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Secrets of Bonding #119: Lien On Me

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“It ain’t what you don’t know that gets you into trouble.  It’s what you know for sure that just ain’t so.”  A famous quote by…?

Let’s go over what you need to know about construction liens.  They can have a big impact on construction contracts and companies.            Click for mood music!

A Mechanic’s Lien is filed when a subcontractor or supplier on a construction project fails to be paid. The lien is a form of claim filed against the project itself. For example, the unpaid mason (subcontractor) files a claim against the building owner. “My bricks and labor are in that façade. I can’t take them back now, but assert that the general contractor has failed to pay me!”

Liens are used on non-governmental projects. Typically, claimants are prohibited from liening a public building – which is where Payment Bonds come in. Issued by surety companies, the payment bond is a resource to protect suppliers of labor and material from non-payment.

So far that’s all pretty straight forward. On private contracts unpaid subs and suppliers can file a lien. On government jobs they make a claim on the payment bond instead.

Here are some implications worth knowing.

Release of Lien

The lien can be released, or “bonded off,” by the filing of a (you guessed it) Release of Lien Bond. This removes the lien from the property in question, which is beneficial for the project owner, while still providing financial protection for the plaintiff (unpaid sub or supplier.) The dispute is still unresolved, but the plaintiffs security shifts from the physical project to the surety bond.

A release of lien bond is not easy to obtain. But if a payment bond was issued, that surety has motivation to prevent a payment bond claim, and issuing the lien release bond could do so.

When the lien release bond is filed, it takes some pressure off the defendant (general contractor). You can assume the unpaid mason hopes the lien will cause the owner (who is the recipient of the lien) to force the GC to respond. When the lien is bonded off, that effect disappears from the project owner – but not the surety.

Stop Notices

California, Mississippi, Arizona, Alaska and Washington use a slightly different procedure. On governmental projects a Stop Notice is filed which freezes a portion of the project funds to protect the claimant. This forces action on the part of the GC, or they can file a Release of Stop Notice bond to keep the project funds flowing while dealing with the dispute.

Understand the Difference

Mechanic’s Liens are filed against the project owner.  The claim attaches to the real property and is recorded against the property title – which therefore restricts the owner’s ability to dispose of the property.  

With a lien, the claimant may be paid regardless of whether the owner paid the GC.  In fact, the owner may have to pay twice: First to the GC then again to the sub / vendor claimant, to remove the lien and clear the property title.

Stop Notices “trap” contract funds, assuming there are funds to trap.

If the claimant files a Stop Notice after the funds have been disbursed, it is useless. 

Other basic differences:

  • Unlike a lien, the stop notice does not give the debt any security.
  • The stop notice is sent to the relevant parties, but it is not legally recorded such as a lien filed against the property title.  The claim is inherently less official and is sometimes even ignored because of it’s less formal appearance.
  • Unlike a Mechanics Lien, the Stop Notice can affect the entire project because it freezes a portion of the contract funds – which the GC may need in order to continue working.

NOTICE: The author is not an attorney and is not giving legal advice.  This article is for entertainment only.  Gimme a break!

mark-twain

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 #118: Bonding Company = Girlfriend

Steve Golia2 Comments

I’ve been in the surety business for a long time.  As a student of the industry, I have observed the dynamics that occur between bonding companies and their clients.  My conclusion: Bonding Companies are like Girlfriends!

(My comments are written from a male point of view, but I’m sure you can flip this to be applicable if the reader is “non-male.”)

Think about relationships you’ve been in.  Don’t they always have a “love / hate” aspect? Jokes about relationships often capitalize on this reality:

Marriage is a three-ring circus. First the engagement ring, then the wedding ring, then the suffering.
– Milton Berle

My wife is a light eater … as soon as it’s light, she starts to eat. 
– Henny Youngman

“I am” is reportedly the shortest sentence in the English language. Could it be that “I do” is the longest sentence?
– George Carlin

And for the ladies:

What’s the difference between a boyfriend and a husband?
About 30 pounds.
– Cindy Garner

As very sophisticated types, we know how to deal with the technicalities of these relationships.  It isn’t always easy, but it’s worth it.   Bonding is pretty much the same!

Step One

How does a construction company gain the support of a surety?  It starts with a flirtation and then “getting to know you.”  The underwriter receives information about a bond that is needed. If there is a spark of interest, an application and financial statements are submitted. 

The construction company wants to look attractive:

  • Here is what we’ve accomplished!
  • This is how much money we’ve made!
  • We can really perform!

Think of this as the dating stage.  It is exhilarating and intense! There are probing questions and well-crafted answers.  Both parties want to achieve success and avoid failure / embarrassment. The same as in romance, the underwriter (girlfriend) will walk away if they find that the contractor (suitor) is dating other underwriters.  This is why bond producers may approach only one market at a time.  No girl wants a playboy who may be disloyal.

Ravishing Wedding Rings Clipart Also Appealing Wedding Rings Clipart Hd Pictures 4 Boostnow Wedd - ~ zxtzdb ~

Step Two

If the relationship blossoms, wedding bells may chime! They tie the knot with a pre-nuptial / general indemnity agreement that says “We’re in this together.  But hurt me and you’ll PAY.” 

Step Three

Eventually they become old married folks.  The contractor gripes that “he/she is never satisfied.”  More info, more questions, more money spent to keep the surety / spouse happy. It NEVER ends.  But the contractor needs the surety and works to keep things on track.

Is the underwriter frustrated?  Yes…  “I have to beat everything out of the contractor.  It’s like pulling teeth!” The contractor may be slow in providing the answers and info the underwriter needs to keep the bond account in healthy condition. “I thought we were in this together!”

There is an element of pain in the relationship, but both parties gain if they keep it together.

Yente  (Click for mood music) cupid

So where does the bond producer / agent fit in?  They are the dating service that brings the parties together.  They succeed by matching the contractor with the right surety.  The role as cupid continues as we shepherd the relationship forward, keeping the info flowing so bonds are available when needed.

The fact is, bonding involves more than paperwork.  It involves people, their perceptions and preferences.  The seasoned bond producer will make the match and guide the relationship forward for the benefit of all parties.  

Sureties, can’t live with them, can’t live without them.

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 #115: The Most Important Question in Bonding

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When Surety Bonds are needed, there is always a questionnaire to fill out.  Why?  Because the underwriters need some basic info, and quickly.  The app asks for company location, ownership, plus facts about the operation and its history. 

So many questions!  Are they all relevant?  Are they all needed?  Actually… they are not equally important.  In fact there is one question on the app which is undoubtedly 

THE MOST IMPORTANT QUESTION OF ALL

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Let’s test your underwriting skills!  Here are some typical bond app questions.  Are they hot ones, or just background music?  Which question is the most important for bond underwriters?

  1. Q. Date Business Formed This is very important because many surety reinsurance treaties require that all the bond clients have certain longevity – such as minimum 3 years in business.  If the applicant has less than 3 years, some underwriters will stop reading at this point and decline.
  2. Q.Has the company, any affiliate or subsidiary, or any owners / spouse or companies in which they have had an ownership interest or managerial role ever experienced a bankruptcy?  Here is another important question, a deal killer with many underwriters.  They may not want to hear about the circumstances of the BK or subsequent positive developments.  Their reinsurance may forbid supporting such applicants.
  3. Q. Formal Buy-Sell Agreement in place? This question concerns continuity.  In the absence of key people, how will the company survive?  How will the bonded jobs get completed if the boss gets run over?
  4. Q. Is full corporate and personal indemnity by all owners, spouses, and affiliates provided? This is important b/c full indemnity is normally required and some applicants are reluctant to provide it.

Got your answer?  Read on.

 

Conclusion

**All the questions are relevant.  That’s why they are on the questionnaire.**

Let that sink in…

They are ALL important.  So for the underwriter, the question that jumps up off the page is the one left unanswered.

Why do people fill out the app and skip one question?  It has to be either carelessness “Sorry, I skipped over it by mistake,” or intentional “If I answer that question honestly, I may not get the bond approval!”  Both reasons are bad.

We can assume that “N/A” is an option for an irrelevant question, or “Unknown” if you have no info.  But a blank is a problem b/c cause the reader doesn’t know how to take it.

Many facts are double checked during the surety underwriting process.  But for a large portion of the info, the market is simply trusting the applicant to be truthful and transparent.  They depend on having full disclosure, and are entitled to it as the guarantor.

So please, please, please don’t skip any questions.  The app is often the underwriter’s first opportunity to meet the client.  Put your best foot forward by answering completely, and attach additional comments if an explanation is in order.

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.

Secrets Of Bonding #114: Offer a Concrete Solution?

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This Concrete Subcontractor has a big problem.  How would you solve it?

The Facts

  • The bond applicant, we will call ‘Subby,’ is a highly experienced subcontractor who performed concrete work on a school job.
  • Subby was not required to give a Performance & Payment Bond to the GC.
  • The GC, “Gigunda Const.,” has given a P&P bond to the school district.
  • The GC claims that the concrete Subby installed has failed a critical strength test. As a result, Gigunda is demanding a 2 year maintenance bond to cover potential defects.
  • Subby has disputed this claim and feels they are in compliance with the contract.
  • Since the requested maintenance bond will run to the GC and not the school district, it appears the issue must be resolved from within the subcontract terms (not directly with the school district).
  • Subby has an ongoing relationship with a major bonding company: “Wonderful Surety.”
  • Wonderful Surety has refused to provide the maintenance bond.
  • Subby’s agent called us for help. Is it possible we may support it?

Consider the Issues

  1. The work is not covered by a performance bond.
  2. Subby’s current surety has refused to support them.
  3. If Subby ignores the problem, the GC may ultimately have a performance claim on their bond. The GC, and their surety, are responsible for the entire project, including the subcontracted work.
  4. If Subby ignores the problem, the GC may have to fix it – and will back charge them for the costs.
  5. If Subby doesn’t provide the maintenance bond, the GC will withhold the remaining money in their sub contract.
  6. Gigunda’s subcontract may have imposed the GC contract conditions automatically on to the subs (possibly including concrete strength requirements).
  7. It would be normal for the subcontract to state that Subby must protect Gigunda from claims arising from their work.concrete_truck

Possible Solutions

Which One Do You Like Best?

  1. Subby can ask a new surety to provide the maintenance bond.
  2. Subby can rip out the questionable work at their own expense and re-do it to Gigunda’s satisfaction.
  3. Subby can review the subcontract to determine what strength requirements were indicated, and if Subby is actually in violation.
  4. Gigunda can press their surety to issue the maintenance bond. (Although this would be unlikley if Gigunda is the beneficiary.)
  5. Subby could refuse to get the maintenance bond or replace the work (do nothing.)
  6. Subby could ask Gigunda for a contract amendment providing additional money to rip out / replace the questionable work.
  7. Subby could let Gigunda hold money for 2 years in lieu of the bond (the entire bond amount).

So you chose: #_____

 

Conclusion

The step we recommend is #3, “review the subcontract requirements.”

Subby is an experienced concrete company that is convinced their work product is correct. They are not aware of the strength requirements that are the basis of this dispute – but a careful legal review is needed.  

Subby should also ask the GC to cite where these strength requirements appear in the subcontract.

If the work is in violation of the subcontract, Subby will have to choose between paying to replace it now, or face the difficult task of obtaining the maintenance bond. It is possible that no surety will support this without requiring substantial collateral, or maybe even full collateral.  

Pretty tough, but the bond would offer some important advantages even if full collateral is required:

  1. Subby could totally avoid the cost of replacing the work if the concrete performs successfully. Only time will tell, and filing the bond gives them that time.
  2. The bond is better for Subby than letting Gigunda hold funds. If Gigunda concludes the concrete has failed during the 2 years, they will have to go through the surety’s claim department for recovery.  That’s better than just letting the GC use their money if they want. This type of advantage always exists for bond applicants when choosing between a surety bond or putting up cash directly with an obligee / beneficiary.

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.

Secrets of Bonding #112: Net Worth – Feed the Pig!

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When it comes to Bid and Performance Bonds, you may have heard that Working Capital is a deciding factor.  If the calculated amount on the applicant’s financial statement is insufficient, the surety underwriter will decline the bond.pig3

So what is Net Worth (NW) and how important is it for bonding purposes?  Let’s start with a brief description of what this is and where you find it in the financial reporting.  Funny thing about net worth: It is a measure of the company’s financial strength, but it is listed among the company’s debts! Hmmm…

Where Do You Find It?

NW aka “Stockholders Equity” is listed on the company Balance Sheet, which is divided into assets and liabilities (debts). 

The assets include cash in the bank, accounts receivable, buildings, equipment, etc.  The liabilities are accounts payable, bank and other loans, other debts, and (in a corporation) the Stockholders Equity. The NW or Stockholders Equity section appears at the bottom of the Liabilities column, below “Total Liabilities.”

What Is It?

Stockholders Equity shows the funds put in (loaned to) the firm by the stockholders such as Capital Stock, plus the portion of all past profits allowed to accumulate in the company (called Retained Earnings). These comprise the corporation’s NW.

Why is it a liability?  NW is a liability because it is owned by the stockholders, not the corporation itself. If the company shuts down and is liquidated, the NW goes the stockholders and the corp reverts to its original financial position: $0.

pig2Think of NW as a piggy bank that holds the company’s long-term, ultimate financial reserves.

Now let’s discuss what this has to do with surety bonds. Bond underwriters always evaluate the Working Capital amount.  And many place equal importance on the NW.  While it is true that a company can show good Working Capital but have no NW, is a lack of NW really a concern?  You may assume it is difficult to get a bank loan with no NW, the same applies to bonds. 

Surety underwriters are concerned about a company’s staying power if they don’t have financial reserves to help survive tough times.  When companies fail, there are bond claims – exactly what the underwriters don’t want!

Analysts will wonder “Why is there no NW in this company?” especially if it is not a new entity.  Has there been a lack of profitability, a failure of management, and therefore no profits to accumulate?

Our “Secrets” articles are usually inspired by the file activity we enjoy each week with our valued agents. Such was the case this week.  Here is the actual info from a financial statement that was the seed for this article:  “(  )” indicates a negative number.

STATEMENT OF EQUITY, September 30, 2015

Balance at January 1, 2015               $            0
Plus: Member’s contributions               33,616
Less: Net loss                                          (50,597)
Less Member’s distributions              (131,060)
Balance at September 30, 2015       $(148,041)

This report is describing the changes in one part of the NW.  They started with nothing, put in $33 thousand, lost $50 thousand this year, and on top of that, took out everything they put in and more!  What are they thinking?!

Q. If you are the bond underwriter contemplating the likelihood of this company’s survival, what might you conclude?

  1. Company management is weak?
  2. Their ability to continue may be doubtful?
  3. Instead of bolstering the company with additional funds, the owners are stripping it of assets – maybe with the intention of declaring bankruptcy?

A. All of the above!

Our conclusion is that Net Worth IS important. In bonding, the company is the applicant.  Its financial position indicates if management has achieved profitability and accumulated a war chest of funds to provide a strong foundation.  Without it, future credit may be unavailable, and the company may falter when facing difficulties.

NW is one of the critical factors underwriters, and all credit analysts, review.  It should be nurtured, protected and preserved.

pig1

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.

Secrets of Bonding #110: Contract Additions – Is More Always Better?

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USUALLY more is better. 

  • “Would you like more ice cream?”
  • “Congratulations on your raise!”
  • “Honey, we’re pregnant!”more2

The same is true when it comes to construction contracts.  It is not uncommon for the scope of work to be modified. The project engineer may have discovered a problem and they will pay the contractor to fix it.

There could be a desire to expand or enhance the project, resulting in an increased contract price.  These additions occur routinely. Sometimes there are also “deducts” meaning an amendment that reduces the contract amount.

Additions to the contract mean more revenues for the contractor – it’s a good thing, unless unexpected problems pop up.

In this discussion, we are talking specifically about bonded contracts.  Whether public or private, prime or subcontract, our comments herein apply.

more3Bond Amount vs. Contract Amount

Surety bonds, Performance and Payment Bonds on contracts, are all similar but may have important variations.  It is common for the bond to adjust upward to follow an addition in the contract amount.  This means if the $1,000,000 contract is increased by amendment to $1,200,000, the bond is increased so that 100% coverage is maintained.

Not only does the bond increase, the adjustment is usually automatic.  Most bonds say there is an automatic increase with no obligation to inform the surety of the change.

When the surety is required to accept the additional exposure, they are entitled to be paid for it.

The Downside of Contract Additions

What could possibly go wrong to spoil this perfect picture? You have a contract and “Poof!” it just got bigger!  You provided a surety bond and “Wham!” it automatically adjusted to the new amount!  All good!

  1. One problem that can occur involves the additional bond premium. The subject is sometimes complicated, but the short version is that the surety will charge for the increase.  If the contractor fails to include the additional bond fee in the negotiation for the amendment, the bond fee will come out of their profits instead of being passed on to the project owner as is normal.
  2. A second issue can arise in connection with the automatic bond increase. Sometimes it doesn’t happen.  Some bond forms state that contract increases in excess of a stated percentage (e.g. 20%) must be pre-approved by the surety.  This is to prevent the surety from being pulled into a contract amount far above the original support level. If the surety refuses to accept the increase, the contractor will have the difficult / unpleasant task of seeking a new surety and possibly paying twice to bond the project!  Doesn’t get much uglier than that…

Subtletiesmore1

On the subject of the bond fee, some sureties demand payment when the contract increase occurs.  The thinking is, “We have the exposure now, why not get paid?”

Other companies may wait until the contract ends and net out additions and deducts, then charge for the net increase over the original bond amount.

You may also run into companies that charge for increases, but do not net out or give refunds for contract deductions.

If you want to know what to expect in these situations, you must ask for written answers from the surety.  These fine points are usually not stated in writing in advance – but are worth knowing.  With contract additions, it’s what you don’t know that can hurt you.

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.

Secrets of Bonding #107: Surety vs. Fidelity, The Cage Match

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Surety. Fidelity.

They’re both bonds, they come from the same family, but can they get along?cage-match2

To some, this timeless battle is mere entertainment, a Cage Match for the ages.  We’d like to put this question to rest once and for all. Which is more important? Which is more beneficial? Do companies need both?

A surety bond is a guarantee of performance. For example, the state of New Jersey is guaranteed that a construction company will faithfully perform its building contract. 

A fidelity bond protects a business from acts of employee dishonesty. 

Which is More Important?
One could argue that fidelity is more important because EVERY company would benefit by avoiding the impact of employee theft / dishonesty.  Companies have been ruined by such crimes. Examples:

Worker nets $400,000 in refunds. After mastering the furniture company’s phone and mail-order system, Suraj S. started issuing himself refunds for purchases made by customers. Suraj would cover up his rampant refunding by altering inventory records. In less than a year, he stole almost $400,000. 

Security expert finds — and exploits — $1 million hole in company’s internal controls. It’s not an unheard of scenario: A company hires a former “professional” thief as a theft-prevention specialist because of real-life expertise in the security field. In this case, a former embezzler, Barry W., was hired at (name withheld), Inc., as a “theft-prevention specialist.” Rather than protection, Barry ended up writing himself checks on company stock — signed with a signature stamp of a co-worker — cashing the checks, then destroying the canceled checks that were returned to the company. He made false entries in the company’s books to cover his actions. Before being caught he stole a staggering $1,138,334!

For contractors that depend on public works contracts, surety bonds (bid, performance, payment) are essential.  The company cannot survive without them. However, they may survive without a fidelity bond.

Should a Company Have Both?
Let’s stay with the construction company example, but this is true for all firms that have cash flow running through their accounting department. Fidelity bond underwriters know it is often the trusted employee who commits the act of theft. It is simply because they are in the best position to steal. It is not uncommon for a theft scenario to reach astronomical levels as it drags on for years, undetected. 

cage_match

Added Bonus
Does having a fidelity bond help a company qualify for a surety bond or vice versa?

The underwriting of fidelity bonds includes an evaluation of internal controls, such as money handling procedures, monthly account reconciliations and annual audits.  The issuance of surety bonds involves the analysis of accounting procedures, financial performance, quality of management, operating history, and many other factors. Having the appropriate fidelity controls in place, and actually having a fidelity bond, are pluses for the surety underwriter.  We may conclude that surety bond clients are natural candidates for a fidelity bond, and the opposite is also true for those companies that need surety bonds in order to operate. It helps both ways.

There you have it: Surety and Fidelity can co-exist in harmony at last, each proud of the role it plays. 

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.

Secrets of Bonding #106: Better Than a Paid Bond Claim

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Performance and Payment Bonds are required on contracts so a claim can be filed if there are problems.  There could be unpaid bills from suppliers of labor or material.  Workmanship and / or materials could be faulty. The contract terms may have been violated.  There are many things that can go wrong, and the P&P bond is the safety net.money5

Making a bond claim can be technical and time consuming, but the fact remains – the surety industry pays out millions every year.  So bond claims do get paid.

Surety bonds are designed to be cheap protection for taxpayers and other project owners. The system works, which is why bonds are required on nearly all public works projects.

There is another benefit that project owners receive.  It exists on all bonded contracts even if no claim is filed.  In fact, a “no claim” project is the best example of this important effect. 

This effect begins even before the bond is issued.  What is it?  Let’s call it the “F-Factor.”

The F-Factor is the result of the structure under which P&P bonds are provided.  We called them cheap protection – they are, in relation to the exposure the surety assumes. How do bonding companies make money if they are paid little in relation to the risk they face? The answer is that they are very cautious when evaluating the contractors that apply for bonds.  Every aspect of their capabilities is considered so the surety can avoid a loss. This is the all important F-Factor:

The Filter

The surety only supports contractors that present no likelihood of claim or loss on the bonded projects.  It’s the only way a bonding company can remain profitable and survive. This filter effect means the project owner can be confident that the contractor passed the surety’s evaluation.  The bonding company’s very existence depends on filtering out the weak applicants that may falter.  A true saying among bond underwriters is that “No premium is worth a claim.”

detectiveBond underwriters are trained to evaluate all the relevant factors. They look at the company history, its financial records, banking, and credit status. Resumes are reviewed and personal bank accounts are verified.  The company, its owners and spouses are all required to promise reimbursement if they cause a bond loss (surety bonds are not insurance policies). The underwriting process is strenuous and comprehensive.

When a bonded contractor is required on a project, the owner is getting a company that has passed the test.  They have been processed by a group of analysts trained in the art of evaluating all these elements. Underwriters are expected to produce a 0% loss ratio, meaning no bond claims or losses.  Their career depends on it.  You can assume that no project owner has the ability to perform this thorough analysis the way a trained underwriter does.

So this is the F-Factor, the Filter Effect.  The screening out of less capable contractors is an automatic benefit that occurs on every bond.  In the vast majority of cases, the bonded contractor performs as expected and no claim results.  However, when the unexpected occurs and the bond kicks in, a paid claim may save the day for owners, subs and suppliers. 

Every bond is beneficial, even if no claim is made, especially if no claim is made.  The filter, the pre-qualification of contractors, is an important benefit that every project owner enjoys when a bond is required.

About Us: 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 #102: Little Bonds That Bite

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 “The water looks great!  Let’s go in!” 

Like nasty little fish with razor sharp teeth, there are many small surety bonds that can cause BIG problems.  Here are some to watch out for.

piranha2Appeal Bonds – Anyone can be sued.  If a judgement was rendered and you wish to appeal the decision, you will need one of these.  ALL bonding companies are reluctant to provide them.  Plan on putting up liquid collateral in an amount greater than the judgment.  The alternative: Don’t appeal the decision, pay it.

Other Court Bonds: Replevin, Injunction, Release of Lien, all can be hard to obtain.  The Release of Lien normally requires full collateral.

Fuel Tax Bond– Any bond with “Tax” in its title can be tough.  These are guaranteeing future payments.  Financial obligations are the most difficult for sureties to support.  Plan on a rigorous underwriting process with the likelihood of collateral required PLUS full indemnity.

Dealer Bonds– Used Car Dealers, Milk Dealers, are some examples.  These guarantee compliance with applicable laws and proper handling of funds.  If the applicant is a new company and lightly financed, underwriters run for cover.piranha1

Customs Bonds– There are many different kinds.  Import / Export companies may be set up to qualify for these but other firms can have trouble. A Single Entry Bond is needed to import a shipment without delay, i.e. perishable or time sensitive goods.  The applicant’s financial data must be appropriately dated, correct in form, and show adequate strength.  Not everyone is prepared for this.  If you can’t get the bond, your pomegranates may rot on the dock.

Utility Deposit Bond– Required by the power company on new commercial accounts. In the absence of demonstrated financial strength, collateral will be required.

Lost Instrument Bond  “Hillary, have you seen my saxophone?”

Actually, these concern lost or destroyed FINANCIAL instruments such as a check or security.  These bonds have a long term, only one premium is normally collected, and they can be the subject of fraud.  Sureties are “not fond of them.”piranha3

Bid Bonds– Their dollar value may be low – resulting in the expectation that they are easily obtained. Wrong! The underwriting is based on the potential Contract Amount which may be five or ten times larger.  The process can be difficult if the company is young or financial strength / credit is lacking.

Wage and Welfare Bonds-These are needed when contractors set up relations with a labor union.  For underwriters, this is the least desirable part of the account.  A company that can get a $250,000 performance bond may find that the same surety requires full collateral for a $20,000 labor union bond.  Ugh!

Solution
The fact is, there are many nasty little surety bonds.  They can disrupt a company and its relationships when they are hard to obtain.  Failure to get them can be fatal!  These small bonds can have a big impact.

The best step is to deal with an expert in handling such transactions.  Go to a bonding pro for advice and market access.  Specialists often know how to resolve these problems.

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 #101: S-T-R-E-T-C-H  That Bonding Line

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Here is an easy and legitimate way to fit more projects into a bonding line.

Stretching-DollarVirtually all Surety Bonding programs include a “single job limit” meaning the maximum dollar value of one bonded contract, and an “aggregate amount” which is the maximum permitted exposure at any one time.

When a construction company gets close to their aggregate amount, it can hinder the ability to pursue additional projects and keep their pipeline full. Understanding how the aggregate is administered by surety underwriters can help get the most out of this critical element.

The Science

Current Data

The first thing to know is that current info is required.  If the underwriter has not been updated in more than 30 days, you can expect a request for an update.

Proper Format

This info may be conveyed as a dollar figure “We have $876,000 on hand to complete” or a detailed schedule may be required.  Such reports are called a Work On Hand (WOH) schedule or a schedule of Work In Process (WIP).  We call it the latter because computers hate to type “WOH.”

The WIP schedule can be a short form containing 5 or 6 columns of info on each incomplete contract, or they can be twice that involved. It is important to use the format the underwriter requires, and fill out the form completely.

The Art

So here are the interesting parts.

Contractors tend to think of their projects based on the status of the Billings.  Obviously, that’s how they make their money.  No billings, no cash flow, no company.

  1. How much do you have left on that job?
  2. (Contractor replies) We have $350,000 left to bill.

Surety underwriters and accountants view the projects based on Costs. This is because, even if the project is 100% billed, it is not complete until there are no more costs left to incur.

  1. How much do they have left on that job?
  2. (Bond underwriter replies) Their remaining costs are $290,000.

S-T-R-E-T-C-H  That Bonding Line

So the first point is to know that the surety is viewing the “Remaining Costs to Complete” when determining how much aggregate is in use / or available.  MORE costs incurred to date mean the job is closer to completion, and less aggregate is in use – and therefore available to support the next project. Contractors are cheating themselves if their cost data is not up to date, or they are failing to include materials delivered to the site, soft costs such as insurance, bonding, etc.

The second point is that most underwriters include ALL work in the calculation, but some only view the condition of the jobs they have bonded.

Be sure you know what is being requested.  It is incorrect to show tons of work if the underwriters only want details on the two jobs they bonded. If you’re not sure what’s needed, ask!

Understanding how aggregate capacity is calculated and providing the right info can dramatically increase the portion of a contractor’s line that remains available.

About us: 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.