Federal bond

Secrets of Bonding #148: The Greatest Impediment to Bonding

Steve GoliaLeave a comment

Surety bonds are hard to get. Contractors and their insurance agents know that underwriters are conservative. They ask lots of questions. Then they ask more questions. Then they say they can’t help you. It’s a fun-filled process.

Some contractors can’t get bonded because they have a poor credit history. Others have weak or insufficient financial statements. There are plenty of reasons for an unhappy ending, but what is the single biggest reason – and what can you do about it?

Crappy credit: This is a very common problem. The company may be struggling to get enough work, resulting in a weak credit report. So they decide to move into public work for additional revenues – but the bad credit report makes this impossible. Sometimes the report can be improved by correcting errors and updating the info. This is not the greatest impediment contractors and their agents face.

Weak or insufficient financial statement: There are innumerable potential problems. No financial statement, only an internal statement, only a compilation, an interim FS, a net loss, no working capital – the pitfalls are endless! It’s not the biggest impediment though.

Unsavory circumstances: Excessive bid spreads, inadequate prior experience, bad bond forms, harsh contract terms, too much other work. They are all bad, but they are not the king.

The Greatest Impediment

Picture how the process starts. When the contractor decides to go after bonding, a list of information is requested. The underwriter wants business and personal financial statements. A current work in process schedule is needed. Prior tax returns, resumes of key people and a bank reference letter are desired.

The contractor wants to pursue this, but MAN, that’s a lot of stuff!

He has not needed to make company financial statements, so how to come up with them now?

The company owner never needed to make a resume, always been self-employed. How do I write that up?

The WIP schedule: I don’t have that info available. I know where I am on all my jobs. Why would I take the time to fill out a bunch of forms anyway?

I can get the bank reference letter completed and make copies of prior tax returns (they want the WHOLE THING?!) But if I do that, who’s gonna do the estimating so we don’t run out of work? And I have to visit the projects or everything will grind to a halt. The workers want to milk every job like it’s their last. They’ll suck the profits out of everything if I give them the chance.

Conclusion 

The greatest impediment is the applicant themselves! In my 40+ years of surety bond underwriting, I have concluded that MOST contractors deserve to be bonded, but many fail to acquire surety support. It is because they stop trying, or never really start.

People must make choices. They have to put bread on the table. If they can succeed by doing what they know, why try some experiment that may fail? Sometimes it’s just easier to keep doing the same thing – even if you are discontent.

Our observation is that bonding takes perseverance and patience. It is a journey, a path with unexpected twists. There can be obstacles, but we have solutions! If contractors or agents expect it to be fast and easy… they may be disappointed.

Applicants for bonding must plan to devote some time and energy to achieve a goal they know is worthy. It says a lot to have a surety backing you. They are vouching for your ability, and putting up their own money to prove it. It’s a big deal and not always easy, but always worth it in the end.

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 #140: Make Tax Liens Disappear!

Steve GoliaLeave a comment

When tax liens, bankruptcies and judgments appear on credit reports, they can prevent sureties from issuing bonds and banks from granting loans.  This can be devastating for construction companies that need both to succeed. 

Are there ways to get the tax lien off the credit report?  Yes! Let’s find out how.

According to the government: “A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets.”

For surety bond underwriters, the tax lien is a red flag for a number of reasons:

  • It can mean the bond applicant had insufficient cash flow to meet their financial obligations.
  • It may be a sign of poor management or weak internal controls.
  • The scariest part may be the “weapons” used by the IRS to collect their tax money. They can issue a tax levy.  This permits the legal seizure of property to satisfy the tax debt. They can garnish wages and take money from a bank or other financial account.  They also have the ability to seize and sell vehicles, real estate and personal property. These collection activities can threaten the success of bonded projects to the detriment of the contractor and surety.  Bad for everyone except the IRS agent.

Here is how to remove tax liens from the credit report:

  1. Eventually the credit bureau may drop it from the report even if it is not paid, but this can take years.
  2. Pay the tax bill. Eliminating the debt will not remove the lien from the credit report, but will show it as “released.”  For credit grantors, this is still negative, but less threatening.  Paid liens remain on the report for seven years. So the next step is also needed…
  3. Federal form 12277. With this document you can ask the IRS to withdraw (remove) the lien notice, even when the debt is not paid off!

More about form 12277

This is part of the federal “Fresh Start” program, which provides certain benefits to taxpayers.  12277 is the Application for Withdrawal form.  The IRS will consider withdrawing the lien notice if the debt is being paid through a Direct Deposit installment agreement, plus a few other conditions.  See the form.

The purpose of the Application for Withdrawal is not to eliminate the lien, but to remove it from public view when there is no longer the threat of a tax levy.  Consider using this procedure on liens that are not paid off, and those that are!  In both cases it is legal and beneficial to have the lien disappear.  But is this practice unfair or deceptive?   No, because banks and bonding companies have other ways of detecting the lien.  They are not being deprived of relevant information.  For example, the debt will appear in the financial statements and also on the Contractor Questionnaire.

One more comment about the dreaded, draconian tax levy: Before the IRS proceeds with the levy they are required to send the taxpayer a Final Notice of Intent to Levy and Notice of Your Right to A Hearing. This gives the taxpayer one last chance to argue against the levy before it is implemented.  Go for it. Maybe it will help.  Remember – they’re from the government and they’re here to help!!!

Now you know the ways to remove a federal tax lien from view.  By waiting, paying and / or using form 12277, the lien can be wiped from the credit report.  For the taxpayer, it can be an important step toward financial recovery.

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.

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

Secrets of Bonding #137: Identify 5 Mystery Bonds Contractors Need

Steve Golia1 Comment

Think you are pretty familiar with the various surety bonds contractors may need?  See if you can identify these five that we are commonly asked to provide by contractors and our agency partners. Also try for the Bonus Question at the end!

  • Mystery #1: In this instrument, the bonding company guarantees that a contractor / “principal” will correct defective materials and / or workmanship in a completed project.  These bonds are often written for one or two years.
  • Mystery #2: This bond is issued with a municipality as beneficiary.  It guarantees that the construction company, if allowed to disrupt public property, will restore the area after performing a contract and prevent the municipality from having to pay for such reconstruction. Hint: A plumbing contractor may need these.
  • Mystery #3: Number three is a form of financial guarantee that promises a money penalty will be paid if the construction company does not enter into a contract when expected to do so.
  • Mystery #4: This one is a guarantee that the construction company will comply with all the terms in a written contract and faithfully pay suppliers of labor and material used in connection with the project.
  • Mystery #5: Also written with a municipality are beneficiary, this bond promises that the principal will build certain “public improvements” stipulated by the municipal engineering firm. The municipality does not have a contract with the principal, nor will it pay for the work.Question mark

OK, got your answers? 

#1: This is a Maintenance Bond.  They normally are issued after the completion / acceptance of a contract.  The dollar amount is often for less than the contract.

#2: A Street Opening Bond is an example of a Permit Bond.  This enables a contractor to cut the street open for access to water and sewer connections.  If the municipality grants permission for the work, they expect it to be reconstructed in accordance with local building standards, and not at public expense.

#3: Is a Bid Bond. Bid bond amounts are often expressed as a percentage of the proposal they accompany (such as a “10% bid bond”).  This is because the actual bid amount is confidential to the bidder at the time of bond issuance.  If the bidder fails to accept an award of the contract, the bid bond penalty may be claimed by the obligee to reimburse them for going to the second (higher) proposal.

#4: A Performance and Payment Bond (aka Labor and Materialmen’s Payment Bond) is issued usually for 100% of the contract amount.  These are commonly required to protect the public interest on government contracts.  Private owners and lenders may also stipulate them.

#5: A Site Bond. Contractors sometimes ask us for these, but the correct applicant is the property OWNER, not the construction company being hired to do the work.

If the contractor furnishes this bond (we do NOT recommend this), they become obligated directly to the municipality, and must build the required public improvements even if they are not paid by the property owner.  Bad!  The site bond obligation more correctly lies with the property owner / developer.

Bonus Question: This bond is different.  It has the construction company as the obligee / beneficiary of the bond.  The “principal” (the party whose actions are the subject of the bond) are the company employees.  The bond reimburses the company for dishonest acts committed against it by its employees.  What type of bond is it?  Unscramble these letters for the answer:  

l e f i y t i d

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.

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

Secrets of Bonding #133: “Please Sign Here” (with caution!)

Steve GoliaLeave a comment

sign-here-arrow-2

We have written about indemnity agreements before (enjoy Secrets #19 and #79) but recent activity with our clients has inspired yet more on this vital subject.

As a follower of the “Secrets” series, you may already know what a General Indemnity Agreement (GIA) is, and that it is a requirement all bond applicants face.   Basically, it contains a payback obligation to the surety similar to a promissory note.

As a bond applicant, why should you be cautious when signing such documents?

The first reason is that it may include companies or individual people who are inappropriate. Some examples:

  • An affiliated company in which the bond applicant has a minority interest. These should be excluded if the bond client doesn’t have a controlling interest.  
  • Another example would be an individual person with little or no ownership in the company who is not married to an officer, key person or major company owner.

The second reason is that there may be clauses in the indemnity agreement that may be subject to negotiation – although underwriters tend to resist such modifications. Nevertheless, if you see something objectionable such as “Confession of Judgement” which is not even permitted in some states, you should ask for it to be removed. 

This would also be the time to ask for additions to the document, such as a dollar limitation on personal indemnity of certain individuals (Spouses? Minority owners?) or Trigger Indemnity which is only activated under specific circumstances.  No harm in trying.

The third reason is because of the gravity of the indemnity obligation. Through the GIA, the bond applicant company and its owners agree to repay the surety for losses and expenses.  They are literally putting everything on the line. sign-here-arrow-204x300

What is the dollar limit of this obligation?   Is it:

a) The contract amount? 

b) The Payment Bond amount?  or

c) The T-list of the surety? 

Answer: The liability amount is unlimited. 

This is a big deal. Keep in mind (see Secret #1!) “Bonds Are Not Insurance.”  The surety is a guarantor of the principal’s performance. If the contractor fails to perform, the bond is not insurance to protect them from the consequences of their failure.

In conclusion, the bond applicant should approach the signing of a GIA with some caution.  Certainly it is a document to read and manage where possible but this brings us to the final point: If you want surety bonds, it is mandatory that the surety be indemnified.  Regarding the indemnity of spouses not active in the business, they too must sign.  We tell contractors “Nobody likes it, but everybody has to do it.”

sign_here_manIf you want bonds, be cautious, but get ready to sign on the dotted line.

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.

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

Secrets of Bonding #129: What It Takes To Get a $1 Million Bond

Steve GoliaLeave a comment

Here is a common fallacy held by observers of the surety bonding industry: whellbarrow money

How much cash do you need to get a $1 million bond?  The answer is NOT $1,000,000. Surprisingly, you only need a fraction of the $1 million, but you do need other elements as well.  Let’s dive in!

Our readers may be familiar with the 3 Cs of Surety Bond Underwriting: Coercion, Corruption, Cowardice.  Actually they are Character, Capacity and Capital. These describe areas of analysis that are important to the bond decision-makers.  Cash falls under the Capital heading.  Other factors are also important.

  • Character includes the applicant’s credit rating and operating history. Bill paying habits are reviewed along with references from suppliers and lenders. Character evaluates if the applicant is likely to honor their obligations under the contract and bond.
  • Capacity cover the skills of key people, company experience overall, plant, equipment and other factors.
  • Capital includes all financial resources, including Cash.

The Magic Number

Stacks of US currency

There is no magic number. When underwriters review the company financial statement they do look at the cash position.  In addition, they evaluate the Working Capital, which is the sum of cash, accounts receivable, inventory, and other items, minus Current Liabilities.  Working Capital consists of elements that will become cash during the current fiscal period (the accounting year).  For example, a dollar of “good” receivables is the same as cash to credit analysts.  So to this extent, less pure cash is needed.

Financing New Projects

One of the reasons contractors need Working Capital (WC) is to finance the start of new projects.  They must mobilize the job site, pay laborers and purchase materials – all out of their pocket initially.  As the project proceeds, it starts to fund itself. 

For the $1 million contract with the $1 million bond, would it take $1 million to finance the start?  No, it would just be a percentage of the $1 million.

The Two-Part Answer

Many bundle of US 100 dollars bank notes

This brings us to the answer. Cash is one component of Working Capital, and underwriters expect WC to equal about 10% of the bonded exposure. This could mean that the $1 million bond requires less than $100,000 cash when combined with other working capital components. However, cash alone doesn’t get bonds approved.

All of the 3 Cs are equally important. Cash is not the sole basis of the decision.  A cash rich company with bad credit or weak prior experience will still be declined.  Cash cannot overcome these deficiencies.

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 # 128: The Unexpected Cause of Contractor Failure

Steve GoliaLeave a comment

Why do construction companies go out of business? What reasons have you heard for companies shutting down?

  • “The economy is terrible.”
  • “There’s no work.”
  • “Too many bidders. You can’t get a decent profit and I won’t work for nothing.”

All these explanations amount to the same thing: A lack of projects resulting in low revenues, low profits and no cash flow. The situation seems obvious. When there isn’t enough work available, many contractors are forced to shut down. So is this THE BIG cause of contractor failure? Surprisingly,  no!

closed1Many construction companies fail because they have too much work. Is it possible that too much of a good thing spells disaster? We’ve all heard the stories about lottery winners who say the money ruined their lives. Suddenly they’re rich, but they weren’t ready for it. The very thing they wanted more of, turned out to be their undoing.

For construction companies, the mission is to acquire and perform profitable contracts. A tremendous amount of effort is spent in the pursuit of new work. So what can go wrong to make the volume a disadvantage, causing the demise of the enterprise?

Capital

One answer is the Lack of Sufficient Capital – both the money kind and people. As companies grow, more liquid resources (cash) are needed to finance the start of new projects and solve problems. Human resources are needed such as field supervision and back office support. Companies can fail when the office staff is unable to keep pace with the paperwork. Billings don’t go out on time, receivables are not collected, cash flow is choked off.  It is management’s responsibility to anticipate these needs and prevent the deficiencies.

Field production can suffer when the supervisory staff is inadequate. This leads to reduced gross and net profits, less available cash, the beginning of a downward spiral.

Managmentclosed2

Consider the Corner Office: Poor leadership, lack of business knowledge and inadequate financial management can be catastrophic. In addition to setting the tone and establishing the company mission, the bosses must have the technical knowledge a larger company requires.  They must be sophisticated financial managers to control resources and garner needed support from financial institutions. The successful manager of a mid-sized business is not necessarily equipped to run a large company.

New Geographic Territory

Management’s pursuit of growth can lead the company into new geographic markets (the grass is always greener.)  This may present unexpected challenges and obstacles including local union resistance, unfamiliar underground conditions, logistics problems, reduced labor productivity rates, adverse weather conditions, etc.  On the east coast (I’m a New Yorker), bond underwriters have long shared stories of NY contractors who ventured to Florida and got their butts kicked…  They say “Florida beaches are littered with the bones of NY contractors.”

Adding New Type Work

Some companies have strayed from their normal type of work in the pursuit of added revenues. They get in trouble trying to enter and compete as newcomers to the field. The company may lack the expertise (estimating, field management) for the new type work. How can you be successful in a competitive bidding environment when going against companies already entrenched in the market?  Do you take work cheap and hope for the best? “We’re losing money but we’ll make it up on volume.”

Our point of view is based on surety bond underwriting. All these issues are well known to bonding companies. When their construction clients want dramatic growth, new types of contracts or transition to a new geographic market, that’s a red flag. They come back with the hard question, “Tell us: Why this is a good idea?”closed3

Contractors may feel that sureties hold them back. Maybe they are too conservative. Do they really want contractors to grow? They think they know better than the contractor?

Actually, the surety and the contractor succeed or fail together. Having seen good clients encounter unexpected problems, underwriters know firsthand how quickly things can unravel.

Writing more bonds and bigger bonds is how bonding companies grow. Certainly, construction companies must grow to survive, and being bigger can be better.  But uncontrolled growth is the major cause of contractor failure that sureties, and contractors, must avoid.

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.

Not available in all states including Idaho.

Secrets of Bonding #125: When to Call It Quits

Steve GoliaLeave a comment

Construction contracts can be terminated by either party under certain circumstances.  Let’s take a look at it from the Contractors point of view.

Federal contracts make it easy for the government to end a project.  The “termination for convenience” clause spells out how the project can be ended (with no fault on the part of the contractor) and provides a method of payment for the work in place. Other public and private contracts may also contain this clause.

Sometimes it is the contractor who is motivated to end the project early. In these situations, it is important to know how and when to proceed.no-work

The Disputes Clause

“The Contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract, and comply with any decision of the Contracting Officer.”

Found in federal contracts, this clause means you must continue to work when facing a dispute. This assures that the contractor doesn’t hold the project hostage while the dispute is under review. 

Other public and private contracts may include language regarding unresolvable disagreements, so it is important to…

Read the Contract

Contractors should only quit a project when they have a legal right to do so.  You need to read the contract and, with the help of your attorney, choose a course of action.

An Unresolvable Disagreements clause may allow the contractor to stop work.  An example could be engineering issues that make it impossible to proceed.

Stop Work for Nonpayment

In these cases, the contractor should send written notification of the overdue payment and allow a time period to collect the funds.  Some contracts require that a second notification be sent before work may be suspended.

Because nonpayment may be a material breach of the contract, it can justify stopping work.  However, state laws vary on this subject.  An attorney can help determine if such action is advisable.

Surety Bonds

If a Performance and Payment Bond covers the contract, it can play an important role.

General Contractors should alert their surety regarding any disputes.  They should also remember that stopping work can result in a Performance Bond claim.  This can hamper the availability of bonds for other projects. The surety will want to understand the dispute and may offer guidance to the contractor and attorney.

Subcontractors have these same issues if they have bonded their subcontract.  In addition, contracts with “pay when paid” wording may justify the GCs nonpayment – another reason to read the contract.

An advantage for subcontractors may be a P&P bond above them, filed by the general contractor.  This Payment Bond is available for claims by subs and suppliers.  It can be a powerful tool to protect subcontractors.  Even a letter to the GC threatening to file a payment claim can shake the money loose in some cases.

Conclusion

Stopping work can be an important remedy for the contractor, providing the action is legally permitted.  When a contractor considers suspending work they must weigh the risk that they may ultimately be found in breach of contract themselves.  On the other hand, the larger situation of the nonpaying party may demand action, such as an impending bankruptcy.

The best approach is to review contracts in advance and negotiate the addition of language that allows work stoppage under appropriate circumstances.  The goal is to acquire the contract while limiting the risks.

Note: we are not attorneys and are not giving legal advice.  If you have a project dispute, call your attorney for help.

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 #124: Underwriting Challenge – What’s Wrong With This Picture?

Steve GoliaLeave a comment

Years ago when I was just a cub reporter for the Daily Planet, I mean surety underwriter, I ran into a strange situation that was recently repeated.  In this article we will present the scenario and ask you to use your underwriting judgement. The question is… “What’s wrong with this picture?”

Scenario #1

Originally this came up on a Lost Instrument Bond.  These are needed when requesting the issuance of a duplicate cashier’s check, security, or other financial instruments.  The applicant claimed a negotiable instrument (anyone holding it could potentially cash it in) had been inadvertently destroyed. He was a young adult in his 20’s who had inherited the asset.  His financial statement showed little other than the asset in question, which was a problem because the underwriters do not want to feel that the person has a reason to fraudulently convert the “lost” asset and it’s replacement.

We wrote back and expressed the underwriting concern, that the applicants financial position was inadequate.  In response we received a novel proposal: When the replacement instrument is issued, it will be conveyed directly to the surety who can hold it as full collateral against their exposure, until the bond is released (years!) “There will be no risk to the surety.”  Sounds pretty good? 

In my infantile underwriting mind I thought this sounded intriguing, but it also made me uncomfortable. Why had I never heard of doing this before? Maybe I was on the verge of creating an entirely new underwriting procedure.  Will they name it after me?

What was wrong with this picture?

Scenario #2Whats_wrong

In the more recent situation, the surety was being asked to support a multi-million dollar purchase transaction.  The applicant (a person) was a foreigner, an accomplished business person, who was not familiar with surety underwriting requirements.  They were not accustomed to providing personal financial info or involving the spouse in business obligations.

As a way of supporting the transaction, and maybe dodging the indemnity requirements, it was suggested that title to the purchased property would be conveyed directly to the surety (sound familiar?).  After the financial transaction (which was the subject of the surety guarantee) is completed, the surety will be released, the title will be transferred to the buyer, and “the surety will never be in a position of risk.” Boom!  Let’s do it!

What’s wrong with this picture?

The Answer

Here is good advice.  If your underwriting brain feels like something is wrong, it probably is!  The problem with both these scenarios is the timing.  

Bonding companies ALWAYS secure their position before assuming an obligation. It is incumbent on the underwriters to protect their company assets and its owners by doing so. 

Think about bank lending practices, which are not unlike surety underwriting.  Would a bank make a building loan relying solely on the future value of the project? No, they require being secured with sufficient assets in advance such as the company and personal net worth of the applicant and possibly other collateral.

Financial obligations always require that the credit grantor be secured in advance. Prudent decision making requires this.

So the next time you see something that doesn’t feel right, trust your gut.

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

Steve GoliaLeave a comment

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

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

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

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

murphyslaw

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

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

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

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

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

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

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

First Indemnity of America Ins. Co.

Secrets of Bonding #121: Are Court Bonds Like Fruit?

Steve GoliaLeave a comment

produce_manMostly we issue site, subdivision and contract surety bonds (Performance & Payment).  However, we are also an important provider of Court and Probate bonds.  We issued a number of interesting court bonds recently so here is some info on this subject.

What Are Court Bonds Are Why Are They Needed?

Generally, court bonds serve three purposes.

  1. They provide required protection for the other party in the litigation (opposite the bond applicant)
  2. They guarantee the payment of related court costs
  3. The court likes them

An Injunction Bond is a good example.  In these legal actions one party wants to limit or prevent the actions of another.  An insurance agency may request an injunction to prevent a former salesman from soliciting their clients.  The court requires the plaintiff (insurance agency) to provide a bond for the protection of the defendant (salesman) in the event it is found that (s)he has been wrongfully restrained.

A Replevin Bond is similar.  These are required when the plaintiff (a bank) wants to seize an asset (your private jet) for failure to pay your finance charges.  The bond will protect you if it is later found they wrongfully seized “Wings Over Yonkers.”  See how these work?  In different situations the bonds provide the same type of function.  The name of the bond identifies the underlying legal action.

Why Do Courts Like Them?

You may think “what’s not to like?!” That’s true. But the court may require a surety bond for a practical reason.  If the litigation involves a financial matter, they could require that an escrow deposit be placed with the court for the benefit of the other party. They would hold this money until the case is decided.

This works, but is not convenient.  Where will the funds be held?  Who is responsible for their safekeeping?  Will there be periodic accounting if the case runs for years?  Who pays the expenses associated with this?  What if the money is misplaced or stolen? 

Compare this to a surety bond: Get the bond, throw it in the folder. Done!

cherriesEven though the court may have the option to take cash in lieu of bond, they may demand the issuance of a surety bond simply for its convenience.

Other Court Bonds

When a money judgment is rendered, the defendant may want the matter heard by the Appellant Court. Let’s say Maynard sued Dobie for money and wins a $10,000 judgment.  Maynard figures “Ok here comes 10 big ones!”  However, Dobie wants to dispute the decision so now Maynard has to wait.

In order to bring the Appeal, Dobie must obtain an Appeal Bond which protects the interests of the court and guarantees prompt payment if Dobie loses again.  To get this bond, he’ll have to give his personal financial statement, his indemnity, and put up maybe $11,000 for the surety to hold.  Oh, and pay the bond premium!  Why is all this necessary?

Bond underwriters know that most defendants lose at the Appellate level.  They also know that the court will simply claim on the bond to pay off the judgement.  This means that underwriters expect full penalty claims on defendant’s appeal bonds – which is why they normally require full collateral for the judgment amount plus interest and expenses.nanners

Conclusion

Hopefully it is apparent that there is a thread of similarity between these different types of court bonds.  This can make it easier to understand them when tey are needed.

Oh, so why are court bonds like fruit?  Because they have appeal!

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.