performance and payment bond

Developers and Home Builders: Important News!

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Important news for Developers / Home Builders and their Surety Bond Agents:

“Now more than ever, you need to protect your cash position.

As you start your new project, do not use cash or a cash backed Irrevocable Letter of Credit (bank instrument) to secure your obligation to the township. Instead, file a Subdivision Bond. Preserve your capital!”

We have specialized in this area since 1979. Call us for immediate service.

Steve Golia, Marketing Mgr. 856-304-7348

FIA Surety / First Indemnity of America Insurance Company, Morris Plains, NJ

We are currently licensed in: NJ, PA, DE, MD, VA, NC, SC, WV, TN,  FL, GA, AL, OK, TX

Surety Bond Challenge: Solve This Problem!

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A key vendor / supplier is demanding that a GC provide protection for their purchase agreement. However, the project owner did not stipulate a Performance and Payment bond on the contract and none was provided. The work has started and the contractor needs to get materials delivered from the reluctant vendor.

What are the possible solutions that may satisfy the vendor? Choose one!

  1. Issue a Payment Bond on the Purchase Agreement
  2. Issue a Performance & Payment Bond on the Purchase Agreement
  3. Bond the contract in a normal way (100% Performance & Payment)
  4. Issue only a Payment Bond on the contract

(1.) Issue a Payment Bond on the Purchase Agreement?
A. A vendors purchase agreement is not the same type obligation as a construction contract. A bond guaranteeing payment of the purchase agreement would be considered a Financial Guarantee Bond (Why?  See below *) They are more difficult to obtain than a Payment Bond, so that’s not be the best solution.

(2.) So what about issuing a Performance & Payment Bond on the Purchase Agreement?
A. This is also not an option due to the differences between the nature of a purchase agreement and a construction contract.  (Details below *).

(3.) Can we bond the contract in a normal way (100% Performance & Payment)? That Payment bond would cover all vendors, so it would cover the one in question.
A. Bonding a started project is always a red flag. The underwriters initial question is “Why do they want a bond now?” It does seem suspicious, like there may be a problem with the performance of the construction work or the owner received some negative info on the contractor. Maybe the contractor has a problem and the work is in jeopardy.
Another issue is the cost. If a bond was not originally required, the bond cost was not included in the contract price. This means a bond purchased subsequent to the execution of the contract will be paid for out of the contractor’s profit margin. The Principal / GC will be looking for the most inexpensive solution possible.
Keep in mind that the purchase order amount is less than the contract price, so bonding the contract would result in a bond higher (and more expensive) than actually needed.

(4.) Can we issue just a payment bond on the contract?
A. This too will be viewed as a red flag by the underwriters. Who asks for a payment bond but doesn’t want a Performance Bond? That would be unusual.

Summary
We have concluded that it will be difficult to retroactively bond the contract, the amount of the contract is more than the purchase order and only a financial guarantee bond can be issued on the purchase agreement, so a Performance Bond may not be the solution at all!

Our Solution
In this case, we offered Funds Administration instead of a bond. This was an inexpensive alternative, and provided an assurance for the vendor that bills would be paid in a routine manner. (The project owner pays the Funds Administrator who directly pays the vendor.)
Keep in mind, however, that the Funds Administrator has no obligation to the vendor. If there is an unexpected event, such as termination of the contract, the Funds Administrator does not guarantee to the vendor that they will be paid appropriately.  A bond would, if one had been written.

*The nature of purchase orders is different from construction contracts. When issuing a P&P bond on a contract, the surety depends on the fact that the obligee / beneficiary is paying for the work, and that money may be the key to solving any claim or default.

When bonding a purchase order, the obligee / beneficiary (vendor), is not paying – they are receiving payment. That is why a Financial Guarantee Bond must be used, and is why they are harder to obtain.

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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FIA Surety Success Story

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This was a tough case.

The contractor needed a performance bond. We reviewed the bond request form and noted the bid results: They were 100% below the second bidder!

We obtained the company’s fiscal year end financial statement. Our analysis revealed a negative working capital and their net worth had slipped below zero due to a net loss for the period. Pretty tough…

The agent was not a bonding expert, so it was up to us to find a way to help this account.

Collateral was not an option because of their weakened condition. If it hurts the contractor, it can’t be good for us.

We dug deeper to fully appreciate all of the applicant’s attributes:

  • The bid spread resulted from the fact that the project was specialty work and the second bidder was a general contractor. They would have to hire someone like our client to perform the job. This contributed to their significantly higher price. Also, the applicant documented a good profit margin in their price.
  • There were specific reasons for the net loss. Corrective actions were taken and current financial results were improved.
  • We identified the applicant’s additional financial resources – there were multiple credit lines available (unused) and personal cash.

We wrote the bond! The difference is that FIA has a team of seasoned professionals with many years of experience (since the ’70s!). We know how to get through these tough cases.

Site, Subdivision, Performance and Payment Bonds.

Now you know who to call.

Steve Golia, Marketing Mgr. 856-304-7348

FIA Surety / First Indemnity of America Insurance Company, Morris Plains, NJ

We are currently licensed in: NJ, PA, DE, MD, VA, NC, SC, WV, TN,  FL, GA, AL, OK, TX

Free CE Update

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Love, Love, Love!
Love is in the air! We know you love free stuff, so get some here.

FIA Surety provided two free CE seminars in North Jersey recently. We’re doing one this week at an agency in Hatfield, PA.
It’s time to get your agency on our calendar. We have dates available in March. How do you set it up? Just give us a call. It’s that simple!

Speaking of simple, when you need a surety bond, we can make that simple too! Since 1979, First Indemnity of America (a carrier) has been making agents look great.

We’re your “can-do” market for:

  • Site and Subdivision Bonds
  • Bid and Performance Bonds
  • Deposit Bonds for home builders

What’s not to love?

Steve Golia 856-304-7348

FIA Surety / First Indemnity of America Insurance Company, Morris Plains, NJ

We are currently licensed in: NJ, PA, DE, MD, VA, NC, SC, WV, TN,  FL, GA, AL, OK, TX

Alpacas vs. Llamas

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Look at that face!  Don’t you love it? That sure is a cute Alpaca! Uh…or is it a Llama?  Hard to tell,  but  it’s  OK.  You still love it.

For Surety Bond Producers, it can be hard to tell the difference between a performance bond and a site bond.  In this case, it does matter because the apps and markets you use for performance bonds may not get you the site bond your client requires. You need to know the difference!

Info #1.  You have at least one market that is a strong, stable player on Site and Subdivision Bonds.  FIA Surety is your go to market.  We have been writing these confidently since 1979.

Info #2. FIA offers a free, accredited CE course on Site and Subdivision Bonds.  In fact we have nine accredited courses you can attend and learn “everything” about surety bonds!  Click for info and to register.

Info #3. That’s an Alpaca!  Smaller than a Llama: 150 lbs vs. 400 lbs. llamas also have longer faces and banana sized ears.  (Trick to remember: The “ll’s” in Llama look like the long ears.)

Steve Golia, AVP of Underwriting
FIA Surety is First Indemnity of America Ins. Co.: A carrier providing A rated, T-listed bonds in all states!
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
Office: 973-541-3417
Visit us: www.fiagroup.com

Alpaca <–> Llama

186. Bonding Companies: Can’t Live With Them, Can’t Live Without Them

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  • “I don’t know what you want unless you tell me.”
  • “Nothing is ever enough for you.”
  • “No, those pants don’t make you look fat.”

Sound familiar?  Have you uttered these words?   Were you talking about your romance life, or your bonding company (except for the pants comment.)

It turns out that much of the frustration we have in life arises from a failure to see things from another point of view. Husbands and wives know this.  But the good news is that there is a common solution.  Open communication and good listening skills are the key.  Can this be applied to suretyship?  (For mood music, Click!)

“What’s with all the Questions?!”

This is a good place to start.  Why do bonding companies ask so many questions?  And just when you get to the end of round one, they think up more.  It’s like they don’t ever want it to end!

Answer: To a degree, it doesn’t ever end.  That’s because the credit analysis a surety performs is based on info that constantly changes – and will do so without notice to the surety. They have to keep a finger on the pulse to be confident when issuing bonds.

“Why do I have to give my personal indemnity AND pay a premium for the bonds?”

It seems like the bonding company is taking no risk and they get paid for it!

Answer: Actually, personal indemnity does not guarantee that a surety will not have a net loss on a bond claim.  When a claim occurs, the company owners may already be depleted (trying unsuccessfully to resolve the problem.) When the “stuff” hits the fan, the surety has to foot the bill and the indemnity may be worthless.

“Do these pants make me look fat?”

When contractors start to pursue an excessive work load the bonding company may put the brakes on. They don’t want the company spread too thin with insufficient management and financial resources. Actually, dying from an excessive amount of work (too fat) is more prevalent than the opposite.

The surety wants to be sure the client remains stable and able to perform their work – and thus avoid any possibility of a bond claim.

Conclusion

Are bonding companies unfathomable, impossible to understand? No, it’s just that, unlike insurance companies, they are risk averse.  They operate on a very thin margin and problems (claims) of any size can hurt them.  Their very survival depends on being prudent and conservative.  This means ask questions and move forward with caution.

So now, can you love your surety?  Maybe a little bit…

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

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

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184. Surety Bond Quacks Like A Duck

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Isn’t that a great expression? “If it looks like a duck, swims like a duck…”

This article is about correctly identifying the type of surety bond.  It is a problem we see often: Cases where the wrong app was used, time wasted, etc.  It happened again this past week.

The agent called us with a performance bond need, about $10,000.  They has used a short form application and sent it to another surety that rejected it.  The reason given “the applicant was the principal.”  The applicant is always the principal, so this didn’t help.  We dug deeper.

The client and agent thought they needed a performance (P&P) bond, but we quickly identified it as a Site Bond – most sureties don’t do them. Let’s go through the key questions and characteristics that make it easy to recognize a site bond when it quacks.

Quick Primer:

A Performance and Payment bond guarantees a construction contract in which the Applicant / Principal is paid by the Obligee to perform the work.

Site Bonds are written with the city or township as Obligee, guaranteeing that a developer or property owner will build required “public improvements” at their own expense.

Here are three key questions to get you on the right quack:

1. Who is the Obligee that is requiring the bond?  On site bonds, it is always the township or city whose planning board has approved the project.

2. Is there a construction contract?  On site bonds there is no contract between the township and the property owner or developer. On P&P bonds there is always a contract between the principal and the obligee.

3. How did the need for the bond arise? On site bonds, the township or township engineer writes to the property owner describing the need for the bond, the work it will cover “public improvements” and the dollar value. On P&P Bonds there are written specifications (requirements) and a construction contract that talk about the bond.

Another clue that helped us quack this case was the low dollar amount.  You could get site bonds for less than $5,000 but it would be extremely rare to go that low on a P&P bond.

So now when a site bond lands on your desk, you’ll recognize it.  Any of your commercial clients could need one when they upgrade or modify their property. The next question is to choose a market.  Most sureties don’t write them – but WE DO!

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

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

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174. When You Can’t Get a Bid Bond

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Bid specifications often provide alternative forms of security to accompany the contractor’s proposal. Cash, a Certified Check, or a Bid Bond may be permitted.

Let’s take a look at the implications of each and when to use them, or not!

First, a quick primer on bids:

When contractors submit a proposal on bonded public work, bid security is normally required. The security assures the bidders sincerity: They will accept the contract if offered or pay a penalty for walking away.

Typically, the specifications require a Performance and Payment Bond or other form of acceptable security equal to the contract amount.

About the forms of bid security

1) Cash is King, but not when it comes to bid security. Bid security amounts are usually thousands of dollars so this method is not realistic for many contractors.

2) Certified Checks are similar to cash. This means the contractor must estimate the maximum proposal amount and arrange for a check payable to the obligee. Initially, the bid bond percentage is known but not the bid dollar amount. The specifications require security ranging from 5-20% of the proposal amount. However the actual proposal amount is often not compiled until close to bid time when all the vendor prices have been received and negotiated. To use a check, the contractor must estimate an amount sufficiently high so it is adequate to cover the bid figure when it is finally known.

3) Bid Bond issued by the surety. The advantage is that the bidder’s money is not tied up (as compared to cash or a check). As a precaution on public work, obligees hold the bid security of the second and third bidders until the contract is awarded – which could take weeks. This means the contractor’s cash or check could be tied up and the likelihood is that they will not win the project.

Looking at these options, a bid bond is the preferred choice. However, a bid bond is not always available when needed. When this happens, the bidder may consider an alternative.

Normally there is no requirement to use a bid bond specifically. The bidder also has the latitude to use one surety for the bid bond and a different one for the P&P bond (although some sureties dislike following another’s bid bond.)

Why would a bid bond not be available?

1. The contractor does not have a surety.

2. Short notice: Not enough time for the surety to make an underwriting decision.

3. Short notice 2: The surety has approved the bid bond but there is not enough time to issue.

4. Bid bond declination: The surety considered the project but will not support it.

5. Bid bond declination 2: The surety wants to support the project but they are unable to due to their lack of credentials, their insufficient capacity, licensing issues, or other problems on the surety’s part.

6. When contractors are changing bonding agents or sureties, there could be a gap in service where the new surety is not ready.

In all these cases, the contractor can decide to bid with cash or a check. However, there may be a downside to consider. Let’s look at each of the six scenarios described above.

Risks of bidding with cash or a check

1. No surety: The contractor could forfeit the bid security if they are awarded the project but are unable to produce the P&P bond.

2. Short notice: The risk here is the same as #1. Forfeiture could be the result if no P&P bond can be arranged within the timetable allowed.

3. Short notice 2: This is one situation where the check may be a reasonable alternative assuming the surety has provided a written approval to bond the contract.

4. Bid bond declination: This is a particularly troubling situation because the effort to arrange a Performance Bond faces two obstacles:

  • Time: Contract awards demand the issuance of the P&P bond by a specified date. There could be insufficient time to set up a new surety relationship.
  • The new surety, which hardly knows the contractor, is being asked to bond a project the incumbent surety declined. The incumbent was willing to lose the account over this project. Can the new underwriters be confident they are making a better decision than those who know the account well?

5. Bid bond declination 2: This example isn’t as onerous as #4. The problem is that the surety wants to bond the project but can’t. The new underwriters will be less hesitant than in #4. (So why don’t they just issue a bid bond to help the client get to the next step with another surety? See answer below.) If cash or a check is used, a surety must be arranged to prevent forfeiture.

6. Changing sureties: Handle the same as the short notice situations.

Conclusion

While it’s true bidding with cash or a check is usually an option, it places the contractors funds at risk. Contractors should not consider using cash or a check unless the availability of the P&P bond is confirmed in writing.

Answer to #5: The surety would not want to issue the bid bond if they can’t provide the performance bond, which is the main product of the surety operation. Second reason, if no performance bond is arranged by the client, the bid bond could go into claim. There is little for the surety to gain in this situation.

Note to agents, contractors and other readers: We are not offering legal advice and do not assume to have covered all possible situations in this article. Every bonded contractor should have a good surety attorney to handle such matters.

Want this expertise and creativity on your next Bid or Performance Bond? FIA Surety is a NJ based bonding company that can help! We have specialized in Bid, Performance, Site and Subdivision Bonds since 1979.

Steve Golia is Marketing Manager for FIA Surety.  Call Steve now: 856-304-7348

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Surety Bonds: How I Voted

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Last Tuesday was the big day: 

  • “The most consequential mid-terms of our lifetime!”
  • “Your mid-term vote is a chance to affirm / reject (choose one) the president’s agenda!”
  • “The end of life as we know it!”
  • “Blah-blah-blah!”

I’m not making a joke about voting.  I think it is a privilege.  As citizens of a democracy, we owe it to all who have suffered and died defending this noble right.

So on Tuesday, I awoke bursting with patriotism and planning to cast my ballot.  But I decided to do it differently.  You’ve heard the expression, “Vote With Your feet.” This time I’ll do it!

I identified myself to the voting lady and she sent me to booth #2.  I quickly removed my shoes and socks.  It was hard getting the curtain open.

I entered the booth and reviewed all the choices.  Here it comes.  I steadied myself and placed my big toe on the lever.  I need to flip the lever, slippery, hard to turn it… I got it!

It became easier as I proceeded.  At the end you push a button to register your choices.  My big toe wouldn’t fit so I used the side of my “pinky toe.” Awesome!

I must admit, voting with your feet is harder than I expected, and a lot less fun. Why do people like it so much?  Eventually… it dawned on me what the expression means.  My “foot voting” was a fiasco!

You don’t have to make the same mistake. It’s not too late for you to vote with your feet – the right way.  Choose what’s better for you.  You can do it on Surety Bonds:

  • Circular 570, T-Listed bonds in excess of $10 million
  • Increased commissions
  • Superior, 365 service.
  • Same day response on new submissions.

You can have all this.  You should have it all! Vote with your feet and come over to KIS Surety for all these benefits.  Give us a call with your next Bid or Performance Bond.

Steve Golia, National Surety Director, KIS Surety

856-304-7348

Secrets of Bonding #166: Meet the Weatherman

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Tonight’s forecast: Dark!

We like to joke about the TV weather team: “I wish I had a job where I could be wrong 50% of the time!” *  But in reality, we still tune in and watch.

   Question: Is a surety bond underwriter just like a weatherperson?  How are they similar?

Both are paid to make predictions.  They gather and analyze information: “Crystal ball gazers.”  There is a hope / expectation that they will achieve some degree of accuracy.  Whether you are forecasting the POP, or the completion of a construction project, isn’t it just about the same?

You know forecasters use computer models.  They have the National Weather Service and there are Canadian and European Models.  They could just put that up on the TV screen!  We don’t really need the “local weather talent,” do we? 

What about bonding? Many sureties already use computer based programs.  These provide instant or quick answers on surety bonds that fall into certain categories.  Is that all we need?  Should we get rid of the Surety Underwriter / Weatherman entirely?  We say “No!”  Here’s why…

  • The Underwriter does more than predict the future. A good underwriter contributes to the outcome.  Their efforts positively affect many people. 
  • When bonds are approved, the bond agent makes money.  The construction company achieves new revenues. So do their suppliers and subcontractors.  Think of the ripple effect!
  • The bonding company and their reinsurers make money. 
  • Presumably something of value is built for the owner; a useful asset is created. 

Really good underwriters are more than “yes / no” decision makers, they are facilitators. The experienced underwriter sees a path forward that may not be obvious to others.  How can this deal (performance bond) be supported while protecting the interests of the surety, the guarantor of the project’s success?  Here’s where knowledge, experience and attitude come in. 

Does the underwriter want to make the deal happen, and have the know-how to do it?

These high level underwriters aren’t weathermen, they are Rain Makers!  They work actively to produce profits and success for all they touch. Without their expertise, projects would not be supported and built.  Doors get opened and companies reach new, higher levels of mutual success. 

This is a combination of science and art with a dash of experience.  And you don’t find it too often.  But when you do, grab an umbrella and watch good things happen.

Steve Golia is a long established surety bond provider and expert. Call us with your next bid or performance bond. 856-304-7348 

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*  Actually, weather forecasters average more than 80% accuracy.  Good job guys!