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Secrets of Bonding #78: The Single Most Important Key to Obtain Bonding

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Underwriter: “Tell me about your job cost records.”
Contractor: “I’ve been doing this for so long, I know just where I am on every job! I keep it all up here.” (Pointing to head.)

Underwriter: “Do you produce mid-year financial statements to track your progress?”
Contractor: “No, I have a bookkeeper do my taxes at the end of the year. That’s when I find out how I did.”

Underwriter: “Have you been profitable the last few years?”
Contractor: “Sure, but why give it all to the government? I bonus out the earnings to keep my taxes low.”

This is not an atypical conversation. Is this contractor a good applicant for Bid and Performance Bonds? Will the company be able to qualify? Mmm… Probably not! Let’s look at the decision making process used by bond underwriters to understand why.

You know the normal routine.  Many pieces of information are required:  Questionnaire, financial statements on the company and owners, resumes, a bank reference letter, work in process schedules, tax returns, etc. Why do bonding companies ask for all this? The info is needed to reveal where the company has been, the current status, and where it’s headed. This evaluation will determine if the company is approved for bonds.

All bonding companies are looking for successful, well-managed firms that require bonding in their normal course of business.  Remember: All sureties are risk averse. They are not looking for desperate contractors who need a bonding company to rescue them from impending failure. Sureties are “for profit” operations that issue bonds for the sole purpose of making money.

Now that we understand the underwriter’s viewpoint, think about that opening dialogue. Did the company appear to be successful, well-managed and headed in the right direction? Would the answers make you confident to back them with your money?

The simple fact is that regardless of how financially successful business owners may be, if their companies do not appear to be successful in the eyes of third-party analysts, bonds will not be forthcoming.

The contractor who carries the books in his head, takes out all the profits, and has a minimal financial presentation does not have a means of proving the company is viable to outsiders.  The single most important key to obtaining bonding is for the company to demonstrate a level of success and good management. Contractors who have not been successful and those who cannot prove their strengths will have great difficulty obtaining bonds.

The guidance we provide to specific contractors depends on each applicant’s circumstances. The company may need to develop better management practices or accounting methods. Some need to build up their track record of completed projects.

For companies that have never been bonded, the simple answer is that they must demonstrate that they have operated profitably/successfully on non-public work. This is the critical steppingstone to bonded work.

Surety agents make money by delivering bonds to contractors. They will always attempt to provide bonding even if applicants are minimally qualified.  However, all bond agents know that the best applicants are companies that have thrived on private work and now wish to pursue public contracts. These firms can show elements of success that bonding companies expect to see.

The essence of qualifying for bonds is to demonstrate the past success, solid management and future business plans that make surety underwriters enthusiastic supporters of the firm.

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 #77: Fire, the Wheel, Surety Bond Rates

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These were among caveman’s greatest inventions.  But unfortunately, bond rates have changed little since the Paleolithic Era!

That may be a slight exaggeration, but it is true that bond rates and rating methods are not revised often.  Here are some of the peculiarities worth knowing, primarily in the area of contract surety:

  1. All sureties are entitled to charge for bid bonds, but most do not.
  2. They may charge for performance bonds in advance, but many wait 45 days for payment even though the instrument is uncancellable.
  3. A performance and payment bond costs the same as just a performance bond.
  4. A 100% performance and 100% payment bond costs the same as a 100% performance and 50% payment bond.
  5. A maintenance bond may be cheaper if the same surety preceded it with a performance bond.
  6. A 20% performance bond may cost the same as a 100% bond even though the surety has 1/5th as much exposure.
  7. In cases where a bid bond or surety consent letter is required, but then the work is awarded without requiring a final bond, the surety is entitled to make a charge for the unissued performance bond.

Now here is my favorite crazy bond rule.

Situation: You have a $1,000,000 private contract on which a P&P bond is optional.  The project owner asks the contractor to price an “alternate” to include a bond.

Let’s say the bond rate is 2% of the contract amount. So what is the bond price?

  1. $20,000
  2. $40,000
  3. $20,400
  4. $40,200

I know you love #1. It just looks so right.

But alas, that is not the answer, which is why this wins the wacky award!

#3. is the correct answer. The reason is that the bond fee is actually calculated on itself.  When determining the bond fee, it is not correct to remove the bond cost from the contract amount.  Like the cost of insurance and all costs related to the project, the bond cost is included in the contract amount.

Therefore, the correct basis for the calculation is $1,020,000 x 2% = $20,400.

Q. So what about the additional $400? Should the calculation actually be $1,020,400 x 2%? (Then, wouldn’t you have to recalculate it again, and again, and again…)

Q. And who pays the extra $400? It’s not in the $1,020,000 contract amount.

A. Beats me. You better ask that Neanderthal in the corner office!

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.

Bonding Pros Success Story

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November 12, 2014 to Bonding Pros:

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

Frankly, we even impressed ourselves on this one!

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

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

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

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

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

Secrets of Bonding is brought to you by Bonding Pros

856-304-7348  www.BondingPros.com

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?!

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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 #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.

fia_surety_logo

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.

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

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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