aggregate capacity

Secrets of Bonding #76: The Second Bidder’s Second Chance

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In this article we will talk about some opportunities that may exist for second bidders.  These are the contractors who have come in 2nd on a competitively bid project, such as a federal or state contract.  These projects are typically awarded to the “lowest responsible bidder” (meaning they must have the proper credentials and meet other requirements.)  As for the 2nd bidder, they get nothing.  They were close, but did not win.  It’s a 100% waste of time and money – unless they DO ultimately acquire the project.  A contract may be awarded to the second bidder under certain circumstances – such as a defect in the low bidder’s paperwork.

There are many documents required in a typical bid proposal: Licenses, certifications, references, non-collusion affidavits, business registration, consent of surety, bid guarantees, etc.  If documents are missing, or issued with defects, the low bid can be declared “non-responsive” at the discretion of the project owner.  The 2nd bidder then becomes the lowest responsible bidder and may receive the contract award.

Here are some of the technical areas to check that can cause bids to be rejected:

  1. Mandatory forms Failure to use mandatory forms, use of obsolete / expired forms, or not following a stipulated format.  Does the bid invitation contain a bid bond form described as mandatory? Bid bonds are all similar but the failure to use the right format or document is a potential cause for rejection.
  2. Bid bond details Check all the typed information for accuracy.
    1. Bidders name
    2. Obligee’s name
    3. Job description and project number
    4. Bid bond percentage or dollar amount
  3. Capped bid bonds If a “capped bid bond” is used, a proposal amount that exceeds the bid bond maximum would invalidate the instrument.  (More info in Secret #68)
  4. T-List requirement If a “Treasury Listed” surety is required, does the bonding company appear on the list, and for a sufficient amount?  http://www.publicdebt.treas.gov/fsreports/ref/suretyBnd/c570.htm
  5. Power of Attorney Is one attached, in the correct name, properly executed and for a sufficient amount?
  6. Notary Acknowledgment Needed for both the surety and the contractor, properly executed.  Is the notary’s commission for the correct state and not expired?
  7. Execution Signed and sealed with the correct seals?
  8. Financial Statement Attached for the surety?  Is it for the correct surety name? Is it as of an appropriate date (not obsolete)?
  9. Consent of Surety This is not always required. However, if stipulated, failure to provide it can cause a rejection. Are all the details on the consent accurate? Properly executed including correct seal?  If there are stated conditions, does the proposal comply? (Example: The Consent may only be valid up to a stated bid amount.)

On public bids (municipal, state and federal), the bid documents are normally available for public review.  Second bidders may be surprised to learn they have a second chance if the low bid is defective.

Another second chance may arise if the low bidder falters on the project after commencing work.  In the event of default, the bonding company must come to the rescue and they want an efficient (fast, economical) way to complete the job. Who better to call than the 2nd bidder?  The 2nd is the natural “completion contractor” to finish the job for the surety.  They already know the project and presumably offered a price close to the low bidder. The 2nd should contact the claims department of the surety that holds the Performance Bond if they see the project is in trouble.

Now a parting comment for LOW BIDDERS: Keep in mind that 2nd bidders don’t give up easily.  They, too, spent time and money pursuing the work, and want to win the contract.  Be sure your quality control prevents bid errors that cause bid bond claims and open the door for 2nd bidders.

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

Steve Golia: 856-304-7348
First Indemnity of America Ins. Co.

Don’t miss our next exciting surety article: “Follow” this blog in the top right hand corner.

Secrets of Bonding #75: How come HE can get a bond?!

Steve Golia1 Comment

We have been dedicated exclusively to providing bonds for contractors for 40 years, and we’ve heard this question at least 40 times!

It’s frustrating for contractors.  Everyone knows surety bonds are hard to get, but it is really maddening when your less capable competitors are bidding public work and you can’t get across the goal line.  What is the missing ingredient?  Can we name the secret that answers this question?

The process of qualifying for bid and performance bonds is based on people and paper.  The contractor is interviewed and evaluated.  That’s the people part.  A file is gathered and the paperwork is reviewed.  What can cause a perfectly capable contractor to not qualify for bonding?  The answer may be the paperwork.

Secret #5 was “The Three C’s of Bonding – Plus One!”  It touched on this important point. In our experience, the most common area where capable and bond worthy contractors fall down is in the creation of their file.

The people part of the process is obviously important.  If the underwriter is uncomfortable with the applicant, guess what: No bonds.  The paperwork doesn’t matter if the human element fails.

However, it is equally true that the paperwork must achieve its goal.  And what is that goal?  It is CREDIBILITY.  The difference between two equally capable contractors, where only one is bonded, may be the failure to present a convincing file.

When reviewing a new account, bond underwriters know what is normal and believable.  Contractors who fail to meet these expectations will be rejected. Think of an extreme example: If you were evaluating the file, would you be more likely to believe an applicant’s self-serving comment that they have $100,000 in the bank, or an independent CPA firm that issued a report confirming they verified such an asset? HOW the info is presented can make all the difference.

It’s just that simple.  The purpose of the file is to establish the contractor’s CREDIBILITY for all who read it, including those who will not actually meet the applicant.  For them, their decision-making is based solely on the credibility and content of the file.

What are some of the most common paperwork deficiencies that derail contractors?

  1. Lack of credible financial information. They don’t have a year-end financial statement.  Maybe the accounting method is unacceptable or they should have a CPA prepared report but don’t. Sometimes the financial reports contain arithmetic errors and have sections missing.
  2. Bad advice. Actions taken by management can make it harder to obtain bonds. Borrowing money, investing and even the choice of accounting methods can have an impact.
  3. Incomplete files. Many contractors start but fail to complete.  Their energy is focused on “making money,” so they never take the time to complete their bond submission.

We don’t want to over simplify the process.  Each company is different, and there are nuances to developing each applicant to assure their strengths and capabilities are showcased.  We are not intending to explain HOW to establish credibility.  Out point is that unless it is established, there are no bonds – regardless of how capable the contractor may be!

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

Steve Golia: 856-304-7348
First Indemnity of America Ins. Co.

Don’t miss our next exciting surety article: “Follow” this blog in the top right hand corner.

Secrets of Bonding #66: Timing, the Cart, the Horse

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Being in the right place, or the wrong place, can make all the difference. In the world of surety bonding, particularly contract bonds, timing plays an important role.

Here is a typical scenario.  It is a question of timing:

The client comes to us to get their bond account set up for the first time.  We send over the “laundry list” of documentation that is normally required.  It’s a bit daunting.  For companies that have never been bonded, they probably do not have all the info readily available.  They must gather documents, others must be filled out, they must be scanned and shipped. There are better ways to spend a Friday evening!

The cause of this activity is usually that the first bonded project has popped up.  We had a case like this recently where the project was being negotiated.  No bid bond was required. If the effort was successful, the contractor would need a bond.  If not, the bond monster goes back to sleep.

Our new client seemed unconcerned about the bond.  They didn’t want to take the time to develop their file unless they won the project.  Only then would they find out if it is easy, hard, or impossible to get the bond!

For this applicant, the project comes first – then the bond. Is this a smart approach?  Maybe not, because sometimes the first bond is a harder, slower process than expected!

Let’s look at some aspects that could cause unexpected delays (assume this is not for a small contract):

  1. Financial Information – The underwriters will request business financial statements, not just tax returns. Not all companies automatically prepare these. If the year-end date is not close, it can be very inconvenient to go back and reconstruct the financial picture.
  2. Accounting Methods – Companies that have been using Cash Method statements will find they need to re-issue the document using a different accounting method.  To accomplish this, the accountant will require an additional body of financial information, then they commence with their processing.
  3. CPA – Don’t have one? You will need to choose/engage a firm then allow time for their due diligence and procedures.
  4. Accounting Presentation – If a CPA Compilation has been the norm, it may be necessary to upgrade and re-issued as a Review. The CPA will need time to perform the additional services.
  5. Outside References – These are sent to creditors and vendors for handling, then you wait for their response.
  6. Historical Data – The project history of the company and its key people, including contract details, will be required. Prior financial data is needed. Three years of complete tax returns are often requested.
  7. Work In Process Schedules – Many contractors do not employ a sophisticated method of analysis. All sureties do! It may be necessary to upgrade the reporting with highly detailed individual project cost records and profit projections.
  8. Credit Reports – Erroneous or incomplete reports can have a devastating effect on the underwriting, and such problems are slow to correct. Adjustments to the credit report are only accomplished after a time consuming process with the rating bureau.

Issues like these can throw the timing off, and delay the bond issuance, but they are all correctable.

There may be other unexpected problems that cannot be easily fixed.  For example, unacceptable financial ratios.  The company could be solvent and profitable, but with poor ratios, some underwriters will say “Come back and see us next year.”  An unacceptable company or personal credit report can have the same effect.

Contractors often dread the bond underwriting process.  We’re not trying to foment anxiety by describing these pitfalls – actually just the opposite!  By allowing enough time, we often can help the client through them.

Summary: Get your bonding set up in advance. Then you have it when you need it with no last minute surprises or disappointments.

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.

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Secrets of Bonding #9: Capacity – Cure or Lure?

Steve GoliaLeave a comment

Bonding Capacity is a key point for many contractors along with rate (the cost of the Performance & Payment Bonds) and the approval terms.   Capacity is the amount of bonding the surety will provide, both the “per job” limit, and the total amount.  Let’s look at how all this works. 

Traditionally, the capacity amount is defined as Single and Aggregate.  The Single is the per job amount for any one contract and bond, which is the way bonds are actually issued.

The Aggregate is the maximum at any one time, comprised of:

  • The remaining “costs to complete” on started projects
  • The full amount of all awarded, signed but unstarted contracts
  • The full contract amount for low (winning) and undecided bids

Typically, the Single is no more than half the Aggregate. It is also common for the Aggregate to include all contracts, both bonded and unbonded.  The Aggregate is not just an expression of how much the surety will provide.  It is also an indication of how much work they feel the contractor can undertake without being overextended.

Here are some underwriting elements surety underwriters may review when making a capacity determination:

  • Working Capital (WC) and Net Worth (NW) of the company – The benchmark is for each of these to not be less than 10% of the Aggregate.  i.e. $100,000 WC could support $1 million Agg.
  • Secondary Financial Resources – Available bank credit, personal financial strength, affiliate companies and strong credit reports could help justify support.
  • Prior Experience – The Single is normally not more than 100% greater than the largest similar single contract successfully completed. Company longevity and expertise of key individuals is also considered.
  • Current Work On Hand – Even if the applicant has a good financial condition, underwriters may be unwilling to add to their workload if company resources appear to be fully utilized or if exisiting contracts have problems.

There needs to be balance between the elements.  For example, support will be withheld from an applicant who has good prior experience but no financial resources.

Bottom line is that bonding capacity is important.  It influences which projects the contractor will pursue and directly affects their annual revenues and profits.  Having adequate capacity can be the Cure for construction companies seeking better financial performance and market penetration.  It also Cures the bond agents need for increased commission income.

Capacity can also be a Lure. The promise of increased capacity can be a hook to draw in a contractor’s account.  Lines of bond capacity are always conditional.  Any bond can be declined for various reasons – meaning: “We’ll actually give you the capacity if we feel like it.”

It’s best to look at the credibility, reputation and stability of the provider of the line. Make sure the capacity you rely on is a Cure, not a Lure.

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.

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