It’s not sexy. Nobody has it on their business cards. It may not be in your “official” job description. But this article is the start of your new vocation as an official Bean Counter!
A major area of surety bonding is “Contract Surety.” This refers to bid and performance bonds for construction contracts. When we set up a new account, an amount of bonding capacity is established and the individual bond requests are processed within that line. It is possible for a client to use up the full capacity of their line, then our underwriting department could consider granting an exception to support additional work.
We manage bonding capacity the way a bank runs a credit line. A series of individual transactions (bonds) can equal the full capacity amount (referred to as the “aggregate”). Bank credit lines work the same way. For the bond or bank customer, it is advantageous to maximize the available credit. Prompt reporting of bid results helps accomplish this objective.
Advantages Of Reporting Bid Results Promptly
- When a bid bond is approved / issued, the underwriter debits the amount against the aggregate capacity. However, the full contract amount is used, not the dollar value of the bid bond. For example, a 10% bid bond for $100,000 actually uses $1 million of aggregate capacity. Therefore, when it is known that the bid is not likely to result in a contract award (the client is not “apparent low bidder”), this fact should be reported so we can restore the capacity.
- Detailed bid results are needed on low bids in order to process final bonds. Example: Our guy has a low bid for $5,000,000. The second bidder is at $5,400,000. Third bidder submitted $5,550,000. Because our bid is less than 10% below the second bidder, the adequacy of the contract amount is supported. If our client is more than 10% below the second bidder, there will be an additional evaluation before proceeding with the P&P bond.
- Bid Spreads – in cases where the bid spread is excessive, it is important to have a prompt discussion with us. If there is a bid calculation error, and the contract price is inadequate, there is a limited amount of time to withdraw the bid without penalty (such as a bid bond default / claim). Learn more about bid spreads: Click!
- Low bids may be for lesser amounts than the original bid approval. Example: We approve a bid for an estimated contract amount of $9 million, but the actual bid goes in at $8,500,000 due to last minute changes and reductions. Therefore, when the low bid results are reported, $500,000 in capacity is restored to the aggregate.
- Postponements – sometimes bids are postponed at the last minute, with no immediate reschedule date. The bid approval may never be used. If it dies on the vine we will restore the capacity immediately.
- Withdrawal – clients may decide not to bid a project after ordering the bid bond. They may have determined that the plans are unclear or unacceptable. Advise us so capacity can be restored.
If you are now sufficiently impressed with the importance of minding these small details, you may don your green eye shade and declare yourself an Official Bean Counter. It’s not glamorous, but it is necessary for proper management of the bond account. (Actually, we think it is glamorous!)
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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
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