site bond

Secrets of Bonding #61: Solve This Problem

Steve GoliaLeave a comment

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.

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

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

Steve GoliaLeave a comment

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.

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

Secrets of Bonding #30: The Greatest Danger

Steve GoliaLeave a comment

Bid Bonds, Performance Bonds, Payment Bonds. They each have a different purpose and include certain risks. So which one is the Greatest Danger for the surety and agent, and why?

Performance Bonds are an obvious choice.  We may think of Performance Bonds as the main reason a project is bonded – they protect against contractor default and assure completion of the work.

While this is certainly significant, it is not the Greatest Danger. Performance claims are usually preceded by events that give the surety a chance to respond.  A “Cure Notice” may be sent by the obligee alerting the contractor and surety that a deficiency exists and if left uncorrected, a bond claim may result.  Another event preceding claim is the declaration of default by the obligee.  (The contractor is thrown off the project.) This would be a major event and all interested parties would receive notification.

If the surety cannot help remediate the performance problem and a claim results, the unpaid portion of the contract amount is a financial resource that always helps the surety in addition to potential recovery via the General Indemnity Agreement.

The Payment Bond is actually the most common source of bond claims. There may be disputes about the performance of subcontract work or materials supplied.  Unjustified claims will be declined and for valid claims, the contract funds and Indemnity Agreement are resources for the surety.  Even though they have claim frequency, Payment Bonds are not the Greatest Danger.

So that leaves the lowly Bid Bond.  Some think of them as just incidental, like ordering a Builders Risk policy.  Their dollar amounts are smaller than Performance Bonds.  They are issued for free or for a small service charge.  Once produced, they are quickly forgotten like they were hardly valuable in the first place.  Nothing glamorous here.  But what are the dangers with Bid Bonds?

The first unique thing is that you get once chance to issue them correctly. On competitively bid work, such as government projects, the bid bond accompanies contractor’s proposal.  The bids are stamped for date and time when submitted, and if your proposal is late, it is rejected!  The bids are opened and examined by the contract administrators.  The bid bond and accompanying proposal can be rejected for technical errors such as the wrong project number, missing signatures, or any other details.  On the other hand, mistakes on Performance Bonds can normally be corrected without penalty.  The contractor already has the project, so there is no harm in allowing the bond to be adjusted. With bid bonds in a competitive situation, there is no chance to make a correction – the other bidders will not allow it! A bid protest or lawsuit would likely result.

In addition to accuracy and timely delivery, bid bond documents can result in a rejection if mishandled.  For example, the failure to use a mandatory bid bond form or the absence of a Surety Consent could result in proposal rejection.

Proposal Rejection – let’s talk about that.  The surety or agent makes one of the errors we described, the bid bond is deemed insufficient, and the contractor’s proposal is rejected. On public work the bid results are normally published, so the client will know if their rejected proposal would have been the winning number, and they would have acquired the contract.

In addition to the embarrassment of making an error, the loss of revenues, and maybe losing a customer, here’s the worst part: There have been cases where the contractor sued the surety for lost profits – the profits they expected to acquire from the project.  This is a constant threat on Bid Bonds, and the indemnity agreement doesn’t help if the error was solely on the part of the surety or agent.  A lawsuit like this could be for millions of dollars.

 

Bid Bonds are the winners!  They are the Greatest Risk for sureties and the agents who execute them.  We have one chance to get them right.  They must be perfect every time.

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 want to miss our next exciting article?  Click the “Follow” link in the upper right corner.

Secrets of Bonding #15: How to Submit a Contractor’s Bond Account

Steve GoliaLeave a comment

In this post we will talk about the key elements when sending a contractors account to the surety for evaluation.

Think of the underwriters mind as a blank canvas.  (Some more blank than others!)  Presenting a bond account is an opportunity to paint the picture.  The underwriter knows no more than you tell them. It is up to the sender to describe the key points and explain why the account deserves support.

Let’s go over the primary elements:

Introductory Letter: This letter should state how well the applicant is known.  Can the sender vouch for the applicant’s honesty, good character and capabilities?  The letter (which is typically just an email) should describe what’s needed – if it is a bonding program and / or a specific bond.  There should also be comments about any significant underwriting points such as “The account has been declined elsewhere because…” or “The incumbent surety cannot provide the bond in question because…”

The author may also talk about any known underwriting issues and how they may be effectively addressed.

Contractors Questionnaire: All sureties have some version of this form which asks all the basic questions such as “Who owns the company?” “What kind of work do you do?” “What are the largest projects completed in the past?”

This document should be filled out completely, signed by the applicant and dated. If there is uncertainty on how to answer, don’t leave a blank.  It gives the reader an uncertain feeling – which is not the picture you want to paint.

Financial Statements: These are needed for the company and its owners and should be provided in a complete form. Underwriters normally want to see 3 fiscal year-end company financials plus a current interim FS if the recent year-end is more than 6 months ago. If CPA prepared financials are not available, provide whatever info is.  It may be financials prepared by a bookkeeping service or just produced from QuickBooks.  Some companies only have tax returns if they have never pursued bonding in the past.

The personal financial statements are less formal.  Most underwriters will accept self-prepared financial states if well-presented, signed and dated by the owners and spouses.  Note: Typically, spouses are included in everything when it comes to bonds.  Their names appear on the Questionnaire and personal financial statements, and they sign the General Indemnity Agreement (hold harmless for the surety) even if they are not active in the business.  Underwriters take this approach because the company is jointly owned marital property.

Work In Process Schedule: Referred to as a “WIP Schedule,” this describes the financial condition of their uncompleted contracts.  It indicates how much work the company has on hand and if it will be profitable.  Other important info is gleaned from this document so treat it with care!  CPAs normally do a good job presenting such data. But if it is being prepared by the contractor, be careful to follow the exact meaning of the column headings and fill out the form completely.

Specific Bond Needed: Provide a Bond Request Form.  This document tells key details about the project and bond needed.  Fill out completely and include attachments as indicated.

Optional: Include other info that may help paint the picture such as a company brochure, web site link, reference letters and resumes of key people.

When submitting an account, keep the underwriters point of view in mind.  Sureties only provide bonds for applicants that present no likelihood of claim or default.  It is important to show the company’s expertise, capabilities and financial strength.

Once the paperwork is moving, an “in person” meeting with the underwriter is always beneficial.  Contract surety bonds have a human element that is not part of the paperwork. The underwriter must be personally convinced that the account deserves support.

If a real meeting is not possible, consider a teleconference such as Skype or Go To Meeting, or even send jpg pictures of the people, premises and some key projects.

Seize the opportunity to paint a convincing picture and gain the enthusiastic support of your surety underwriters.

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 #10: Site / Subdivision

Steve GoliaLeave a comment

Site / Subdivision: Oh what a tangled web we weave…

Feel like you’re not an expert on these?  You’re not alone!  In this article we’ll cover the basics as well as some of the tricky stuff.

Site and Subdivision (Sub-D) Bonds are both similar for the surety.  A Site Bond is needed when a business expands their facilities whereas Sub-D arises on residential development projects.

In both cases, the property owner or developer has obtained zoning board approval to proceed, but is required to build certain elements the township wants such as sidewalks, roads or lighting.  Contractors call this “site work,” thus the name Site Bond.  Site bonds do not concern the construction of the buildings.  “Improved Lots” are property where such elements have been completed.

This required work is collectively called the Public Improvements.  A township engineer will prepare an “Engineers Estimate” with an estimated current cost for each item.  The bond amount is the sum of these costs plus an added cushion in case the bond is called at a future date when construction costs are higher.

The purpose of all Site and Sub-D Bonds is to guarantee that public improvements will be built at the developer or surety’s expense, not the taxpayers.  For example, if the developer fails to topcoat the road, the township makes a bond claim and the surety must complete the work.

How Site & Sub-D differs from Performance Bonds:

  • There is no contract with the obligee (township)
  • The obligee is not paying for the work.  It is self-funded by the principal (property owner)
  • There is no definite completion date

FIRST TANGLED WEB: Since the work is self-funded, the property owner must either have cash on hand or arrange for a construction loan. If the latter, it is likely that the property in question will be collateral for the lender. This means in the event of the principals failure (such as bankruptcy), the bank becomes the new property owner but the surety remains obligated to the township.

In the borrowers absence the bank has no obligation to disburse the remainder of the loan (the purpose of which was to improve and increase the value of property THE BANK NOW OWNS) – but the surety is still required to complete the work.

Untangle this by obtaining a “Set Aside Letter” from the lender prior to issuing the bond.  This requires the bank to continue disbursing funds to the surety in the event of the borrower’s failure – with no pay back required.  In this manner, the work can be completed as intended.

SECOND TANGLED WEB: When the property owner hires a contractor to build the public improvements, it is not uncommon to require the construction firm to obtain the Site / Sub-D bond.  After all, the contractor may already have a surety relationship.  Problem: In the event of the property owner’s default, the construction contract is terminated however the Site / Sub-D bond obligation remains in force.  No more money is coming to the contractor to complete the work. The contractor is now solely responsible to the township and the surety and must self-fund the completion of improvements for property they do not own.

Untangle this one by a) requiring the developer, not the contractor, to be the bond applicant, or b) at least get the financial statements and indemnity of the developer so the contractor is not solely obligated to the surety and township, and c) a set-aside letter or escrow account (for funding by cash) could still be required.

Summary: Key questions are:

  • Who will build the public improvements?
  • If built under a construction contract, is it bonded to the developer? (Performance and Payment Bond)
  • How will the work be paid for?
  • How will the surety be funded in the event of failure by the property owner?

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, 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.)