Secrets of Bonding #104: Your Bid is BUSTED!

Contractors put so much effort into the bidding process. And yet, there is one thing that can cause the bid to be thrown out, BUSTED! All that effort is wasted. 

Busted-1For contractors pursuing public works projects (city, state, and federal), bidding is how they acquire most new jobs. A lot goes into creating the project proposal. The estimating, subcontractor pricing, materials, insurance, it all takes time. When their bid is busted, they lose the time and expense dollars plus the revenues are unrealized. That’s a huge drain management must avoid.

The Process

Almost without exception, public works projects require bid security to accompany the proposal – usually issued in the form of a Bid Bond. The contractor uses a Bond Request Form to notify the surety of the upcoming bid event. They state an estimated contract price (ecp) on the bond request form, which is the focus of the underwriting decision. It is the approximate expected amount for the Performance Bond that follows when the contract is awarded.

The ecp is a guesstimate. Sometimes the subs come in higher than expected. Material costs could jump, especially when unique items have been stipulated: expensive electrical equipment, etc. The final bid number may be higher than anyone anticipated. Then what?

The Issues

It is possible that the bid documents will not support the new, higher amount – resulting in a lost opportunity.

Busted-2This can happen if the bid bond indicates a maximum dollar amount. Federal projects require a bond for “20% of the attached bid,” meaning it automatically adjusts to the contract amount being submitted. But in some cases, a “capped bid bond” is issued.  It will not follow the contract amount above the ecp that was approved. Example, a 10% bid bond is issued on a project estimated / approved for $500,000. If the bid bond is capped, it cannot be worth more than $50,000.  When submitted, if the related proposal exceeds $500,000, the bid security is deficient: Proposal is thrown out! (How do you know if the bid bond is capped? See below *)

In some cases (common in New Jersey) a Consent of Surety is also required. The surety must state “we promise to issue the P&P bond.” This too may be capped, “This Surety Consent shall be valid in support of a contract amount not exceeding $500,000.” Here again, the bid is busted at the last minute – too late to have the documents re-issued for the higher amount.

Prevent / Solve The Problem


  1. Don’t shortchange the estimated contract amount. Try not to cut it close. There is never a problem if the contractor bids less than expected.
  2. Don’t order the bond too early. Try to gather the pricing first or at least get indications from subs and suppliers. Using the engineer’s published estimate (in the bid advertisement) may not be a sufficient basis for the bond request.
  3. Determine if the bond, surety consent or power of attorney has a maximum dollar value that may limit the bid amount. Knowing about it is half the battle. Consider increasing the ecp to create a cushion.

When Faced With A Last Minute Increase Unsupported By The Bond Or Consent

  1. Notify the surety promptly! If they re-approve the bid for the higher amount, new documents can be produced. Originals could be rush delivered or electronic copies used – if accepted by the obligee.
  2. If the obligee allows, the dollar value of the bid bond can be supplemented with a bank check. Note: If the Surety Consent is deficient, it must be re-issued / increased.

Honor Cap

Here is an important variation: What action is appropriate when there is NO CAP on the bid bond or surety consent? In this case, there is nothing to prevent the contractor from proceeding with the “higher than authorized” bid amount.

We’ll coin a phrase here, the Honor Cap comes into play. The Honor Cap is the ecp that was approved by the surety. Is the contractor willing to respect the bond approval process? If they cannot obtain re-approval in time, will they still submit the bid and worry about it later? The bonding company expects the contractor to honor the approval terms. This is essential if an ongoing relationship is desired. In this case a simple phone call may be all that’s needed. The surety can quickly confirm that the higher estimated contract price is approved.

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.

* Capped Bid Bond, sample language: “Ten Percent of the attached bid not to exceed $50,000.”

Secrets of  Bonding #103: “Expert” Surety Quiz

If you have been reading our surety articles (well over 100 have been published), you may know SOMETHING about surety bonds by now.  So let’s see if you know more than the basics!

(Answers and your Award appear at bottom.)Test


  1. When calculating Working Capital “as allowed,” what portion of an HVAC contractor’s Inventory is included when analyzing an audited Balance Sheet?
    1. 50%
    2. 75%
    3. 100%
  2. Why do underwriters prefer to NOT issue Performance and Maintenance bonds simultaneously?
    1. The bond premiums cannot be accurately calculated
    2. It is not yet known if the project will be built correctly
    3. Performance Bonds may automatically cover one year of defective materials and workmanship
  3. Which accounting method is not acceptable to sureties and why?
    1. Completed Contract, because it excludes open projects
    2. Percentage of Completion, because unearned profits are excluded
    3. Cash, because Accounts Payable, Receivable and other items are excluded
  4. Which if the following assets is treated as Long Term by accountants and Current by surety analysts?
    1. Cash Value of Life Insurance
    2. Face Value of Term Insurance
    3. Pending liability claims
  5. What is the % of bid spread? 1st $125,000  2nd $ 168,000
    1. 34%
    2. 26%
    3. 34%
  6. The purpose of a Dual Obligee Rider is:
    1. Prevents claimants from Dueling over the proceeds of the bond
    2. Protects the surety from paying the bond amount more than once
    3. Assures that all “interested parties” can make a claim
  7. A “Capped Bid Bond”…
    1. Has a definite expiration date
    2. Has a maximum aggregate
    3. Has a maximum penal sum
  8. Which of these financial statement assets would be disallowed by surety underwriters in their analysis?
    1. Stockholder Loan Receivable
    2. Stockholder Loan Payable
    3. Stockholder Deferred Bonus
  9. What is the Debt to Equity Ratio and how will the surety respond? Total Liabilities and Stockholders Equity: $1,450,000 Stockholders Equity: $250,000
    1. $1,200,000 “Too low!”
    2. .17:1 “Let’s write bonds!”
    3. 4.8:1 “Sorry, we’ll pass.”
  10. When is the surety exonerated on a Labor and Materialmen’s Payment Bond?
    1. Upon fulfillment of the contract provisions and expiration of the applicable lien period
    2. One year after completion of the work
    3. When the original bond document is returned to the surety



  1. C, because with an Audit, the CPA has confirmed the asset
  2. B, they may want to avoid continuing their obligation if the project encountered difficulty during construction
  3. C
  4. A
  5. A: 168,000 – 125,000=43,000. 43,000/168,000=25.6 or 26%. The low bid is 26% below the second bid.
  6. B
  7. C
  8. A
  9. C (Trick question: You must first calculate “Total Liabilities” which is 1,450,000-250,000=1,200,000.)  Then 1,200,000/250,000=4.8 or 4.8:1
  10. A


All correct:

7-9 correct:

Less than 7 correct:  

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.

Secret #102: Little Bonds That Bite

 “The water looks great!  Let’s go in!” 

Like nasty little fish with razor sharp teeth, there are many small surety bonds that can cause BIG problems.  Here are some to watch out for.

piranha2Appeal Bonds – Anyone can be sued.  If a judgement was rendered and you wish to appeal the decision, you will need one of these.  ALL bonding companies are reluctant to provide them.  Plan on putting up liquid collateral in an amount greater than the judgment.  The alternative: Don’t appeal the decision, pay it.

Other Court Bonds: Replevin, Injunction, Release of Lien, all can be hard to obtain.  The Release of Lien normally requires full collateral.

Fuel Tax Bond– Any bond with “Tax” in its title can be tough.  These are guaranteeing future payments.  Financial obligations are the most difficult for sureties to support.  Plan on a rigorous underwriting process with the likelihood of collateral required PLUS full indemnity.

Dealer Bonds– Used Car Dealers, Milk Dealers, are some examples.  These guarantee compliance with applicable laws and proper handling of funds.  If the applicant is a new company and lightly financed, underwriters run for cover.piranha1

Customs Bonds– There are many different kinds.  Import / Export companies may be set up to qualify for these but other firms can have trouble. A Single Entry Bond is needed to import a shipment without delay, i.e. perishable or time sensitive goods.  The applicant’s financial data must be appropriately dated, correct in form, and show adequate strength.  Not everyone is prepared for this.  If you can’t get the bond, your pomegranates may rot on the dock.

Utility Deposit Bond– Required by the power company on new commercial accounts. In the absence of demonstrated financial strength, collateral will be required.

Lost Instrument Bond  “Hillary, have you seen my saxophone?”

Actually, these concern lost or destroyed FINANCIAL instruments such as a check or security.  These bonds have a long term, only one premium is normally collected, and they can be the subject of fraud.  Sureties are “not fond of them.”piranha3

Bid Bonds– Their dollar value may be low – resulting in the expectation that they are easily obtained. Wrong! The underwriting is based on the potential Contract Amount which may be five or ten times larger.  The process can be difficult if the company is young or financial strength / credit is lacking.

Wage and Welfare Bonds-These are needed when contractors set up relations with a labor union.  For underwriters, this is the least desirable part of the account.  A company that can get a $250,000 performance bond may find that the same surety requires full collateral for a $20,000 labor union bond.  Ugh!

The fact is, there are many nasty little surety bonds.  They can disrupt a company and its relationships when they are hard to obtain.  Failure to get them can be fatal!  These small bonds can have a big impact.

The best step is to deal with an expert in handling such transactions.  Go to a bonding pro for advice and market access.  Specialists often know how to resolve these problems.

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.

Secret #101: S-T-R-E-T-C-H  That Bonding Line

Here is an easy and legitimate way to fit more projects into a bonding line.

Stretching-DollarVirtually all Surety Bonding programs include a “single job limit” meaning the maximum dollar value of one bonded contract, and an “aggregate amount” which is the maximum permitted exposure at any one time.

When a construction company gets close to their aggregate amount, it can hinder the ability to pursue additional projects and keep their pipeline full. Understanding how the aggregate is administered by surety underwriters can help get the most out of this critical element.

The Science

Current Data

The first thing to know is that current info is required.  If the underwriter has not been updated in more than 30 days, you can expect a request for an update.

Proper Format

This info may be conveyed as a dollar figure “We have $876,000 on hand to complete” or a detailed schedule may be required.  Such reports are called a Work On Hand (WOH) schedule or a schedule of Work In Process (WIP).  We call it the latter because computers hate to type “WOH.”

The WIP schedule can be a short form containing 5 or 6 columns of info on each incomplete contract, or they can be twice that involved. It is important to use the format the underwriter requires, and fill out the form completely.

The Art

So here are the interesting parts.

Contractors tend to think of their projects based on the status of the Billings.  Obviously, that’s how they make their money.  No billings, no cash flow, no company.

  1. How much do you have left on that job?
  2. (Contractor replies) We have $350,000 left to bill.

Surety underwriters and accountants view the projects based on Costs. This is because, even if the project is 100% billed, it is not complete until there are no more costs left to incur.

  1. How much do they have left on that job?
  2. (Bond underwriter replies) Their remaining costs are $290,000.

S-T-R-E-T-C-H  That Bonding Line

So the first point is to know that the surety is viewing the “Remaining Costs to Complete” when determining how much aggregate is in use / or available.  MORE costs incurred to date mean the job is closer to completion, and less aggregate is in use – and therefore available to support the next project. Contractors are cheating themselves if their cost data is not up to date, or they are failing to include materials delivered to the site, soft costs such as insurance, bonding, etc.

The second point is that most underwriters include ALL work in the calculation, but some only view the condition of the jobs they have bonded.

Be sure you know what is being requested.  It is incorrect to show tons of work if the underwriters only want details on the two jobs they bonded. If you’re not sure what’s needed, ask!

Understanding how aggregate capacity is calculated and providing the right info can dramatically increase the portion of a contractor’s line that remains available.

About us: 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.