Secrets of Bonding #127: “The Call”

A couple of times every week we talk to a new contractor who wants to get their bond account set up for the first time.  Here’s how it always goes:

  • Contractor: We want to go after bonded projects but we’ve never had bonds before.  What’s involved?
  • Surety: OK Hi! Who am I speaking to?
  • Contractor: I’m Humphrey.
  • Surety: All right Humphrey, can we start by asking you a few questions?  What is the size and nature of the work you intend to pursue?TelefMan-07

Scenario #1 (Pursuing contracts up to $500,000)

  • Contractor: We have performed residential and light commercial work.  We want to go after general construction contracts up to about $250,000.
  • Surety: Great! Tell me the ownership and structure of your company.
  • Contractor: The company is an LLC owned by me and my partner, Bogart.
  • Surety: Are you married?
  • Contractor: Yes, but not to each other.
  • Surety: We have a very easy program that may be a perfect starting point for you.  To be eligible, the owners and spouses must have good personal credit reports. Are the reports favorable?
  • Contractor: Yes.
  • Surety: There are some other criteria.  For example, the program cannot be used for long-term contracts or difficult / unique construction – needs to be plain vanilla.  The good thing is that no financial statements or other documentation is required, only a simple, short app. If this program fits your needs, you’ll never find anything easier or faster! Give me your email address and we’ll send you the FASTAPP.  We can probably get you pre-qualified within 24 hours!

Scenario #2 (Pursuing contracts in excess of $500,000, or for applicants with low credit scores)

  • Surety: We find that most contractors are able to qualify for bonding if their account is developed properly.  That’s where our expertise (since 1979!)  comes into play.
  • Contractor: What info will be needed?
  • Surety:  Getting approved for bonding is like applying for a bank loan. The same kind of financial and background info is needed.  Your relationship with the surety is similar to banking and you promise to protect the surety from loss, just like signing a promissory note with a lender.  That’s why surety bonds are not insurance policies.
  • Contractor: OK what’s the next step and how much does it cost?
  • Surety: We don’t charge for setting up your account!  We’ll send you an email with a list of items that are needed initially.  Gather as much as you can and send over so we can get started.  The process normally takes a week or two.  You don’t pay until you win a contract and need a performance bond.

Conclusion

Have we oversimplified the process? Actually, no.  It is easier than people assume to get their bond account arranged – when you know the ropes.  That’s our niche.  We don’t pretend to be good at everything, but we are experts at this!

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

Steve Golia: 856-304-7348

First Indemnity of America Ins. Co.

Secrets of Bonding #126: Surety Bonds in the Bizarro World

There have been 24 movies about Superman, but I loved the original TV series starring George Reeves (the real Superman). Even before that, there were Superman comic books published by DC Comics.

BizarroThe character, “Bizarro #1,” first appeared in 1958 – a mirror image of Superman but from a world where everything was opposite from that of humans. That was over 50 years ago, but strangely, there is a little piece of Bizarro World that still survives today. It is alive in our surety rate system. See if you agree…

Example #1

A contractor won a $1 million contract. The specification calls for a 50% performance bond: $500,000. The surety’s maximum exposure is $500,000.

Bizarro Fact: The bond rate is based on the contract amount, the full $1 million!

Example #2

Sureties often issue a Performance and Payment Bond in a single combined instrument that states the bond amount once (the penal sum). However, if required, they will issue two separate instruments, one Performance and the other Payment, each with it’s own penal sum (double the amount in the combined bond form.)

Bizarro Fact: When required to issue this double bond amount, the bond premium remains the same as for the combined bond form!

Example #3

The contractor has already started the project. Now it has been verified that 50% of the work is completed and accepted by the project owner. It is confirmed that all related bills have been paid. It is apparent that 50% of the exposure has been eliminated.

Bizarro Fact: The bond costs the same as if it had been issued at the start of the work. There is no reduction or recognition for the portion of the exposure that has been eliminated.

Example #4

The contractor has negotiated a $1 million contract. Now the project owner has indicated that a P&P bond must be provided. The surety states that the cost of the bond will be 2% of the contract amount. Is the cost 2% of $1 million ($20,000)?

Bizarro Fact: No! The correct calculation is 2% of $1,020,000 or $20,400. The bond premium is calculated on itself, even though it cannot be classified as part of the contract exposure.

There you have it: The upside-down world we actually live in. Naturally there are justifications for all the procedures sureties use, but still, they are Bizarro!

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety 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.