subdivision bond

Surety Bond Challenge: 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? 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.

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

Free CE Update

Steve GoliaLeave a comment

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

Steve GoliaLeave a comment

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

Developers: Missing the Boat?

Steve GoliaLeave a comment

You love being a developer, but it’s a tough industry.  Here is a way to instantly improve your cash flow, and you could save time and money in the process!

Many developers are missing the boat when it comes to securing their projects with the local township. They tie up their cash for indeterminate periods and may expose themselves to financial loss – unnecessarily.

The local township requires a form of security to guarantee that the “public improvements / site work” will be built. You can satisfy this requirement with cash, an irrevocable letter of credit (ILOC) issued by a bank, or a surety bond.  Cash and the ILOC amount to the same thing because lenders typically require full security to issue the ILOC (you post / encumber an equal amount of cash).  Either way, your cash is tied up.

The “boat missing”

A surety bond, called a subdivision or site bond, is the better alternative.  Many developers are not aware of this.  Why is it better?

  1. Frees up your cash – you could put cash with the township or bank (to back the ILOC), but then it is tied up for the duration. And how long is that?
  2. The township is in no hurry to release the security.  It protects the township and the taxpayers.  If a problem develops, they don’t have to fix it, you do.  You may expect your cash to be tied up for less than a year, but it could turn out to be two or three with all the red tape and inspections.  If you used a subdivision bond, you simply renew it.  When the bond amount is reduced based on your progress, the cost of the bond renewal goes down too.
  3. Claims / problems – With cash or an ILOC, the township simply taps your cash while you sit by and watch.  The surety bond can protect you.  All claims must be processed though the claims department of the bonding company.  There is a discovery process; we don’t simply write a check like the bank does under the ILOC.  The bank is legally required to issue a check within three days!  You have no leverage or control.

With subdivision bonds your cash remains available for other purposes such as acquiring and starting new projects.  You gain control over your money and help protect it from claim by the township.

Think subdivision bonds are hard to get? They aren’t if you go to the right folks.  We are a bonding company (carrier) that has specialized in this area since 1979!  We also provide Down Payment Bonds!

You can call FIA Surety right now for more details: 856-304-7348  (Yes, we mean right now.)

First Indemnity of America Insurance Company, Morris Plains, NJ

 

173. Mistaken Identity: Surety Bonds

Steve GoliaLeave a comment

Your client needs a performance bond. It’s not a big one. This shouldn’t be too hard…

You submit it to the bonding company using their “E-Z, Quick, Fast, No Sweat” bond app and get rejected! Not because of the applicant – it was because of the type bond.  The underwriter gave a brief explanation, “We can’t write this because there is no contract.”   Waaaaaaaa?!

This is clearly a case of Mistaken Identity. Now we’ll help you avoid this trap and explain how to efficiently get the business written.

True Fact #1: ALL Performance Bonds guarantee a written contract between the Obligee (beneficiary) and the Principal (applicant).

True Fact #2: With Performance Bonds, the obligee is paying the principal to do the work described in the contract.

  • If the obligee is the local township
  • If there is no contract between the township and the applicant
  • If the township in not paying the applicant to do the work, then…

You actually need a Site / Subdivision Bond and that Quick, Easy app won’t get it. You also probably need a new surety, because most are reluctant to provide these. That’s where we come in!

FIA Surety is a bonding company that has specialized in these opportunities since 1979. Make no mistake, we actually like them! Big or small, we get them done.

Call us with your next Site or Subdivision Bond.

First Indemnity of America Insurance Company
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
Office: 973-541-3417
Visit us: www.fiasurety.com
We are currently licensed in: NJ, PA, DE, MD, VA, NC, SC, WV, TN,  FL, GA, AL, OK, TX

185. Surety Bonds Are Not Fair!

Steve GoliaLeave a comment

Why are some surety bonds better than others? Why can small ones be harder to get than big ones?

Construction companies are among a bonding company’s most important clients. They are the source of Performance and Payment bonds which guarantee their construction contracts. For a bonding company (surety), these are probably the largest and most lucrative transactions. So why would the surety risk losing a client by giving tough terms on an obviously small bond?

There are many different types of surety bonds, and contractors may need a variety of them: Bid bond, performance, payment, maintenance, license, permit, court, are a few. In this article we will discuss why the big ones (large dollar amount) can be easier to get than small ones – even for the same applicant.

The answer to this question lies in the nature of the obligation, not the dollar amount. A good way to illustrate this is to compare a Performance bond to a Wage and Welfare bond.

Performance Bond

Performance and Payment (P&P) bonds concern construction contracts. They guarantee that the applicant will perform the project in accordance with all aspects of the written contract, and they will pay the related bills for suppliers of labor and material.

Wage and Welfare Bond

This type of bond is needed by union contractors (companies that employ union workers.) The W&W bond guarantees that the construction company will pay the union wage rate as required and make the related periodic contributions to the union benefit plans such as the pension and health insurance program.

It’s Just Not Fair!

P&P bonds range in amount from a couple hundred thousand dollars to tens of millions, whereas a W&W bond is often under $100,000. So why can it be easier to get the big one? Why can a $500,000 performance bond be easier to get than a $50,000 union bond?

The answer lies in the nature of the obligation – and the worst case scenarios.

Let’s assume the contractor goes out of business. With a performance bond, the surety steps into the contractors shoes. They must make arrangements to complete the project in accordance with the contract. The beneficiary of the performance bond (aka the obligee, the owner of the contract) continues to pay out the remainder of the contract amount as work progresses. Now they pay the surety performing the completion. This is called the “unpaid contract amount.” Even if the contractor falls flat and has no money personally, the unpaid contract amount is a resource the surety can depend on – and hopefully avoid a net loss on the claim.

The union bond is a promise to pay funds at a future date. It is a financial guarantee – the toughest type of surety obligation. The underwriters will look into their crystal ball… Oh, sorry, we don’t have one.

The surety is guaranteeing the future solvency of the construction company, not an easy task. And if they are wrong, if the contractor cannot make their union payments because they have no money, then there is no money for the surety, either.

Q. Who is likely to pay the wage and welfare claim?

A. The surety (a net loss)

It is the tough nature of some small bonds (wage and welfare, release of lien, supersedeas) that makes them exceptionally hard to get – often requiring full collateral. On the other hand, the surety may give the same applicant a $300,000 performance bond based primarily on just their credit report!

Bottom line: It just ain’t fair, but we never promised it would be – because the nature of the obligation differs. That is the deciding factor, even more than the dollar amount of the bond.

Want to deal with real experts on your next surety bond? FIA Surety, a NJ based insurance company, provides Bid, Performance, Site and Subdivision Bonds.

Steve Golia: 856-304-7348
FIA Surety / First Indemnity of America Insurance Company

For more cool bond stuff “follow” this Blog (Upper right hand corner)

174. When You Can’t Get a Bid Bond

Steve GoliaLeave a comment

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

Visit us Click!

180. Completion, Performance, Site, Subdivision Bonds: What’s the DIF?!

Steve GoliaLeave a comment

Po’boy, hoagie, grinder, heroe, sub: You get the idea. Different names for the same thing. 

So what about these surety bond names?  Over the years I’ve heard them all used for the same transaction. But are they really the same?  No, No, Nooooooooo!  We will explain.

“Who’s” on first: (brief definitions)

Principal – party whose actions are the subject of the bond

Obligee – is the party protected by the bond

Surety – is the bonding company providing the guarantee

  • Performance Bonds: Issued in connection with a contract that is referenced in the bond.  Guarantees that the principal will complete the project on time and in compliance with all written conditions.  The obligee is the beneficiary of the bond and is the “project owner” of the contract (they are hiring the contractor and paying for the work).  The obligee could be a public or private entity. A Dual Obligee Rider could add parties with a financial interest – such as the construction lender. They would share in the bond amount in the event of a claim.
  • Completion Bonds: Issued in connection with a construction loan. These are issued directly to the construction lender and protect the loan.  The lender is not a party to the construction contract.
  • Another version is a Movie Completion Bond for the film industry – guarantees that the new movie gets produced and “in the can.”
  • Site Bonds: Issued in connection with a specific lot.  Could be a business owner modifying the company property, parking lot, driveways, etc.  The public body with jurisdiction over the job site is the beneficiary (obligee.) The bond promises that “public improvements” required by the planning board will be built at the principal’s (property owner’s) expense.  Such work is not paid for by the township.  The township is not party to a construction contract. The principal pays for the work out of pocket, or though a construction loan.
  • Subdivision: This is the same as a site bond, although on a larger scale. The difference is that it involves multiple sites all covered under one bond.  The bond promises that “public improvements” required by the planning board will be built at the principal’s (the land owner / developer’s) expense.  These improvements are later deeded over to the township – such as streets, curbs, lighting, water and sewer lines, etc. These bonds do not concern the building of homes or buildings. The guaranteed work is not paid for by the township.

It’s no surprise that folks use these terms interchangeably.  They all involve the contractor’s performance, but with a slightly different purpose.

You can assume all bond people know these differences.  But can you assume all bonding companies provide these bonds?  No, no,  nooooo!

Developers are the applicants for subdivision bonds, but any business can require a site bond. You need to know that FIA Surety is a leading provider of Site and Subdivision bonds. We write them and we’re good at it!

Next time you need a site, subdivision or performance bond, give us a call.

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

FIA Surety

Secrets of Bonding #152: I’m SO confused…

Steve GoliaLeave a comment

We recently had a long conversation regarding “Completion Bonds.” Think you know what they are?  We couldn’t agree on it!

  • Is a Performance Bond a Completion Bond? They do guarantee that a project will be completed. 
  • Is a Completion Bond required when a surety has a defaulted contract and they hire a completion contractor to finish the job? 
  • Are Completion Bonds required by lenders to assure that projects with construction loans are completed? 

Here are a few more confusing bond things:  

  • Working Capital does means the same as Net Quick: It is a measure of a company’s short term financial strength.
  • Net Worth is the same as Equity: What’s left over if the company sells everything and shuts down.
  • Sales = Revenues: The money a company takes in during a certain period of time.
  • Net Profit = Net Income: The after tax earnings of a company.
  • Under Billings = Costs and Estimated Earnings in Excess of Billings. A measure of the extent to which the contractor’s billings are not concurrent with (less than) the degree of job completion.
  • Over Billings = Billings in Excess of Costs and Estimated Earning. This measures the portion of the billings that are more than the % of completion.
  • Back Bond = Subcontract Bond: A Performance Bond given “back” by a subcontractor to the general contractor in support of their subcontract.
  • Site Bond = Subdivision: Subdivision projects are bigger and involve multi-unit housing. Bond guarantees the construction of “public improvements.”
  • Funds Control = Funds Administration = Escrow:  A professional paymaster handles all the money and pays the bills on a contract.  They pay everyone, including the contractor.
  • Retainage = Hold Back:  A % of contract funds held (retained) by the project owner or Funds Administrator to assure completion of the final contract details.  Then the money is released to the contractor.
  • Completion Bonds are technically called “Film Production Completion Bonds.” They guarantee a  Movie Producer’s work in financing / creating a film and getting it “in the can.”
  • FIA Surety = Your Bond Problem Solver: Our experts have been solving surety bond problems since 1970. We’ve seen it all (and know how to fix it.)  

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 #145: “You Can’t Fit Ten Pounds of S…” (Covering Contract Additions)

Steve GoliaLeave a comment

You know that old expression about jamming in too much. It’s true, and it applies to Surety Bonding like everything else.  “You can’t fit ten pounds of “STUFF” in a five pound bag.”

Check this out:

“Here’s what we’ll do: We will issue a $500,000 contract and bond it.  Then, once the surety is on board, we’ll issue an addendum for an additional $500,000.  The surety will automatically cover it and we’ll have the $1 million bond we couldn’t get in the first place!”

Would that actually work?  Yes, often it could because many P&P bonds state that they will automatically cover increases in the contract amount.

The surety finds themselves bonding a contract larger than originally intended – perhaps well beyond their comfort level. Sound underhanded?  It could be and it happens in multi-million dollar amounts. 

This scenario can also come up inadvertently – in an innocent way.  The contract has a large increase and the bond gets pulled along.  Either way, the underwriter is holding an obligation far in excess of their intended approval amount.

It’s the sureties own fault for allowing this to happen, right?  Uh, no! When underwriters caught onto this practice, they added a bond condition stating that increases of more than a certain percentage (i.e. 10%) require the prior written consent of the surety. No more free ride.  No more 5 pound bag.  If the contract is increased in violation of this condition, the bond can be invalidated.  That’s a big deal.

So you can’t jam a ten million dollar contract into a five million dollar bond, but is there a legitimate approach?  One that does not violate the relationship with the underwriter?  Yes!

One option is to issue a phased contract. The $10 million project has “Phase One” for $5 million, and a $5 million  P&P bond is issued.  When the work is completed and accepted by the obligee, the bond is rolled forward to the next phase.  In this manner, the bond is never worth more than $5 million, but it covers every part of a $10 million contract – just not all at the same time.

This method enables the principal (contractor) to stretch their capacity on a contract larger than the surety normally would provide.  The obligee still gets a project that is 100% covered: win / win / win!

Another idea would be to issue multiple contracts (if suitable) and bond them sequentially. This technique can be used when the nature of work is such that it can be logically divided, such as multiple buildings. A separate bond is issued for each contract.

Conclusion

Bonding companies intend to automatically cover minor increases in the contract amount.  But when a big addition is considered, they are entitled to exercise discretion over their exposure.

With open communications, there can be solutions where larger projects are bonded without risking failure to comply with the bond conditions.

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.)