Month: July 2019

173. Bid Results / Sgt. Joe Friday

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    From 1951 to 1959 Dragnet was a defining police series that featured Jack Webb as Sgt. Joe Friday.  Joe was famous for an interrogation line he often used: “Just the facts, ma’am!”

When bonding companies issue bid bonds they need to gather facts, too. It is an important process with implications for both the surety and the contractor.  For mood music, click.

So here are the facts, ma’am!

Bid results are the various proposal amounts submitted by contractors pursuing a particular project.  The bids are submitted at a designated time and place.  The list of bidders “lowest, second, third, etc.,” including the company name and $ amount, are the bid results.

The first party to know this info may be the contractor. They often attend the bid opening and write down the results.  Remember, they have a vested interest in the outcome.  They’re hoping to acquire a new project.

It is important for them to report the results promptly to the bonding company.  Here’s why:

Timely Issuance of Performance Bond

If the contractor is low bidder (offering the most favorable price to do the work), an award can be expected. The performance and payment bond will be needed by a set date to avoid loss of the project.  Reporting the bid results is the first step in this process.

Excessive Bid Spreads

A “bid spread” occurs when there is a significant (>10%) difference between the low and the second bidder. This is a red flag for the surety and contractor. All the bidders wanted the work.  They spent time and money developing their proposal. An excessive bid spread means the low bidder has a unique advantage (better expertise, prior experience, special equipment, lower material prices, etc.) over the other bidders OR they made a bid mis-calculation and are underpriced. (*Why is this a concern?)

If the contractor has a special advantage, they must share this info with the bonding company in order to obtain the P&P bond when required. The surety must be confident that the project will be completed properly.

If they made an error, they must notify the obligee / project owner that they wish to withdraw their bid.  If done promptly, they may avoid having a bid bond claim (for failing to move forward.)

Restore Capacity

When a bid bond is issued, underwriters consider a portion of the contractors surety line to be in use – under the expectation that they may win the project and need a P&P bond. If the contractor / bidder is not the low bidder, the capacity is restored to their surety line to support another project – as soon as the surety is notified.

For all these reasons, the prompt reporting of bid results is necessary.  A tight bid is a win for the contractor and surety.  The bidder acquires additional sales volume and the surety books a premium.  It’s how we all make money.

* Why is an excessive bid spread a concern?

If the contractor proceeds with a project that is underpriced, they may end up losing money on the work.

It’s an issue for the surety too, because they are the guarantor of the project.  They must complete the work if the contractor defaults, and they rely on the fact that the contract amount is adequate to accomplish this.  If it is not, the surety could face a net loss.

Excessive bid spreads are bad for everyone, even the obligee. If they award an underpriced project, they may end up with poor workmanship, missed deadlines and possibly a defaulted contract, ma’am!

Want this expertise and creativity on your next Bid or Performance Bond? FIA Surety is a NJ based bonding company that can help! We have specialized in Bid, Performance, Site and Subdivision Bonds since 1979.

Steve Golia is Marketing Manager for FIA Surety.  Call Steve now: 856-304-7348

Visit us Click!

174. When You Can’t Get a Bid Bond

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Bid specifications often provide alternative forms of security to accompany the contractor’s proposal. Cash, a Certified Check, or a Bid Bond may be permitted.

Let’s take a look at the implications of each and when to use them, or not!

First, a quick primer on bids:

When contractors submit a proposal on bonded public work, bid security is normally required. The security assures the bidders sincerity: They will accept the contract if offered or pay a penalty for walking away.

Typically, the specifications require a Performance and Payment Bond or other form of acceptable security equal to the contract amount.

About the forms of bid security

1) Cash is King, but not when it comes to bid security. Bid security amounts are usually thousands of dollars so this method is not realistic for many contractors.

2) Certified Checks are similar to cash. This means the contractor must estimate the maximum proposal amount and arrange for a check payable to the obligee. Initially, the bid bond percentage is known but not the bid dollar amount. The specifications require security ranging from 5-20% of the proposal amount. However the actual proposal amount is often not compiled until close to bid time when all the vendor prices have been received and negotiated. To use a check, the contractor must estimate an amount sufficiently high so it is adequate to cover the bid figure when it is finally known.

3) Bid Bond issued by the surety. The advantage is that the bidder’s money is not tied up (as compared to cash or a check). As a precaution on public work, obligees hold the bid security of the second and third bidders until the contract is awarded – which could take weeks. This means the contractor’s cash or check could be tied up and the likelihood is that they will not win the project.

Looking at these options, a bid bond is the preferred choice. However, a bid bond is not always available when needed. When this happens, the bidder may consider an alternative.

Normally there is no requirement to use a bid bond specifically. The bidder also has the latitude to use one surety for the bid bond and a different one for the P&P bond (although some sureties dislike following another’s bid bond.)

Why would a bid bond not be available?

1. The contractor does not have a surety.

2. Short notice: Not enough time for the surety to make an underwriting decision.

3. Short notice 2: The surety has approved the bid bond but there is not enough time to issue.

4. Bid bond declination: The surety considered the project but will not support it.

5. Bid bond declination 2: The surety wants to support the project but they are unable to due to their lack of credentials, their insufficient capacity, licensing issues, or other problems on the surety’s part.

6. When contractors are changing bonding agents or sureties, there could be a gap in service where the new surety is not ready.

In all these cases, the contractor can decide to bid with cash or a check. However, there may be a downside to consider. Let’s look at each of the six scenarios described above.

Risks of bidding with cash or a check

1. No surety: The contractor could forfeit the bid security if they are awarded the project but are unable to produce the P&P bond.

2. Short notice: The risk here is the same as #1. Forfeiture could be the result if no P&P bond can be arranged within the timetable allowed.

3. Short notice 2: This is one situation where the check may be a reasonable alternative assuming the surety has provided a written approval to bond the contract.

4. Bid bond declination: This is a particularly troubling situation because the effort to arrange a Performance Bond faces two obstacles:

  • Time: Contract awards demand the issuance of the P&P bond by a specified date. There could be insufficient time to set up a new surety relationship.
  • The new surety, which hardly knows the contractor, is being asked to bond a project the incumbent surety declined. The incumbent was willing to lose the account over this project. Can the new underwriters be confident they are making a better decision than those who know the account well?

5. Bid bond declination 2: This example isn’t as onerous as #4. The problem is that the surety wants to bond the project but can’t. The new underwriters will be less hesitant than in #4. (So why don’t they just issue a bid bond to help the client get to the next step with another surety? See answer below.) If cash or a check is used, a surety must be arranged to prevent forfeiture.

6. Changing sureties: Handle the same as the short notice situations.

Conclusion

While it’s true bidding with cash or a check is usually an option, it places the contractors funds at risk. Contractors should not consider using cash or a check unless the availability of the P&P bond is confirmed in writing.

Answer to #5: The surety would not want to issue the bid bond if they can’t provide the performance bond, which is the main product of the surety operation. Second reason, if no performance bond is arranged by the client, the bid bond could go into claim. There is little for the surety to gain in this situation.

Note to agents, contractors and other readers: We are not offering legal advice and do not assume to have covered all possible situations in this article. Every bonded contractor should have a good surety attorney to handle such matters.

Want this expertise and creativity on your next Bid or Performance Bond? FIA Surety is a NJ based bonding company that can help! We have specialized in Bid, Performance, Site and Subdivision Bonds since 1979.

Steve Golia is Marketing Manager for FIA Surety.  Call Steve now: 856-304-7348

Visit us Click!

FASTAPP for Bid and Performance Bonds

Steve GoliaLeave a comment

Here is your easy solution for bid and performance bonds up to $500,000!

You’ve been through this. You have a good client who never needed a bond.  On Wednesday they call you to get a bid bond… by Friday.  They don’t know how long it normally takes – and you need a fast solution.
Our FASTAPP is attached.  Save it in a safe place.  When you need to use it, we’ll be ready to help!
FIA Surety, First Indemnity of America Ins. Co., is a NJ based carrier that has specialized in bid, performance, site and subdivision bonds since 1979.

#166 Performance Bonds: How To Avoid Funds Control

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Funds Control, Escrow, Funds Administration – are all the same thing, and can be part of the process when a Performance and Payment Bond is needed.

What is it, and how can you avoid it?

Funds Control is an underwriting device used by some bonding companies. The procedure is specifically intended to reduce the risk associated with the Payment Bond aspect of the surety’s exposure. The surety is guaranteeing that suppliers of labor and material will be paid. If they are not, the creditor is entitled to make a claim on the Payment Bond for recovery.

The funds administrator acts as the paymaster on the contract. They pay everyone, including the contractor. Under this arrangement, the contractor is not handling money or disbursing funds. This makes the surety confident that folks will be paid appropriately (thus preventing payment bond claims,) and it also assures that none of the money for our bonded contract is shifted over to support other unbonded projects (an illegal action.)

Now the paymaster doesn’t work for free. They perform monthly checking on the contract status including the billings, they gather lien releases from the vendors, they keep the books on the project and write all the checks on behalf of the contractor. The cost if this may be.5 – 1% of the contract amount, paid by the contractor. Normally it comes out of their profits.

Contractors may be unhappy with the fee, and they always worry about the turn around time to get checks issued by the administrator each month. They need to keep the project moving.

So let’s look at an alternative procedure that doesn’t cost the contractor any money, prevents any possible delay in turn around time… and still protects the surety on the payment bond.

The alternative is to have Joint Checks issued by the obligee. What does this mean?

Joint Checks are issued by the obligee / project owner in the name of the bonded contractor and their vendor. For example, if the contractor owes the lumber yard $20,000, a check is written payable to the contractor and the lumber yard specifically for $20,000. This procedure assures that funds sent to the contractor must end up in the hands of the supplier. Under the normal method of payment, a lump sum check for multiple vendors is sent to the contractor, and everyone hopes the funds will be used appropriately / promptly to pay bills related to the bonded work. Please note: That doesn’t always happen. And when money is mis-directed, a payment bond claim can result.

Conclusion: Compared to Performance Bonds, Payment Bonds are the most frequent area of surety bond claims. When the bonding company needs an extra cushion to assure the proper handling of money, Joint Checking is an alternative to Funds Control that is fast and free for the contractor – and helpful to the surety.

Want this expertise and creativity on your next Bid or Performance Bond? FIA Surety is a NJ based bonding company that can help!  We have specialized in Bid, Performance, Site and Subdivision Bonds since 1979.

Steve Golia is Marketing Manager for FIA Surety.  Call Steve now: 856-304-7348

Visit us Click!

#165 Performance Bonds: How To Avoid Collateral

Steve GoliaLeave a comment

This is a nasty subject. Not because collateral for surety bonds is inherently bad, but because it is a subject of great angst for contractors and their insurance / bond agents. For example:

  • Why is the bonding company taking money from me when they can see I’m in a weak cash position? I need it to successfully perform the new project.
  • You don’t pay me interest on the money? Why not?
  • When the job is half done, you will not release part of the collateral?
  • You will not release the collateral upon acceptance / completion of the contract?
  • You will not release the collateral until the warranty period ends?
  • Etc. Plenty of aggravating phone calls and emails.

With all this aggravation ahead, why do some bonding companies require collateral? The reason is to protect themselves in the event of a bond claim.When a contract surety loss occurs, the claims department hopes to have two dependable resources for financial recovery:

  1. The unpaid balance of the contract goes to the surety as they complete the work
  2. The surety sues the applicant / company and its owners to recover the loss

Collateral requirements arise when the surety wants to have certainty. If a problem develops, they don’t want to find that the client has no money left, or they declared bankruptcy… or left the country. If they are to write the bond, they want a guaranteed way of having financial recovery.Bearing in mind that collateral is a dear price to pay for a bond, let’s look at an alternative approach that helps the surety, but doesn’t take a big bite out of the contractor!

“Retainage” is money the project owner hold back (retains) to assure the final completion of the project and payment of related bills. If the retainage is 10%, the contractor receives 90% of the funds they are owed as the job progresses. At the end, the contract owner / obligee will still be holding 10% to keep the contractor interested in reaching total, satisfactory completion. In this manner, the retainage money protects both the obligee and the surety – making a bond claim less likely.

“Surety Consent to Release of Final Payment” is a voluntary procedure obligees may use as a courtesy to the surety. The last bit of contract funds may be useful leverage to get the contractor moving for the final contract adjustments. There may be building cracks, broken glass, defective lights, painting errors – small stuff that the obligee cares about but the contractor may find annoying to correct. The Surety Consent is another way for the bonding company the avoid a claim. “Fix this problem or we will not agree to release your final payment.”

How can these two useful tools be incorporated to guarantee they will help the surety, and therefore replace the need for collateral?

The answer is to add a condition to the bond (mandatory compliance required by the obligee) stating that there may be no release or reduction of retainage or final payment without the prior written consent of the surety. Now the bonding company is guaranteed to have a financial resource available and the amount is known in advance – just like collateral. But the contractor didn’t have to drain the company bank account to accomplish it: Win-win!

What if the contract terms do not provide for a retainage procedure? One can be added by contract amendment. If Funds Control (an escrow agent) is in use to handle the contract disbursements, a retainage procedure can be added to the funds control agreement.  Keep this alternative procedure in mind if your bond underwriter needs help to be more creative with the underwriting solution.

Speaking of Funds Control, watch for our article next week “Performance Bonds: How to Avoid Funds Control.”

Want this expertise and creativity on your next Bid or Performance Bond? FIA Surety is a NJ based bonding company that can help!  We have specialized in Bid, Performance, Site and Subdivision Bonds since 1979.

Steve Golia is Marketing Manager for FIA Surety.  Call Steve now: 856-304-7348

Visit us Click!