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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.

SUCCESS STORY

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BONDING PROS SUCCESS STORY

On Wednesday one of our broker colleagues called us for emergency help with one of their bond clients. They were on the verge of losing an important federal job – couldn’t get the required bond.

We called the client and started an intense effort developing their file. By evening we were making good progress.  Our staff completed all the processing late on Thursday. By lunch time Friday, the bond was filed with the contract officer. Project saved!

How did we do it? Writing a bond for a new client in less than three days takes great cooperation and a lot of expertise.  Bonding Pros has it!  Since 1974 we have specialized in providing bonds for contractors. That’s all we do.

When you need your next bond, “Talk to the Pros!”  Give us a call today. 856-304-7348

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Secrets of Bonding #74: Twofers

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A Basic Question

 Talk to the experts, and you may get different answers to this extremely basic question: “What is the maximum potential loss for the surety on a Performance and Payment Bond?”

If you have experience producing surety bonds, you know that a 100% Performance Bond (equal in amount to the contract) is priced based on the contract amount. If the bond rate is 2.5% of the contract amount on a $100,000 project, the Performance Bond cost would be $2,500.

How much would it be for a Performance and Payment Bond? It seems logical that if you add to the exposure, you must charge more – but the cost is the same. Surety rules typically say that the Payment bond is provided at no additional charge. Is this because the surety is being generous, or is the exposure amount not actually increased?!

Surety Practices

We have established that bonding companies do not charge twice as much for a P&P bond.

When it comes to the use of the contractors bonding capacity, they use “1 x” here too.  For the contract in our example, $100,000 of capacity is consumed by the P&P bond, not $200,000.

Combined Bond Forms

Look up New Jersey law “N.J.S.A. 2A:44-147” and you will find it stipulates a combined Performance and Payment Bond form for public work in the Garden State. The penal sum (maximum dollar value of the bond) is stated once in support of a two-headed obligation. This may lead the reader to conclude that the single bond penalty is shared by the surety’s two legal obligations. That would justify not making an additional charge when including a Payment obligation with the Performance Bond.

Bond Specifications

On public work, such a federal, state and municipal contracts, the bonding requirement may indicate “100% Performance Bond and 100% Payment Bond” or “100% Performance and Payment Bond.” In the context of this article, the implications may be obvious, but it appears contract officers use them interchangeably.

Federal contract officers, on other other hand, can be quite specific on this point and expect the surety to assume a 200% exposure for the 1 x bond fee.

Federal bond forms require a separate instrument for Performance and another one for Payment, each with its own penal sum.  The Surety may attach them both as a single document and even give them one bond number.  But the government clearly is buying a guarantee with a combined value of 200%.

Twofers

The reality is that, despite the pricing methods and handling procedures used by sureties, the bonding company IS responsible for 200% if they issue two instruments each stating a 100%  obligation. This is the twofer that sureties willingly offer. You can have Performance only, or get Performance and Payment, twofer the price of one!

The Irony

Surprisingly, obligees may not position themselves to obtain maximum value and protection from the bonds they buy, and sureties may give away coverage rather than charge for it. fia_surety_logo

 

FIA Surety / First Indemnity of America Insurance Company
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
Office: 973-541-3417
Visit us: www.fiagroup.com
We are currently licensed in: NJ, PA, DE, MD, VA, NC, SC, WV, TN, FL, GA, AL, OK, TX

Secrets of Bonding #73: Substitute Bid Bonds

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substitute teacher

Remember how much fun it was to have a substitute teacher? Well, this is a little less exciting…

In Secret #49 we talked about bidding with a check.  This is a related topic. Substitute bid bonds are an odd part of what we do as surety professionals.  Here’s how you may run into one.

It is common for project specifications to offer a number of methods to provide the bid security that accompanies a contractors project proposal.  The options may include a check made out to the obligee, or a bid bond.

A substitute bid bond may be issued after bid security has already been given with the contractor’s proposal.  This bid bond will replace, or be substituted for the existing security – thus the name.

This may arise when the contractor has no surety at the time of the bid.  They bid with a check.  Now, with a surety in place, their first request is “How about helping us get our cash back?  It’s tied up with that bid.”

What a great way to start off by helping the new client. However, sureties are not always in favor of issuing these, and some refuse to do so under any circumstances.  Why?!

1. Bid Spread: In this case, the contractor is the low bidder, but they are too low. (Read Secret #16 to learn about unacceptable bid spreads.) The contractor may be in line for the project, but the surety does not want to issue the performance bond (aka final bond).  If the bonding company provides the substitute bid bond, they become obligated to issue the final bond or face a bid bond claim (two bad options!) “Sorry, we are not able to provide a substitute bid bond for that project.”

The fallout is that the contractor may blame the surety when they lose their bid security for failing to deliver the final bond. They will also lose the expected income from the project – pretty ugly.

2. Final Bond Optional: The specs may indicate that a Performance & Payment bond is not mandatory. It is optional at the obligee’s discretion. This amounts to adverse selection against the surety.  If the obligee thinks the contractor looks capable: No bond.  If there is some doubt about their ability to perform or the adequacy of the price, better pass the risk over to the bonding company.

For this reason, substitute bid bonds may be declined if a final bond is not mandatory.  Remember, final bonds are where sureties make their money.  Bid bonds are usually free.  The contractor will not lose anything as a result of the refusal to issue the substitute and they are already eligible to win the contract.

3. Not Low Bidder: This is similar to Number 2. Here the contractor is second or third bidder. The common practice is for obligees to hold the bid security of the second and third bidders in case they need to give them the project (maybe the low bidder can’t get their final bond issued?) The bid checks could be held for months!

From the surety’s perspective there is no question about the adequacy of the second or third bidder’s number.  This may be a well-priced contract. The problem is that they are unlikely to issue a final bond.  (Projects are rarely awarded to the second or third bidders.) This has even less chance of making money for them than a normal bid bond request.

To the contractor, a substitute bid bond may seem like a great idea. For the surety, the only desirable situation is when their client is low bidder with an acceptable bid spread and a mandatory final bond. Absent that, don’t be surprised if the surety only wants to get involved after the contract award takes place and the final bond is needed.

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FIA Surety is your go-to market for Site & Subdivision bonds.

FIA Surety / First Indemnity of America Insurance Company
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
Office: 973-541-3417
Visit us: www.fiasurety.com
We are currently licensed in: NJ, PA, DE, MD, VA, NC, SC, WV, TN,  FL, GA, AL, OK, TX

Secrets of Bonding #72: Surety Consents 1, 2, 3.

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Sorry OCD, we are starting with Consent #3!

#3: Surety Consent to Release of Final Payment

This may be one of the final steps in the life of a bonded contract. The obligee (party protected by the bond) may give the surety the opportunity of providing a “consent to release final payment” before the last money is paid out.

 It is common for contractors to be paid on a monthly basis.  When it is time for the final payment, it may be the obligee’s last opportunity to influence the contractor to resolve deficiencies in the work product.  The contractor may be more likely to make corrections before the last money is paid out than after.  Un-resolved problems can eventually become bond claims.

 The bonding company should determine if the obligee is satisfied with the work (Status Inquiry form) before issuing the consent. In this manner, they may spur the contractor to action and  eliminate a potential bond claim.

 This procedure benefits the obligee in two ways:

  1. The surety will require responsiveness to the obligees reasonable performance demands before consenting to the payment
  2. It reduces the surety’s ability to refuse a future bond claim on the basis that funds were improperly released by the obligee

View sample: http://74.218.115.26/wp-content/uploads/2010/07/4D-AIA-CONSENT-OF-SURETY-FINAL-PAYMENT.pdf

 #2 Consent to Release / Reduce Retainage

This is similar to the Final Payment, but it can occur during the life of the contract.

The obligee may ask the surety for consent to release or reduce the retainage funds.  This money is a portion of each monthly payment (called a requisition) that is held back (retained) by the obligee.  For example, in a contract with a 10% retainage, the obligee will pay $9,000 on a monthly requisition for $10,000.  The retainage is accumulated in the hands of the obligee and used as motivation to assure acceptability of the work as the project concludes.

The retainage percentage may also be reduced during the contract.  There could be 10% retained during the first half of the project, then 0% for the balance.  This enables the obligee to gather some protective money in the early stages, while allowing the contractor to have better cash flow toward the end. View sample: http://www.state.nj.us/treasury/dpmc/Assets/Files/Contractor%20Award%20Doucuments/DPMC-20r(1),%20Consent%20of%20Surety%20to%20Reduction%20in%20Retainage.pdf

Now we come to #1.  Why did we cover these in reverse?

#1 Surety Consent to Issue Final Bond

This consent, which concerns the Final or Performance bond,  is commonly used on all public construction contracts in NJ, and may be used by obligees on private work anywhere (such as a GC soliciting for subcontractors).  View sample: http://www.njsbga.org/yelbook_sec_c-all.pdf

We saved this one for last, because without it, there is no contract!

Important points:

  1. If required in the bidding specifications, the contractors proposal could be rejected for failure to include a consent or if the document is defective.
  2. The surety may issue a “capped consent.” It includes a condition that voids the surety’s obligation above a stipulated amount: “…however, such contract/performance bond amount shall in no event exceed $___.” This language protects the surety from having to support a contract higher than the approved amount. If the contractor does bid above the approved figure, it is likely the bid will be rejected by the obligee based on such language. The contractor must be mindful of this limitation.
  3. Sureties do not automatically issue these consents. They must be specifically requested when ordering the bid bond.
  4. Bonding companies issue this form of consent reluctantly. It deprives them of the discretion to not issue the performance bond if the contractor’s condition has deteriorated, or if there is an unacceptable bid spread. (Read Secret #16: Bid Spreads)
  5. The consent does not require that the same surety be used for the bid and performance bonds. However, if the bid surety balks on the final bond, the contractor and obligee may remind them they are obligated to provide it.

Consents of Surety: They are one more intricate piece in the surety puzzle.

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 #71: The Best Way to Avoid Low Profits

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In this edition of Secrets we will continue a discussion that began in #70 which covered “Labor, Contracts, and Labor Contracts.”  Last time we concluded by describing a project with unusual characteristics:

Materials: 40%     Labor: 60%     Overhead/Profit: 0%

These percentages describe a job that is predicted to yeild no profit. Why would a contractor bid this way? Some possible reasons:

  • Maintain labor force – The project will enable them to keep their valuable / long term employees working
  • The revenues and cash flow will help with creditors
  • There are design deficiencies that will result in profitable addendums to the contract
  • Protect their relationship with a repeat customer (keep out competition)
  • With the job in hand, additional profits can be squeezed out of the subcontractors and vendors

While these strategies (or others) could make sense to the contractor, it is likely the bond underwriters will be reluctant to support the project.  Why?

Remember, if a default occurs, the surety may be required to step in and complete the project.  Their primary financial resource will be the remaining (not yet paid out) contract funds. If the project was estimated with a 0% profit, it would be easy for increased costs or inefficiencies to result in a losing job – which means the surety would be forced to add funds in order to reach completion of the project.

Contract estimates are just that: Estimates or Guestimates.  A job projected to produce a 10% profit may actually end up at 11% or 9% or Zero! Faced with this uncertainty, and the unavoidable responsibility to finish the work, a 0% profit projection may be too much risk for the surety.

The best way for contractors to avoid low profits is to not accept underpriced work.  Whatever benefits they might perceive, the risks are a huge burden. Construction work is a challenge under the best of circumstances.

Starting with the expectation that you are on the verge of a loss only adds to the exposure faced by contractors and their bonding companies.

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 #70: Labor, Contracts, and Labor Contracts

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On the subject of Bid and Performance / Payment Bonds, the process of obtaining one always includes a Bond Request Form.  This document is required by surety company decision makers (bond underwriters), who need to view a summary of the relevant details.

They also use this form to document the approval of the bond, and may make note of special conditions they are requiring, the bond rate and execution / shipping instructions.

The bond request form contains general info identifying the client and the beneficiary of the new bond (the obligee), plus specific details about the project.

For example, it will ask for the description and location of the work, the start and end date, and details about the performance. Subcontractors will be described. There will be a question about other projects the contractor is performing.  There will also be a question about labor on the project.

The labor question is usually part of a group like this:

Est. Materials:___%     Est. Labor___%     Est Overhead / Profit___%

(It’s worth noting that the sum of the three should equal 100%!)

The answer to the labor question has certain implications for the underwriter. There is no “normal” scenario, but let’s use this for illustration:

Materials: 30%     Labor: 60%     Overhead/Profit: 10%

If 30-60-10 is a response within the range of normal, how would you interpret this?

Materials: 90%     Labor: 0%     Overhead/Profit: 10%

This looks like a material supply contract.  The client has a product they are selling.  They have no “on-site labor.”  They are not assembling or incurring any labor costs at the project location.  When evaluating the relative degree of risk associated with bonding this contract, is there more or less risk than normal?

You may run into the opposite situation:

Materials: 0%     Labor: 90%     Overhead/Profit: 10%

This is a “labor contract.” Maybe a general contractor needs carpenters on a project so they give out a labor only subcontract. Would underwriters consider this factor a plus?

The answer is that labor is considered more unpredictable than materials.  You know the exact cost of materials, but how much for installation? There are variable factors that can influence the ultimate cost of project labor (human productivity, worker morale, quality of supervision, design deficiencies, weather, other contractors, etc.)

Conclusion:

A material “supply contract” is easier to bond than a labor and material contract or a labor contract.

What about this?

Materials: 40%     Labor: 60%     Overhead/Profit: 0%

Sounds like the subject of a future “Secret!”

FIA Surety / First Indemnity of America Insurance Company
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
Office: 973-541-3417

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Secrets of Bonding #69: Actual, Consequential and Liquidated Damages. Wazzat?

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You may encounter these legal terms when handling construction contracts and surety bonds. Bid and performance bond request forms typically ask about “Liquidated Damages.” Does this refer to marine contracts?

A typical Performance Bond form may not mention liquidated damages – whether they are covered or excluded. So why does the bond request ask for this detail?

Let’s start by identifying the parties involved:

  • The contractor that applies for the bond is the principal. They would be the defendant in a lawsuit relating to the bond.
  • The owner of the contract, the party protected by the bond, is the obligee. In that lawsuit, the obligee would be the plaintiff, bringing suit against the bond principal and surety.
  • The third party to all such transactions is the bonding company or surety.

Bonded contracts can be between the project owner and a general contractor (GC), or between the GC and a subcontractor (sub). We mention this because sometimes the problems and claims “trickle down” from contract to contract and then onto the bond.

What does a Performance Bond Cover?

The bond language is specific. But remember, it is a guarantee of the contract it references. Construction contracts typically DO establish liability for contract delays, unanticipated increased expenses and other financial losses that may be attributable to the contractor’s actions or inactions. It is through the contract language that the surety becomes responsible for such losses. For this reason, damages are always an issue for bond underwriters. Let’s learn enough about them to be dangerous.

Liquidated Damages (also referred to as ascertained damages) are damages whose amount the parties designate during the formation of the contract for the injured party to collect as compensation upon a specific breach (such as late performance). Such penalties for failure to complete on time can amount to thousands of dollars per day and thus may deter a surety from supporting the contract.

It is not uncommon for general contractors (GC) to pass down the Liquidated Damage penalty in their contract, to the subs below them. The concern is that the subcontractor’s lack of performance could jeopardize the timely completion of the entire project.

When parties contract for liquidated damages to be paid, the clause will be enforceable if it involves a genuine attempt to quantify a loss in advance and is a good faith estimate of economic loss.

Actual Damages In a breach of contract case the prevailing plaintiff may be entitled to actual, or compensatory, damages.

Actual damages can be split into direct and consequential damages.

  • Direct damagesresult naturally from the defendant’s wrongful conduct. The defendant will have foreseen the damages would result from the breach. The benefit of the bargain that is directly and strictly tied to the contract is a measure of direct damages.
  • Consequential damagesresult naturally but not necessarily from the defendant’s wrongful conduct. Consequential damages must be foreseeable and directly traceable to the breach of contract. Lost profits, lost sales, incidental damages and most other damages are consequential damages.
  • Consequential damages (also sometimes referred to as indirect or special damages) may be recovered if it is determined such damages were reasonably foreseeable or “within the contemplation of the parties” at the time of contract formation. This is a factual determination that could lead to the contractor’s liability for an enormous loss. For example, the cost to complete unfinished work on time may pale in comparison to the loss of operating revenue an owner might claim as a result of late completion.

It is important to note that the definition of what the bond covers is only limited by the imagination of the presiding court. Certainly it is true that the interpretation of bond coverage has expanded the exposure of sureties. Here are some examples of losses courts have determined are covered by performance bonds:

  1. Municipal Bond Interest
  2. Loss of Use of Building Site
  3. Interest on Construction Loan
  4. Loss of Rents
  5. Liquidated Damage
  6. Lost Profits
  7. Loan Interest
  8. Delay Damages
  9. Lost Rental Income
  10. Unemployment Insurance Taxes
  11. Prevailing Wage and Overtime Violation Penalties
  12. State and Federal Taxes
  13. Lost Equity Delay Damages
  14. Over payment
  15. Loan Repayment

In conclusion, we must keep in mind that the surety’s obligation is defined by the bond and the contract.

Does the surety have the opportunity to review the upcoming contract when considering the bid bond? It would be unusual if they did! This is why the underwriting questions are so important.

We all know contracts can vary, but bonds can vary too. It is imprudent to make assumptions in this area. Read the bond and read the contract. If necessary, ask for a written legal interpretation.

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 #68: Get Your Surety Bond for Free!

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There’s no question about it.  The only reason bonding companies issue surety bonds is because they want your money. But how, when, and if you pay are all up for grabs!

Let’s look at some of the realities and options when it comes to paying for surety bonds.

Payment Practices

 INSURANCE – You may know that you can pay for insurance with installments.  You may also finance the premiums. Eventually, if you fail to pay the installments, the coverage is cancelled. It is this ability to terminate the exposure that enables the insurer to offer payment terms and the finance company to assume the risk.

 COMMERCIAL BONDS – These common types of bonds are usually issued for low amounts.  For example, the face amount on license and permit bonds may be $5,000 or less.  The premium on them is low and may be a minimum charge. Such bonds may contain a cancellation clause.

 These facts may seem to make installments possible, but the practice is often to require payment in advance. It could be that for a small premium or commission, the issuer is not willing to face any collection problems or related expenses.

 CONTRACT SURETY: BID BONDS – Bid bonds are not issued until the underwriting is completed, so the surety always incurs expenses.

Another fact: You can have a claim on a bid bond and the surety could suffer a net loss.  So there are costs and exposures attached to these instruments.  Bonding companies normally have filed rates that entitle them to make a charge for every bid bond. But do they? No! The majority of sureties do not charge for them. “Free bonds!” Their motivation could be that the fee is so small; it is unprofitable to bill it.

 PERFORMANCE AND PAYMENT BONDS – These obligations are typically irrevocable. Put simply, if the surety issues the bond and bills later, they cannot terminate the obligation for failure to pay. Even a casual observer would be forced to conclude that P&P bonds MUST be paid for in advance. It’s logical, but the industry practice is often to wait 45 to 60 days until the client has collected their first payment on the contract.  This gives the contractor the luxury of not having to “front” the bond fee.

 A portion of the industry does charge in advance for P&P bonds.  You’ can’t argue with their logic!

 COURT & PROBATE – These bonds are normally paid for in advance, and may be fully earned upon issuance.  In a legal action, the mere ability to issue the bond can have a beneficial effect for the applicant.  Knowing this, sureties would be foolish to offer any form of return premium.

 PREMIUM FINANCING – This would seem to be the client’s solution to the pre-payment requirement, but most finance companies will not support bonds due to their non-cancellable nature.

 Conclusion

If you’ve been looking for the thread of logic, there is none!

Billing practices are traditional, and may not make much sense.  We should charge for bid bonds but often don’t. A bid bond for a large project could cost more than a small one.

P&P bonds should be paid in advance but we often collect payment later.

Since the methodology defies logic, you must ask the underwriters in every case.  Don’t assume you can predict when to pay or if you have to pay for it at all!

There’s no question about it.  The only reason bonding companies issue surety bonds is because they want your money. But how, when, and if you pay are all up for grabs!

Let’s look at some of the realities and options when it comes to paying for surety bonds.

Payment Practices

INSURANCE – You may know that you can pay for insurance with installments.  You may also finance the premiums. Eventually, if you fail to pay the installments, the coverage is cancelled. It is this ability to terminate the exposure that enables the insurer to offer payment terms and the finance company to assume the risk.

COMMERCIAL BONDS – These common types of bonds are usually issued for low amounts.  For example, the face amount on license and permit bonds may be $5,000 or less.  The premium on them is low and may be a minimum charge. Such bonds may contain a cancellation clause.

These facts may seem to make installments possible, but the practice is often to require payment in advance. It could be that for a small premium or commission, the issuer is not willing to face any collection problems or related expenses.

CONTRACT SURETY: BID BONDS – Bid bonds are not issued until the underwriting is completed, so the surety always incurs expenses.

Another fact: You can have a claim on a bid bond and the surety could suffer a net loss.  So there are costs and exposures attached to these instruments.  Bonding companies normally have filed rates that entitle them to make a charge for every bid bond. But do they? No! The majority of sureties do not charge for them. “Free bonds!” Their motivation could be that the fee is so small; it is unprofitable to bill it.

PERFORMANCE AND PAYMENT BONDS – These obligations are typically irrevocable. Put simply, if the surety issues the bond and bills later, they cannot terminate the obligation for failure to pay. Even a casual observer would be forced to conclude that P&P bonds MUST be paid for in advance. It’s logical, but the industry practice is often to wait 45 to 60 days until the client has collected their first payment on the contract.  This gives the contractor the luxury of not having to “front” the bond fee.

A portion of the industry does charge in advance for P&P bonds.  You’ can’t argue with their logic!

COURT & PROBATE – These bonds are normally paid for in advance, and may be fully earned upon issuance.  In a legal action, the mere ability to issue the bond can have a beneficial effect for the applicant.  Knowing this, sureties would be foolish to offer any form of return premium.

PREMIUM FINANCING – This would seem to be the client’s solution to the pre-payment requirement, but most finance companies will not support bonds due to their non-cancellable nature.

Conclusion

If you’ve been looking for the thread of logic, there is none!

Billing practices are traditional, and may not make much sense.  We should charge for bid bonds but often don’t. A bid bond for a large project could cost more than a small one.

P&P bonds should be paid in advance but we often collect payment later.

Since the methodology defies logic, you must ask the underwriters in every case.  Don’t assume you can predict when to pay or if you have to pay for it at all!

Steve Golia
First Indemnity of America Insurance Company
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
Office: 973-541-3417

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Secrets of Bonding #67: Get to Know FedBizOpps

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“FedBizOpps” or www.FBO.gov, is a federal website presented by the General Services administration. It is officially described as a “web-based portal which allows vendors to review Federal Business Opportunities.”

This site can be a great help to bonding agents and is a critical resource for contractors pursuing federal work.  Open another browser while you read this and and connect to the site.  We’ll go through the highlights.

The main purpose of this site is to connect contractors with upcoming federal projects.  Let’s try the Quick Search on the front page.  For Type select Presolicitation. For Keyword enter Janitorial, then press Search. A list of upcoming janitorial projects appears. They are all available for bidding!

Do another search using Place of Performance: Alaska. For Keyword, enter “snowmachines” then click Search.  This should take you to a page showing an Air force contract award for $35,500. Here you see the details of a company that successfully acquired a contract.

FedBizOpps provides all the federal contract activity centralized in one web site.  What a great resource!

How to get involved

Contractors are considered “vendors” to the government, so step one is to follow the Vendor / Citizen registration link near the bottom of the front page.

After you register and classify your business, you are ready to perform a contract search. Log in to the site if necessary, and do a Quick Search under My FBO. Use Presolicitation and Janitorial again.

My search resulted in a list of 25 contracts. If you click on the first one it immediately shows you the nature and location of the work, the response date and other key details.  If you wish to pursue this contract, additional information is provided.  When you click Add Me To Interested Vendors, your company info is immediately included under the third tab “Interested Vendor List.”  This entitles you to automatic updates that will arrive in your email.  You will be advised as this opportunity moves through various stages resulting in an award.

When listed as an Interested Vendor, you may find that suppliers and other companies will contact you.  They may offer to assist in your solicitation effort or be your supplier if you win.

As a prospective bidder, you will also see who you are bidding against.  Good stuff!

Saved Searches

Here is an excellent feature of the site. Under My FBO, follow Search and Create Saved Searches. You can use very specific parameters.  After you run the search, choose Save Search Agent. At the bottom follow Save and Schedule Search Agent.  You can instruct the site to run this search every day and email you the results!  You can also set up any number of additional searches you may desire.

There is always a button near the top for the User Guide, which is a very helpful “FedBizOpps for Dummies” type resource.

For Bond Agents, the site provides the names and contact info of federal contractors.  Other vendors and suppliers use the site for the same purpose.

If you have an interest in federal contracts, get to know FedBizOpps!  Make it work for you every day.

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.

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