performance bonds

Secret # 85: No Bid Bond, No Problem!

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Contractors may be relieved when a bid bond is not required during their pursuit of a new contract. It could be a private contract, a subcontract on public work or even a prime, federal project.

A thorough review of the specifications may reveal that a performance bond “final bond” is mandatory or optional.  In some cases, it is simply requested out of the blue!

If the contractor does not already have their bond account set up, they may lose the project if they are unable to bond it. This can lead to lost revenues plus wasted expense dollars spent on the acquisition effort. There is no reason for contractors to face this problem.  Let’s look at how to prevent it.  

Bonding is a lot like banking. Set it up before you need it. It’s hard to get bank credit when your cash is low, receivables are old and profitability is waning. The time to get it is before you need it.

The same with bonding: It is also best to set it up in advance. So assuming the contractor has accomplished this, it is easy to pre-approve the new contract even if no bid bond is indicated.

no prob

Procedure:
We recommend the contractors submit the project in advance, as if bid security is required.

The bond request form is submitted with a notation that no bid bond is needed. The underwriters will review the opportunity in a normal manner. This process includes a view toward the upcoming performance and payment bond. Sureties will never issue a bid bond unless they are comfortable with the prospect of providing the P&P bond the contractor needs upon award.  By following this procedure, the contractor becomes prequalified for the final bond and can be confident that the acquisition effort is not wasted.

Work On Hand Analysis
Technically, the surety has no current obligation in connection with the potential new job. They have no bid bond exposure, and the final bond will only be issued at their discretion. Even if the new job doesn’t ultimately need a P&P bond, the project will affect the contractor’s total work load and available aggregate capacity. (* How is the available capacity calculated?)

Alerting the underwriters in advance allows a view of the client’s upcoming activity and helps them make their current decisions with the potential future workload in mind.

Obtaining the pre-approval of the contract clears a path for smooth processing when the performance bond is needed.  No bid bond, no problem!

*Undecided and low bids for the full estimated contract amount, awarded jobs, started contracts, plus the remaining portion of open contracts (bonded and unbonded).

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

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

First Indemnity of America Ins. Co.

Secret #82: Who’s On First? Understand Surety Bonding Terms

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The world of surety bonding may seem mysterious and complex. Let’s face it, it’s not like insurance. It’s actually more similar to banking. No wonder the subject is not well understood by the very people who need to know.

abbott-and-costelloIn this article we will cover some of the basics such as who the parties are and what they do so the subject does not seem so foreign.

Who is the “insured”?  The insured is the party buying insurance. Therefore, in bonding there is no insured, instead there is a “principal.”  This is the party whose actions the bond concerns.   If a construction company needs a bond, it is the principal, the bond applicant.

The intermediary who assists the contractor may be a bond producer, a bonding agent, or an insurance agent. In every case, the person is licensed by the state to process surety bond transactions.

The firm the agent works for is called an insurance agency or bonding agency. This entity provides the channel between the principal (bond applicant) and the surety, the bonding company, the provider of the bond and party holding the risk.

In the world of bonding, the term “company” is used to describe the bonding company. The agent and the agency would not be referred to as “the company” even if the name of the firm was the ABC Local Insurance Company Inc.

A reference to “the paper” relates to the bonding company.  “Whose paper is the agency using?” means “Who is the bonding company?”

Since the bonding company holds the exposure on the bond, it is their employee who makes the decision to approve or decline it.  This person is called a surety underwriter or bond underwriter.

It is true that insurance agencies may employ individuals with underwriting expertise, and their title may be “underwriter.” They may even have some decision-making authority that has been delegated to them by the bonding company (referred to as “having the pen.”)  But the fact remains that the the bonding company is responsible for the underwriting decisions.

When a contractor is asked “Who is your bonding company?” sometimes they give the name of their bonding agency. Now you know the difference!

Other areas of confusion: The owner of the construction company is not the applicant for bid and performance bonds. In the eyes of the surety, the construction company is the primary applicant because that is the name on the bonds.  The underwriting process is primarily focused on the company, its history and capabilities. The personal factors surrounding the business owner are considered secondarily.

We cannot overstate the importance of our bonding agent. The agent plays a critical role in gathering, shaping, and presenting the file for review by the underwriter – and they guide the process forward as bonds are needed. 

OK, now it’s time for one of our famous Pop Quizzes!  Choose the most appropriate word in each case:

  1. When Elmer the contractor realized he would need a bond, he got right on the phone and called his (Principal / Agent).
  2. Morty the underwriter had a few more questions and sent them to the (Surety / Bond Producer).
  3. The (Surety / Bonding Agency) was not willing to hold any additional risk on the account.
  4. Surety bonds (are / are not) insurance policies.
  5. LaFawnduh, the (Underwriter / Agent), knew it was time to arrange for a new surety.
  6. Thor, the Bonding Specialist, only used quality (Pens / Paper).

7. Bonus Question (Extra credit!): When all else failed, Moonbeam knew it was time to file a bond claim with the (Carrier / Insured).

Answers:

  1. Agent
  2. Bond Producer
  3. Surety
  4. are not
  5. Agent
  6. Paper
  7. Carrier

FIA is a bonding company (carrier) that has served contractors and their agents since 1979.  We are flexible and creative surety bond experts.  Call us for Bid and Performance Bonds.

Call us for Site and Subdivision Bonds – our specialty!

Steve Golia, Marketing Mgr.  856-304-7348

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

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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.

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 #67: Get to Know FedBizOpps

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

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

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

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

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

How to get involved

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

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

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

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

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

Saved Searches

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

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

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

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

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

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

Don’t miss our next exciting surety article: “Follow” this blog in the top right hand corner.

Secrets of Bonding #66: Timing, the Cart, the Horse

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Being in the right place, or the wrong place, can make all the difference. In the world of surety bonding, particularly contract bonds, timing plays an important role.

Here is a typical scenario.  It is a question of timing:

The client comes to us to get their bond account set up for the first time.  We send over the “laundry list” of documentation that is normally required.  It’s a bit daunting.  For companies that have never been bonded, they probably do not have all the info readily available.  They must gather documents, others must be filled out, they must be scanned and shipped. There are better ways to spend a Friday evening!

The cause of this activity is usually that the first bonded project has popped up.  We had a case like this recently where the project was being negotiated.  No bid bond was required. If the effort was successful, the contractor would need a bond.  If not, the bond monster goes back to sleep.

Our new client seemed unconcerned about the bond.  They didn’t want to take the time to develop their file unless they won the project.  Only then would they find out if it is easy, hard, or impossible to get the bond!

For this applicant, the project comes first – then the bond. Is this a smart approach?  Maybe not, because sometimes the first bond is a harder, slower process than expected!

Let’s look at some aspects that could cause unexpected delays (assume this is not for a small contract):

  1. Financial Information – The underwriters will request business financial statements, not just tax returns. Not all companies automatically prepare these. If the year-end date is not close, it can be very inconvenient to go back and reconstruct the financial picture.
  2. Accounting Methods – Companies that have been using Cash Method statements will find they need to re-issue the document using a different accounting method.  To accomplish this, the accountant will require an additional body of financial information, then they commence with their processing.
  3. CPA – Don’t have one? You will need to choose/engage a firm then allow time for their due diligence and procedures.
  4. Accounting Presentation – If a CPA Compilation has been the norm, it may be necessary to upgrade and re-issued as a Review. The CPA will need time to perform the additional services.
  5. Outside References – These are sent to creditors and vendors for handling, then you wait for their response.
  6. Historical Data – The project history of the company and its key people, including contract details, will be required. Prior financial data is needed. Three years of complete tax returns are often requested.
  7. Work In Process Schedules – Many contractors do not employ a sophisticated method of analysis. All sureties do! It may be necessary to upgrade the reporting with highly detailed individual project cost records and profit projections.
  8. Credit Reports – Erroneous or incomplete reports can have a devastating effect on the underwriting, and such problems are slow to correct. Adjustments to the credit report are only accomplished after a time consuming process with the rating bureau.

Issues like these can throw the timing off, and delay the bond issuance, but they are all correctable.

There may be other unexpected problems that cannot be easily fixed.  For example, unacceptable financial ratios.  The company could be solvent and profitable, but with poor ratios, some underwriters will say “Come back and see us next year.”  An unacceptable company or personal credit report can have the same effect.

Contractors often dread the bond underwriting process.  We’re not trying to foment anxiety by describing these pitfalls – actually just the opposite!  By allowing enough time, we often can help the client through them.

Summary: Get your bonding set up in advance. Then you have it when you need it with no last minute surprises or disappointments.

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 #62: ILOC: What is it? What isn’t it?

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Sample #1

IRREVOCABLE LETTER-OF-CREDIT
Wisconsin Department of Transportation
Motor Carrier Services – IRP Unit
P.O. Box 7955
Madison, WI 53707-7955

We hereby establish our irrevocable letter of credit in your favor for ACCOUNT NAME, in an amount not to exceed $00.00.
All checks written by ACCOUNT NAME payable to Registration Fee Trust, (Wisconsin Department of Transportation) for the remaining registration fees will be honored by BANK NAME up to the irrevocable credit limit.

If ACCOUNT NAME fails to make payments to the Wisconsin Department of Transportation when due, the BANK NAME will allow the Department of Transportation to draw on the Irrevocable Letter of Credit up to the credit limit, provided the BANK NAME receives written documentation from the Wisconsin Department of Transportation stating registration fees have not been paid when due.

This IRREVOCABLE LETTER OF CREDIT expires: _______, ______, ______

Sample #2

CITY OF FREDERICK
IRREVOCABLE LETTER OF CREDIT
Date of Issue: _____ Date of Expiry: _____ Issue Number: __________

Beneficiary:
The City of Frederick
c/o DPW Projects Division
Attention Linda Dutrow
111 Airport Drive East
Frederick, Maryland 21701

Gentlemen,
We hereby authorize you to draw on us for account of (name)____________ at (address) ______, up to an aggregate amount of $ _____ (_____) dollars and _ cents) US Dollars, available by your drafts at sight accompanied by a signed statement that the funds are being drawn and required for payment in accordance with an executed Public Works Agreement between the City of Frederick and the party named in this paragraph for (project description) _________________.

Drafts must be drawn and negotiated not later than ______ at our counters. Partial drawings are permitted.

Each draft must state that it is drawn under the Irrevocable Letter of Credit of (name of issuing bank) _____________ Number _____________ dated _______. This Letter of Credit is not transferable or assignable without written consent of (name of issuing bank) ___________________________.

This credit is subject to the “Uniform Customs and Practice for Documentary Credits” (1994, or latest revision) International Chamber of Commerce, Brochure Number 500.

It is a condition of this Letter of Credit that it shall be deemed automatically extended without amendment for one (1) year from the present or any future expiration date of this Letter of Credit unless at least forty-five (45) days prior to such expiration date we notify you by certified mail that we elect not to consider this Letter of Credit renewed for such additional period.

We hereby agree that all drafts drawn under and within the terms and amount of this credit and accompanied by the documents above specified, that such drafts will be duly honored upon presentation to the drawee.

These are two examples of ILOCs. Let’s find out about these, and why they look so different.

“ILOC” stands for Irrevocable Letter or Credit. They may also be called a Standby Letter of Credit. These instruments are only issued by Commercial Banks. The purpose is to enable one party to draw on the account of another in connection with a business transaction. If the beneficiary makes a draft (draw) upon the ILOC, the bank records it as a loan to the account holder who is the subject of the letter (the contractor in a construction scenario). The beneficiary is not required to repay the bank.

A perfect example is the overseas practice to use an ILOC in the same manner we normally use a Performance and Payment Bond in support of a contract. The contract owner is entitled to draw on the ILOC in the event of the principal’s default.

The two examples above are actual suggested formats from those beneficiaries. The Wisconsin DOT is unusual because of its brevity. The City of Fredrick form is more typical of what you may see, particularly if using an ILOC to give collateral to a surety.

What are the important elements missing in the DOT form?

If the duration of the related business transaction is longer than the term of the ILOC, the beneficiary normally demands an “evergreen clause” which provides for automatic renewal. It means if no action is taken prior to anniversary, the instrument does not expire. This gives the beneficiary confidence that they will be formally notified prior to anniversary that the bank intends to non-renew, and they will have sufficient time to draw down (cash out) the entire ILOC so they remain protected.

It is also normal for the instrument to allow partial draws, and require the return of drawn funds that are ultimately unused.

It is important for the document to correctly state the party whose actions are the subject of the guarantee (the principal) and the circumstances under which a draw can be made should be standard.

Beneficiaries of these instruments must scrutinize the financial condition of the issuing bank. In cases where the FDIC rescues a banking institution, they have the ability to unilaterally nullify these instruments to aide in the bank rehabilitation. For bonding companies, this means they can lose their collateral even though they remain “irrevocably” obligated on the P&P bond. Check the bank strength here: http://www.fitchratings.com

Summary
We have covered what an ILOC is, the key aspects and what to look for.

What isn’t it?

For Obligees (the beneficiary of the bond) it may not be a good alternative to a Performance and Payment bond.

1. The bank does not pre-qualify the contractor’s ability to perform the work the way a surety does.
2. In the event of default, the project owner (obligee) must assess the contract status, arrange for a completion contractor and manage the process to a successful conclusion. With a bond, the surety may do all this.
3. An ILOC does not prevent liens against the project or provide the process to resolve them.

Owners may accept an Irrevocable Letter of Credit as an alternative to a surety bond. However, the fact remains that an ILOC does not match the comprehensive protection of a Performance and Payment Bond.

What about for Contractors and Developers?

  1. Bonds are not easy to get.  The contractor must pass a rigorous evaluation by the surety.  Bonded contractors and developers can promote the fact that they have the support of a surety: Bragging Rights!  Many include this info in their brochure along with their banking credentials.
  2. Having cash tied up for indeterminate time periods can put a strain on construction companies.  They need it to finance the start of new contracts and solve problems on existing ones.  Developers may lose out on opportunities to acquire new projects or property.  Reminder: Projects may be completed / released later than expected, meaning the cash remains tied up for how long?

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 #61: 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?

Q. Can we 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 may not be the best solution.

Q. 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 *).

Q. 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. The contractor could have a problem and the work may be 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.

Q. 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 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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Secrets of Bonding # 59: Bonding Specifications, Boilerplate That Bites

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Does anybody really read this stuff? YEP, WE DO!fine print

Just like on insurance, there are written specifications (specs) for bonds, and if you don’t know what they are in each case, you could be setting yourself up for a disaster.  There can be serious consequences if a bid bond is rejected and a contract is lost.

So how do agents protect themselves from such an outcome? Step one is to obtain the written bonding requirements in every case. You may find they are open or they may be very narrow and specific.

Here is an example of one spec we recently handled: “The surety company shall hold a current certificate of authority as acceptable surety on federal bonds in accordance with the United States Department of Treasury Circular 570, Current Revisions.” (Read Secret # 23 about the T-list). To determine if you are in compliance with such a requirement, find the name of the surety exactly as it appears on the bond, and look it up here: http://www.fms.treas.gov/c570/c570_a-z.html
If the requirement goes on to say the Circular 570 dollar amount must be sufficient, compare the “Underwriting Limitation” amount to the dollar value of the bond. It must be is equal to or larger than the penal sum of the bond.

“No modification or waiver of any of the terms of the contract to be performed will in any manner discharge any surety liability thereunder.” This is commonly accepted language meaning the bond follows the contract even if the amount or terms are subsequently changed.

Normally the specs require a Performance and Payment Bond equal to 100% of the contract amount. Occasionally you may see a request 110% bonds. This is troublesome for the surety and they will resist issuing on this basis.

The boilerplate may require a bonding capacity letter issued by an acceptable surety in lieu of a bid bond.

Also note, bid bond percentages vary. Federal is normally 20% of the bid amount. Others are often 10%, but some are 5%.

The bid could also require a surety consent letter, promising to issue the P&P bond if awarded the work.

Federal Projects
On all federal projects where the contractor has a direct (prime) contract with a federal agency, the surety must be on the T-List and for a sufficient amount. Other owners sometimes choose to use this as part their own requirements.

On a prime federal contract you are also required to use the government bid bond form (Standard Form 24) and performance (25) / payment (25A) bond forms. Get them here: http://www.gsa.gov/portal/forms/type/SF

A.M. Best Ratings
It is not unusual for the specifications to require a minimum A.M. Best rating.  To confirm that the surety has a sufficient Best rating, look up the exact surety name in the A.M Best site: http://www3.ambest.com/ratings/default.asp

State Licensing
Another common requirement is that the surety must be “authorized to do business in the state of…” This means the surety must hold a state insurance department issued license (an admitted carrier). To check this, go to the insurance department for the state where the work is located. In our home state of New Jersey, we go here: http://www.state.nj.us/dobi/data/inscomp.htm

Bond Forms and Documents
You may run into mandatory bond forms. These are more common on private contracts than on public work. However, mandatory means just that. So it is important to 1. know if mandatory forms are stipulated and 2. confirm that the forms are acceptable to the surety and contractor. Sometimes on private work, they are strongly slanted against them.

Summary
Referring again to Secret #30, there is a significant risk for bond issuers, especially on bid bonds. Important: Agents should not rely on the bond request form prepared by the contractor. We often find this information incomplete and/or incorrect. To be sure you are issuing a valid bid bond that the obligee will accept, you must directly review the written bonding requirements

All the fine points we discussed can lead to a bond rejection. So get the boilerplate and take a bite out of it, before it bites you!

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

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

First Indemnity of America Ins. Co.

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Secrets of Bonding #58: Bonus Edition

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Balance Sheet Bride + WIP Schedule Groom

In this article we will pull together some of the individual concepts that have been discussed and show how they are married in a contractor’s surety bond account.

In article #48 we talked about the different accounting methods that are utilized. We covered how to recognize the Percentage of Completion method and the Accrual method.  Accrual may be the one you see most often.

An important characteristic of the Accrual method is that it does not include Underbillings and Overbillings. Do you recall which method* does show these entries? Let’s consider the implications when these entries are not part of the underwriting.

In article #57 we reviewed how the Underbillings and Overbillings affect the Balance Sheet analysis.  Sometimes they help, sometimes they hurt.  Overbillings are a Current Liability.  Their effect on the Balance Sheet is that they reduce Working Capital. We all know that’s bad for bonding purposes.  It means less capacity for the client and maybe lower revenues.

Underbillings, on the other hand, are a Current Asset.  They increase the Working Capital calculation, and therefore the customer’s bondability. So you want them in the picture, but Accrual financial statements will not show either entry. Is there a solution?

With a correctly prepared WIP schedule in hand we can find the degree of completion, the correct billing amount, and then determine if the company is Under or Overbilled on each project. (If they were Underbilled $3 on one job and Overbilled $1 on another, the balance sheet adjustment would be the net effect: Underbilled $2.)

If a contractor has a Working Capital deficiency and the bonding capacity amount is inadequate, this calculation can help.  Bear in mind, it can also serve to reduce the bonding line if the net effect an Overbilled status.

The underlying reality is that, good or bad, these numbers must be known. Larger, more sophisticated contractors often use the Percentage of Completion method * which always includes Under and Overbillings – because they are relevant.  They are no less relevant for the Accrual method contractor.  On Accrual method financial statements, you should always analyze the WIP schedule to see if any significant Under or Overbillings could affect the Balance Sheet analysis.

The procedure we described is helpful for contractors when managing their projects, and for their underwriters.  It provides a sharper analysis and results in better management decisions for all parties.

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.