aggregate capacity

181. How to Get Rid of Surety Bonds and Why You Should

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“How can I miss you if you don’t go away?”

Performance Bonds are issued by insurance companies – but they are not insurance policies.  When you get to the end of your auto insurance, it will expire if not renewed.  Plus, the company can cancel it in the middle of the year.  Boom, it’s done!  Insurance policies are not “forever.” Click for mood music!

With surety bonds it’s different.  First off, they’re harder to get.  Then, when you finally have it, they don’t expire! And the bonding company can’t cancel a performance bond. So how do they end?

The fact is, people focus on getting surety bonds because they are a mandatory element of many transactions, but they think little of getting rid of the bond – eventually.  Let’s go over why you want to close out a performance bond, and how to do it.

Every performance bond is married to a written contract that is identified in the first part of the bond.  They are married until death – until the contract is completed. If you have a two year contract covered by a Performance and Payment Bond, you have a two year bond, unless the contract is extended. If the contract is amended to a term of 25 months, the bond automatically follows.  If the contract dollar amount is increased, the bond automatically follows.  The point of the bond is to guarantee the Obligee’s (the beneficiary of the bond) satisfaction with the performance of the contract.  So the bond remains in force until the obligee / contract owner accepts the completed contract.

To close out the surety’s obligation, a release or acceptance of the contract by the obligee is needed.  The applicant / principal (contractor) can’t cancel or close the bond.  Only the obligee can end it.

Closing evidence can consist of a Status Inquiry form completed by the obligee.  The questions would be:

If the project IS completed:

Completion date: ___________  Acceptance date: _____________ Final contract amount: $___________

If the project IS NOT completed:

Approximate percentage or dollar amount completed: $_____________________________

Describe any disputes or performance issues on the project: _______________________________

Do you know of any unpaid bills for labor or materials? ____ No ____ Yes  If Yes, please describe: _____________________

Current estimated completion date: ____________________________________

Now that we know how to close out a performance bond, why bother to do it?  There are some very good reasons…

The Surety

  • The surety (bonding company) will conclude the liability on their books when the bond is released.
  • They also immediately earn all the remaining premium. Two good reasons!

The Contractor / Principal

  • That portion of the company’s bonding capacity will be restored to support a new contract.  This helps them qualify for more projects and larger ones. That is the source of their company revenues.
  • The “acceptance” of the work, by the obligee, is the official conclusion of the contract.  It ends the principal’s obligation – except for a “tail” such as a maintenance obligation.
  • When completed, the project is added to the company’s credentials.  They can now list the contract as a successfully completed job.  That’s how their resume is built.
  • The applicant company, it’s owners and spouses have a legal liability that arises through the indemnity agreement (a hold harmless issued to protect the surety.)  It is literally a liability which must be disclosed on their financial statements.  When the bonds are released, this company and personal liability ends.

The Bonding Agent

  • The agent wins too because more bonds can be issued.  And that’s how they make their living.

Conclusion

Everybody wins when the job is closed out and the bond gets released. This is a necessary process that should not be ignored.

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: 856-304-7348

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Bond Underwriting Challenge

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This is a real case that was handled by our surety bond experts… a doozie! See what you can make of it.

The facts:

  • This is a Performance Bond request for a multi-million dollar subcontract
  • The applicant / principal is a long established company
  • They have successfully completed similar sized projects
  • The company has a modest net worth, but is on a profitable trend. Ratios are OK.
  • Personal financial statements of the stockholders add more net worth to the picture
  • The company is owned by a father and son. Son is the primary stockholder.
  • We noted their SS numbers are only a few digits apart
  • Father has a substantial net worth. Son has a small net worth as indicated on his personal statement.
  • The applicant has started the subcontract
  • The GC / obligee has a mandatory bond form – very tough. It effectively makes it a forfeiture bond (obligee completes the job and sends you the bill.)
  • Father has a living trust
  • Son also indicated he has a trust

A lot of moving parts. What are the issues?

  1. Low company net worth. Too low for the size bond requested.
  2. “Close” SS numbers imply these individuals are immigrants (received SS numbers at about the same time). Are they U.S. citizens?
  3. Started subcontract. Why were they allowed to start without a bond? Degree of completion? Work acceptable? Bills paid? On schedule?
  4. Do we want to write a forfeiture bond form (financial guarantee?)
  5. What assets are in the trusts? Can they give indemnity? Will we rely on the indemnity of a trust?

– Think of your possible solutions – 

Here is the approach crafted by our underwriters:

  1. Low company net worth. We do not prefer to require collateral because it may be counter-productive, making it harder for the client to complete the project. Instead, the client agreed to add capital to the company – an investment in their future. The funds could be a subordinated stockholder loan, or a stronger method: Additional Paid-in Capital. The latter is more permanent and therefore desirable. The client agreed to permanent capital that would be verified in writing by their CPA and supported by a current interim balance sheet.
  2. Close SS numbers. Why would we inquire about anyone with a social security number? It is because the number itself does not prove citizenship – nor does the filing of a US tax return. Non-citizens authorized to work in the U.S. can get a SS#. “Tax residents” are permanent residents and green card holders who are non-citizens required to pay U.S. taxes. All sureties are cautious when taking the personal indemnity of a non-citizen. They may easily flee the country to avoid their obligations. On this account we determined the father and son were immigrants as we suspected, and naturalized U.S. citizens.
  3. Started subcontract. This would be clarified by obtaining our All’s Right Letter from the obligee, stating the relevant facts on the project (degree of completion, on time, no problems, etc.)
  4. Bad bond form. We had previous dealings with this major GC and negotiated a bond modification that made the bond operate more normally. They agreed to use the bond mod again.
  5. Trusts. It turned out there was only one trust. The son was the beneficiary of the fathers trust, no separate trust of his own. A review of the father’s trust showed it was not prohibited from signing the indemnity agreement. However, living trusts are revocable, meaning the terms can be changed and assets moved out – making them unreliable indemnitors. And it contained the single most important asset, the father’s residence. How to overcome this last obstacle? Our solution: We will place a lien on the property giving us access regardless of changes in the trust.

There you have it. Did you come up with solutions to match ours? It was a tough / complicated case, but we worked hard to solve it.We’ll work hard to solve your bond cases too. Bid bonds, performance and payment, and also site and subdivision!

Include us in your bond production efforts. We can make it happen.

 

Steve Golia is FIA Surety’s Marketing Manager.

The insurance company provides Bid, Performance, Site and Subdivision Bonds with speed and creativity. Contact us today and let’s discuss how we can help. Call 856-304-7348.

Visit us Click! FIA Surety / First Indemnity of America Ins. Co., Morris Plains, N.J.

Secrets of Bonding #164: The Phantom of the Underwriting Department

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When it comes to surety bonds, you know your underwriter. You know the process.  There are questions and answers, then a decision.  Simple, right?

You rely on your rapport with the surety and know how to monitor the status of the underwriting.  Maybe you understand the underwriter you see.  But what about the invisible surety underwriter, a shadowy phantom who exists in every transaction, and whose opinion always affects the outcome. Call this mysterious one “The Phantom of the Underwriting Department.” 

For mood music, Click!

You cannot talk to the Phantom…  Invisible.

There are no emails, no Q. and A. 

And yet, the Phantom analyzes, reviews and influences every bonding decision.  Let’s pull back the curtain on this ethereal being.

Contractors Questionnaire

It all starts here.  Your underwriter looks at the basic info: How long in business?  Largest prior jobs? What do they do, what do they sub?

But the phantom yearns for more. What company ownership structure was chosen?  Is it a proprietorship, corporation or LLC?  Did the founders make prudent decisions? These choices affect taxes, profits and future liabilities.  They can help or hurt the company… and its surety.

If criminal history, litigation, tax problems or surety bond claims / losses are indicated, these may require further investigation.  The Phantom will make a deeper review.

Continuity of Ownership: Who succeeds the current stockholder in the event of death? Will the company maintain operations and complete its projects? These arrangements show that management has an eye toward the future.

The Work In Process Schedule

These are requested often.  They show the contracts in progress, their billing status and costs. The underwriter wants to know how much “work on hand.” Then, silently, the Phantom digs deeper.

The current expected profit is compared to the original estimate. What does this show? Is the profit expectation as predicted or better? Is the estimating department in sync with the field organization?  Is job site supervision highly efficient? Can an undeclared underbilling asset be added to Working Capital?

Is the expected profit sufficient to produce a net profit at year end?  The Phantom will compare the projected job profit percentage to the company Profit and Loss Statement. Based on historical expense trends, the likelihood of an upcoming profitable fiscal year-end can be verified.

Company Financial Statements

He loves these.  There is so much.  They talk to him. The Phantom takes full advantage of this document to determine more than just “the numbers.”

Beginning with the accountants cover letter, who has the contractor chosen for this important assignment? Are they using a construction expert? Did they pay for a quality presentation?  Is the best accounting method in use? Is the fiscal date at an advantageous point in their business cycle?

Obviously, underwriters look at working capital, net worth, ratios, profitability. But there is so much more.  The financial statements show how the stockholders / managers treat the company.  What does it mean to them? Do they nurture and respect it, growing the tiny acorn into a mighty oak?

Past borrowing practices are revealed.  Also, the relationship between financial performance and the ambitions of management.

Growth of the revenue stream is observed and management’s success in monitoring / controlling expense levels.

The Phantom reviews financial statements and tax returns to appreciate the owner’s commitment to the bonded company.  This commitment is a cornerstone of the underwriter’s confidence.

Banking Relations

Very important! There are similarities between banking and surety bonds.  The banker’s opinions help reaffirm the underwriting position.

The banking history can reveal good cash flow and prudent business practices.  It can indicate stability, reliability and good management skills.

Credit Reports

The pay record is just the tip of the iceberg.

Now there is a historical review which indicates the adequacy of cash flow, the quality of money management, planning and the applicant’s good moral character.

The Phantom is always there, making this deeper analysis that may never be discussed, but can always make a difference.

Meet Our Phantom

Now, Remove the Mask!

Sorry, we don’t actually have any Phantoms.  All our underwriters are regular people, with real experience and know-how when it comes to bid and performance bonds. Our surety professionals review the facts promptly and efficiently. 

Their deep analysis enables us to support opportunities that may have been declined elsewhere.

We hope you found this article entertaining, but more importantly, informative!  With us, the underwriting is deep and detailed, giving the applicant the highest likelihood of approval.

Call us with your next bid or performance bond, and speak to a real person. 856-304-7348 

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

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

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

It’s SO HOT!

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Record heat is being recorded in many parts of the country.  But what else is hot?

  1. Floyd Mayweather – Hot earner made $7.6 million per minute for his fight with Connor McGregor
  2. Stephen Curry – Hot contract, NBA’s first for over $200 million
  3. Timothy Berners – Lee (never heard of him?) Inventor of the world-wide web and creator of the first web site. He changed everything. Very hot.
  4. Surety Bonds by FIA Surety!
  5. Bill and Melinda Gates – Hot philanthropists donated $4.78 Billion in 2017. (Don’t worry, they kept some for themselves.)

What was that number 4, Surety Bonds?! Come on!  How can they be hot?

Glad you asked:

Surety bonds are a special area of the business.  They are unique and difficult, an opportunity and sometimes an obstacle.  But they are always a chance to shine: A path to greater success for you and your clients.  All you need… is a way to get there.

What if the surety underwriters were cooperative and production oriented?

Wouldn’t THAT be hot?

You need to ask yourself

  • Do my underwriters promise a same day response?
  • Do they help me find a way to write the business?
  • Are they open to a wide range of underwriting situations?
  • Are they Problem Solvers?

If not, you need to heat up your surety bond production.  Find out why agents bring their contract surety, site and subdivision bonds to us.

We’re flexible and creative.  THAT’S HOT!

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.

Secrets of Bonding #160: Deep in the Weeds with Set Aside Letters

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In this article we will peel back the onion on Set Aside Letters (SAL) issued by banks in connection with construction loans.  What are they, when they are useful for bonding companies and when are they not?

Here is the essence of such documents:

“The agreement covering the project will provide that the funds in said impound account are … to be disbursed for payment of the (Name of Project) mentioned above and only after (Bank) has satisfied itself that the work paid for has actually been performed… In the event (Borrower) fails to complete the project described herein… all funds remaining in said impound account shall be immediately available to Surety to complete and pay the costs of said project, and in such event, (Borrower) waives any claim or interest in the remaining funds. Surety shall not in any way be obligated to repay said funds so used to (Bank).

This is an irrevocable commitment of funds which is not subject to recall or offset by (Bank).”

Pretty interesting!  This letter / agreement keeps the loan in play to fund the completion of the project  – even if the borrower (bank customer) fails / defaults.

When Are Set Aside Letters Used?

These documents are a common underwriting tool when a Site or Subdivision Bond is issued by a surety. If the bond applicant (who is also the developer and borrower) is relying on a construction loan to fund the bonded work, the SAL protects the surety by providing funds for the completion of the work in the event of a default.

What a great idea.  So why don’t we use these on everything?  Let’s look at another example.

Commercial Projects

The project owner hires a bonded contractor and a bank loan will fund the project.  The bank needs a guarantee that the asset / project (which backs the loan) will be built as intended.  A Performance and Payment Bond accomplishes this and assures there will be no Mechanics Liens against the property for unpaid bills.  These two aspects benefit the project owner and the lender.  Keep in mind, in a borrower default situation, the bank becomes the new owner of the property.

It is common for the bank to stipulate that a bonded contractor be used, and they may want to be a named beneficiary on the P&P bond – accomplished by issuing a Dual Obligee Rider.  In turn, should the underwriter require a SAL from the lender?

On Commercial projects, the normal practice is to NOT obtain a SAL from the lender.  Why not?  Why is this different?

Choose one:

a. The bank is a secured lender

b. The bank can subrogate against the borrower’s assets

c. The Dual Obligee Rider serves a purpose similar to the SAL

a. and b. are true, but the answer is c.

Welcome to the Weeds

We’re going in now. The Dual Obligee Rider adds the lender as a beneficiary with all the rights and obligations of the obligee named on the bond (the project owner).  And what are they?  Obviously they are entitled to make a performance claim and have the project delivered as indicated in the contract.

The named obligee also has obligations, one of the most primary is to PAY the builder. Important: The obligee is prohibited from making a performance claim if they have failed to pay the contractor.

Therefore, when the bank is included under a Dual Obligee Rider, they accept the benefits and obligations.  If the borrower defaults, the lender cannot make a bond claim unless they continue to pay the construction loan to the surety.  (Now the bank owns the project and the surety has become the contractor.)

Summary

Is this starting to make sense?  When a borrower defaults on a commercial project, a lender included by Dual Obligee Rider cannot make a claim unless they continue to pay the project funds to the surety.

Deeper Weeds

On Site and Subdivision there is a unique risk – the lender can take a free ride on the surety by having the bonding company pay out of pocket to complete the project.

Site and Sub-D bonds have the local municipality as obligee, not the bank.  The bank doesn’t want a Dual Obligee Rider because they automatically receive a financial benefit if the municipality makes a bond claim to demand completion of the project.  If the borrower has defaulted, the bank has the opportunity to withhold the balance of the loan (the borrower is gone), and watch the surety pay to complete a project they now own.  And they were not even the bond claimant…

This is the risk sureties avoid on Site and Subdivision Bonds by requiring the SAL that keeps the loan in play, even if the bond applicant / borrower has failed.

Admittedly, this is a pretty obscure subject, but also interesting to us “bond nerds.”  It never hurts to understand how things fit together.  These skills help us solve your complicated bond opportunities.  Take advantage of our expertise when the next one pops up.

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.

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

Secrets of Bonding #127: “The Call”

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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 #123: Who Was Edward Aloysius Murphy, Jr. (& Why Contractors Should Care)

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(January 11, 1918 – July 17, 1990) An American aerospace engineer who worked on safety-critical systems for the U.S. Air Force. He is best known for his namesake Murphy’s Law, which  states, “Anything that can go wrong will go wrong.”  Murphy regarded the law as crystallizing a key principle of defensive design, in which one should always assume worst-case scenarios.Murphys_Law

Keeping Major Murphy’s principle in mind, what are the critical steps contractors can take to get their projects off on the right foot, and bring them to a successful conclusion – while keeping Murphy’s Law out of the equation?

The first key to having a successful contract is to have a contract. It sounds obvious, but contractors are sometimes induced to start work, or perform change orders / additions to contracts, without an executed document in hand.  Maybe the project owner is in a rush, “We need for you to start right away so we can be completed on time.  We’ll do the paperwork later.”

The contractor wants to maintain good will.  They proceed in the hope that their responsiveness will pay off – and sometimes it does.  There are also times when the contractor incurs costs that are never reimbursed because the contract is not executed.  There could be engineering problems, governmental interference or lack of funding. There are any number of reasons for things to go wrong (as our hero indicated.) And for the contractor, they are all bad.

murphyslaw

On the other hand, let’s say there is no problem with the contract.  The paperwork is signed, the work proceeds, is paid for, and the contract is completed with a profit in hand. Is that the end?

No, not quite. Just like there is paperwork to get into the project, there is more to get out of it.  The contractor should obtain written acceptance of the work by the job owner (obligee.) 

  • This important document establishes a completion date for the contract and concludes a portion of the liability that is attached to all open contracts.
  • It will close the Performance and Payment bond if there was one. Closing the file restores the contractors bonding capacity. 
  • It may also be beneficial with lenders.
  • If nothing else, a written acceptance may be a defense when the project owner attempts to call back the contractor at a later date or claim the work was not satisfactory.

Edward_MurphyThese simple procedures are basic, good business practices. Contractors who win work competitively, and are paid under a lump sum contract, already face significant risks.  It is important to have the correct paperwork in hand when starting, modifying, and ending construction projects. 

Major Murphy learned this important lesson the hard way – but you don’t have to! 

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.

Secret #91: Bonding Capacity – Enough is Enough

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Contractors know Surety Bonding Capacity is good to have and the more you have the better! But how do you determine the amount that is enough?

Primer on Capacity

  • Bonding capacity is normally described as an amount per project and an aggregate total. The amount per contract is referred to as the “single,” meaning the amount available to support a single contract. The aggregate is the incomplete portion of all the current and new contracts on any given day.
  •  Bonding companies look at the contractor’s capabilities when determining the single amount they will support. These include similar jobs successfully completed, available resources such as supervision, labor, and equipment as well as financial liquidity.
  •  To evaluate the aggregate, underwriters look at historical production levels, financial strength and other relevant factors.
  •  They also consider the capacity amount the contractor is requesting. For successful management of the relationship, it is beneficial to provide what the client desires if possible.

So how does the contractor determine the capacity levels to request?

First off, underwriters are unlikely to support new projects more than double the size of prior work. In addition, they generally expect the financial analysis of the last company fiscal year-end financial statement to show adequate levels of strength for such projects. (Read Secrets of Bonding # 4 for a complete explanation regarding working capital calculations.)

The aggregate capacity is generally double the “single” amount although there may be cases where a limited program consists of a single and aggregate for the same amount. This would mean the underwriters only want to support one project at a time with no overlap.

As far as the ability to bid on multiple projects while performing other work, the solution is to have an aggregate amount that is a multiple of the single, for example $1 million single / $2 million aggregate (referred to as “one over two”).

To decide if the aggregate is enough, first determine if it consists of bonded work only or all projects. This enoughvaries by underwriter. It is reasonable and likely they will say “the aggregate includes all work, bonded and unbonded.” This approach takes all the contractor’s obligations into consideration, everything that may tax financial and human resources and therefore affect the bonded work.

The more liberal treatment is to define the aggregate as only including bonded work. This provides unlimited potential to add unbonded work with no scrutiny by the surety.

Capacity Management Tips

One factor that affects the adequacy of the aggregate is the company’s bidding strategy. Stacking up multiple bids in rapid succession consumes the aggregate more quickly.

The prompt recognition / reporting of progress on bonded jobs and their conclusion has the opposite effect. It helps make more capacity available.

Knowing when current bonded projects will complete can be helpful. Underwriters may support bids knowing that the start of the new project will be after the completion of a current bonded job. This is a slightly creative way of stretching the capacity with a view toward the future. Some underwriters will exercise this flexibility.

Conclusion

In our experience we find that capacity is the most important element of a bonding program.

Contractors are always concerned about the competitiveness of their bond rate. But if you don’t have enough capacity to add the new project, the rate doesn’t really matter.

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 #84: Manage the Bid Bond Account

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For many contractors and their agents, the main thing they want to know about Bid Bonds is that they have them when needed.  However, the successful management of the bid bond account requires controlling a number of elements. Let’s review them.

The bid bond facility consists of a single and aggregate limit. The “Single” is the maximum size project that can be bonded (without a special exception), and the “Aggregate” is the maximum combined exposure on the bond account at any given time.

It is important to note that the single limit refers to the project amount not the penal sum (dollar value) of the bid bond. If a contractor is bidding a $500,000 federal project with the 20% bid bond requirement, the amount of capacity involved is $500,000, not the bid bond amount which would be $100,000 (.2 x 500,000 = 100,000).  The underwriting decision is always based on the contract amount.

Bear in mind, the bonding company does not want to know the actual bid amount prior to the bid opening. When requesting a bid bond, the underwriter is given the approximate bid / contract amount in order to preserve the bid confidentiality.

Let’s stay with the $500,000 example. If the contractor’s bid calculation is actually $485,000, it would be appropriate to round up and make the bond request for $500,000. If the actual bid calculation is $510,000, again, it should be rounded up to allow for last-minute increases. A bid bond request for $525,000 or more would be advisable.

While it is true that the penal sum of the bid bond, if expressed as a “percentage of the attached bid,” will automatically adjust up or down to the actual bid amount, a problem arises if the bonding company issues a “capped” bid bond.  This means it cannot adjust upward beyond the amount stated on the approved bond request. If a capped bid bond is used, the contractor will invalidate the bond, and their proposal, if the bid exceeds the amount approved by the surety.

maestro1. The first rule in managing the bid bond account is to request the bond for an amount sufficiently high to accommodate last-minute increases.  This avoids the temptation to bid above the approved amount – a practice that is damaging to the surety relationship.

2. The second important guideline concerns the aggregate capacity.  The aggregate calculation is made on a daily basis and includes the incomplete portion of open projects, jobs signed but not started, awarded projects, low bids, plus undecided bids. As a result, a portion of the available aggregate will be unnecessarily consumed if bid estimates are rounded up unnecessarily high. In our example, if the contractor calculated a $510,000 bid and requested approval for $600,000, they may needlessly consume capacity that could have remained available to support another bid.

3. Another point, submit the bond request early enough to allow time for discussion and processing.  Usually a couple of days is needed.

In conclusion, when requesting bid bonds, round up the estimated contract amount to allow for last-minute increases, but remember to preserve aggregate capacity for future bids.

Allow sufficient time for processing and keep in mind, to the decision makers, it is not “just a bid bond.”

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.

Bonding Pros Success Story

Steve GoliaLeave a comment

November 12, 2014 to Bonding Pros:

“Steve, Good to see it came thru OK. We would like to offer our sincere appreciation and gratitude for your efforts. Thanks so much! Talk soon, (Contractor)”

Frankly, we even impressed ourselves on this one!

The client had a series of obstacles in their file, any one of which could have caused a declination.  With their good cooperation we crafted a file that brought out the key elements of their strength, and effectively addressed issues we knew could be deal killers.

We got them capacity with a highly rated, T-listed surety… with NO COLLATERAL.

This is where our long experience as bonding specialists pays off.

You know insurance, but we know bonds.  Use us as you agency bond department.  We’re problem solvers and our markets are the best.  When you need a bond, talk to the Pros!

We protect our brokers, pay a commission on every bond fee and keep you in the loop.  Try us!

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856-304-7348  www.BondingPros.com