contractor a guaranteed return of $0. If they bid the job at $500,000 there may be opportunities to improve the outcome through contract additions. They may also find labor efficiencies or improve their purchasing resulting in a better profit margin. Nothing ventured, nothing gained!
On the other hand, they could end up with an unprofitable project, one that was underpriced from the start. This not only results in a loss of net worth, it is also detrimental to bonding and banking when the unprofitable contract appears on the completed work schedule.
Underwriters may require a written explanation about the loss before extending additional bonding support. The contractor could have difficulty paying subs and vendors on an underpriced job. This could lead to complaints and even a bond claim. A losing project is always bad news but it is more detrimental when the loss was within the contractors control.
So far we discussed two possible outcomes:
- Don’t bid the job
- Reduce the bid to the maximum amount permitted in the program, even if it may be inadequate for a successful contract.
Beyond the Glass Ceiling
There is a third possible outcome and it is more favorable. Hitting the glass ceiling is an opportunity for the contractor to graduate into a new program with higher capabilities.
This is a natural indication that the time has come for the contractor to move into a traditional bonding program with almost unlimited capabilities.
Granted there are some trade-offs… The traditional programs involve more time, paperwork, and expenses. The benefit is the opportunity to move into larger projects – exactly what the contractor wants.
The bottom line is that the “easy” type bond programs offer advantages but may not be a long-term solution for all contractors. When you hit that ceiling, keep in mind that other bonding solutions are available and FIA Surety can help!
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