surety bond

SECRETS OF BONDING #157: Bid Bond Quiz

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Is there anything less interesting than a bid bond?

They may not seem too exciting, but the lowly bid bond is an integral part of our surety business.  For contractors, they are often the key to acquiring new revenues.  If you don’t think they are important, watch what happens when a client is waiting for one that never arrives.

As surety underwriters, we spend a great deal of effort assuring these documents are accurate, delivered on time, and we track the outcome on each one.

Everybody knows about bid bonds, right?!  OK let’s see if you do…

True or False:

  1. If you decide to not use a bid bond you ordered, you have to send it back to the surety within 48 hours
  2. They have an expiration date
  3. A bid bond precedes every performance bond
  4. The surety can cancel the bid bond
  5. The dollar value of the bid bond equals the amount of the proposal it accompanies
  6. The surety must know the exact dollar value of the bid bond before they will issue it
  7. The premium for them must be paid in advance
  8. They remain active for up to six months
  9. It is better to use a check for security than a bid bond
  10. The same surety that issues the bid bond must issue the performance bond

OK team, how’d you do?  # of True______? # of False____?

They are all False!

  1. An unused bid bond has no value but it makes a great liner for your bird cage
  2. Never has an expiration date
  3. Some contracts are negotiated (no bid bond) or may require a surety capacity letter instead
  4. Like a performance bond, these surety instruments cannot be cancelled
  5. Most often the penal sum of the bid bond equals a percentage (10-20%) of the proposal amount
  6. Most bid bond amounts are expressed as a percentage of the proposal amount, not a dollar amount, to protect the confidentiality of the proposers bid. In such cases the exact dollar value is unknown in advance.
  7. Sureties are entitled to charge for them, but usually don’t
  8. Although not stated, most sureties consider them void after 90 days
  9. Wrong! If a performance and payment bond is not produced, the check can be forfeited
  10. Nope! Two different sureties can be used, even if a “Consent of Surety” was issued with the bid bond.

Bonus Question: If the bid is rejected because the surety’s credentials are found to be inadequate, can this result in a bid bond claim?

Answer: Theoretically, it should not. If the bond is declared inadequate, how can it be sufficient for a claim?

LOVE learning about surety bonds?  Take it to the next level. Here is what bonding companies and agencies use to train their people: Click!

Secrets of Bonding #154: Be A Bean Counter (The Importance of Bid Results)

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It’s not sexy.  Nobody has it on their business cards.  It may not be in your “official” job description.  But this article is the start of your new vocation as an official Bean Counter!

A major area of surety bonding is “Contract Surety.”  This refers to bid and performance bonds for construction contracts.  When we set up a new account, an amount of bonding capacity is established and the individual bond requests are processed within that line.  It is possible for a client to use up the full capacity of their line, then our underwriting department could consider granting an exception to support additional work.

Efficient management of the line can minimize instances where an exception is needed.  Here’s where the bean counting comes in.

We manage bonding capacity the way a bank runs a credit line.  A series of individual transactions (bonds) can equal the full capacity amount (referred to as the “aggregate”).  Bank credit lines work the same way.  For the bond or bank customer, it is advantageous to maximize the available credit.  Prompt reporting of bid results helps accomplish this objective.

Advantages Of Reporting Bid Results Promptly

  • When a bid bond is approved / issued, the underwriter debits the amount against the aggregate capacity. However, the full contract amount is used, not the dollar value of the bid bond.  For example, a 10% bid bond for $100,000 actually uses $1 million of aggregate capacity.  Therefore, when it is known that the bid is not likely to result in a contract award (the client is not “apparent low bidder”), this fact should be reported so we can restore the capacity.
  • Detailed bid results are needed on low bids in order to process final bonds. Example: Our guy has a low bid for $5,000,000. The second bidder is at $5,400,000.  Third bidder submitted $5,550,000. Because our bid is less than 10% below the second bidder, the adequacy of the contract amount is supported.  If our client is more than 10% below the second bidder, there will be an additional evaluation before proceeding with the P&P bond.
  • Bid Spreads – in cases where the bid spread is excessive, it is important to have a prompt discussion with us. If there is a bid calculation error, and the contract price is inadequate, there is a limited amount of time to withdraw the bid without penalty (such as a bid bond default / claim).  Learn more about bid spreads:  Click!
  • Low bids may be for lesser amounts than the original bid approval. Example: We approve a bid for an estimated contract amount of $9 million, but the actual bid goes in at $8,500,000 due to last minute changes and reductions. Therefore, when the low bid results are reported, $500,000 in capacity is restored to the aggregate.
  • Postponements – sometimes bids are postponed at the last minute, with no immediate reschedule date. The bid approval may never be used. If it dies on the vine we will restore the capacity immediately.
  • Withdrawal – clients may decide not to bid a project after ordering the bid bond. They may have determined that the plans are unclear or unacceptable.  Advise us so capacity can be restored.

If you are now sufficiently impressed with the importance of minding these small details, you may don your green eye shade and declare yourself an Official Bean Counter.  It’s not glamorous, but it is necessary for proper management of the bond account.  (Actually, we think it is glamorous!)

~ ~ ~

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 # 141: Surety Bonds and Zombies

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Zombies are bad.  They eat your flesh and brains.  Who wants THAT?!

Same goes for your construction business.  There are zombies that can ruin your bonding and eat up your business – destroy profits and your credit rating.  But the worst part is… it’s preventable!   

Does the zombie have a name? Yes, accountants call it “Fixed Overhead.”  This is a controllable expense that, if left unattended, can eat your flesh and brains (figuratively.) Let’s define the monster:

Fixed Overhead – Construction companies incur common fixed overhead costs. These are costs that do not vary with the level of the company’s output such as: accounting fees, advertising, insurance, interest, legal fees, labor burden, rent, office expenses, salaries, repairs, supplies, taxes, telephone bills, travel expenditures, and utilities. 

Now consider Variable Overhead – These costs vary in proportion to the amount of production. Variable overhead mostly relates to hourly indirect labor costs, supplies and utilities such as electricity, gas and telecommunications expenses.

The danger of fixed overhead is that, during times of reduced volume / revenues, the expense does not automatically go down. This means when sales are weak, your expenses do not diminish proportionately.  These bills keep rolling in relentlessly.  They just don’t care!

The only hope construction managers have is to be cautious when incurring such expenses, and always work to reduce them so the company can survive the inevitable troughs that come between the peaks of activity.

Here are 40 ideas that may help reduce / eliminate fixed overhead:

  1. Lease-purchase options for vehicles and equipment
  2. Employ part-time mechanics and administrative staff
  3. Pay employees for use of their vehicles
  4. Keep equipment longer
  5. In unprofitable years, slow down depreciation schedule
  6. Overhaul facilities and equipment instead of purchasing new
  7. Review / quote insurance annually. Consider self-insurance or association captives. 
  8. Eliminate overlapping insurance coverages
  9. Improve safety program
  10. Examine Workers Compensation classifications
  11. Consider increasing deductibles
  12. Eliminate over insurance, such as reducing inventories
  13. Deactivate, de-register and uninsure unused vehicles
  14. Challenge property valuations (taxes)
  15. Avoid the expense of audited financial statements if possible
  16. Reduce accounting fees by assisting your CPA
  17. Consider using a local CPA rather than a national firm
  18. Lease unused space
  19. Consider a smaller building
  20. Consider high density stacking and storage systems
  21. Renegotiate rent or move
  22. Get indefinite lease with 6-month cancellation rather than fixed term
  23. Pay moderate salaries with bonuses for exceptional performance
  24. Reduce number of management staff
  25. Reward managers with stock instead of cash
  26. Trim fringe benefits (deferred compensation, automobiles, club memberships, etc.)
  27. Cut managers first
  28. Pay bonuses to field staff first
  29. Pay raises based on merit, not cost of living
  30. Cross train office staff to eliminate temporary employees
  31. No vacations during “busy season”
  32. When hiring, seek individuals whose employment qualifies for tax credits
  33. Four day work week
  34. Charge employees for replacement tools
  35. Put company ID on tools, keep records
  36. Centralize tool storage with check in / out system
  37. Close dormant companies
  38. Consider solar panels and solar water heat
  39. Monitor unemployment claims
  40. Consider an office maintenance service instead of employing a janitor, or use a part-time after hours person

Conclusion

Companies can achieve better financial performance, support their bonding and banking and survive the weak years by controlling these relentless expenses. 

Remember: You can’t kill a zombie because technically they’re already dead.  And you can’t entirely eliminate fixed overhead either – but good managers work to control it.

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

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

First Indemnity of America Ins. Co.

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Secrets of Bonding #130: Rob Peter to Pay Paul

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It’s only human nature.  You have a problem, a need.  A financial issue has come up and the timing is inconvenient. So if you just move things around, you can handle the problem and back-fill later.

For construction companies managing multiple projects, not every job goes smoothly.  Construction work is complicated with many variables and uncontrollable elements.  Sometimes the only solution is to throw money at the problem. When cash flow on the project is “temporarily” insufficient, there is a natural temptation to borrow money out of another healthier contract, with the intention of paying it back at a later date. Is this bad?robbing_peter

Trust Funds

From a legal standpoint, money a general contractor (GC) holds, that is destined to pay the subcontractors (plumber, electrician, HVAC, etc.) he hired on the project, is held “in trust” for the benefit of those subs.  The law says it is their money, and the GC must safeguard it.  Therefore, any money in this trust fund category cannot be “loaned” to another of the company’s projects.

Bonded Contracts

When a Performance and Payment Bond covers a contract, the payment section of the bond guarantees that suppliers of labor and material will be paid.  This includes the subcontractors that were hired by the GC. The bonding company is guaranteeing that the trust funds will make it into the hands of the subs.

If money has been diverted into another project by the GC, and subs remain unpaid, they are entitled to make a claim against the payment bond.  Sureties are risk averse and strive to avoid all bond claims.  Underwriters are well-aware of the “Peter Paying Paul” scenario where the funds are never restored and a payment claim results.

Protective Measures

Bonding companies may take steps to prevent such misapplication of funds.  One is Joint Checking.  Under this procedure, the project owner (paying for the work) issues joint payee checks in the name of the GC and the sub or vendor.  Now there is absolute certainty that the funds will get to the sub as intended.

This procedure does not cost money to implement (other than the administrative expense), but is dependent on the willingness and continuing participation of the project owner.

Another protective device is the use of Funds Control, also called Funds Administration.  Think of this as a professional paymaster who pays everyone on the project, including the GC.  Money goes from the owner to the funds administrator, who then issues all the checks.  By limiting the GC’s money handling, misapplication of funds to another project is prevented.

The funds administrator charges a fee, which is paid by the GC.  For this procedure to be successfully implemented, the owner must officially agree to pay the funds administrator instead of the GC.

Conclusion

When it comes to money handling on construction projects, many people have a stake in the process.  The GC’s obligation is more than to simply complete the work.  They have a fiduciary responsibility to handle funds properly and assure that deserving parties are paid.  That’s what the bonding company expects, and it’s simply the right thing to do.

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

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

First Indemnity of America Ins. Co.

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

Secrets of Bonding #119: Lien On Me

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“It ain’t what you don’t know that gets you into trouble.  It’s what you know for sure that just ain’t so.”  A famous quote by…?

Let’s go over what you need to know about construction liens.  They can have a big impact on construction contracts and companies.            Click for mood music!

A Mechanic’s Lien is filed when a subcontractor or supplier on a construction project fails to be paid. The lien is a form of claim filed against the project itself. For example, the unpaid mason (subcontractor) files a claim against the building owner. “My bricks and labor are in that façade. I can’t take them back now, but assert that the general contractor has failed to pay me!”

Liens are used on non-governmental projects. Typically, claimants are prohibited from liening a public building – which is where Payment Bonds come in. Issued by surety companies, the payment bond is a resource to protect suppliers of labor and material from non-payment.

So far that’s all pretty straight forward. On private contracts unpaid subs and suppliers can file a lien. On government jobs they make a claim on the payment bond instead.

Here are some implications worth knowing.

Release of Lien

The lien can be released, or “bonded off,” by the filing of a (you guessed it) Release of Lien Bond. This removes the lien from the property in question, which is beneficial for the project owner, while still providing financial protection for the plaintiff (unpaid sub or supplier.) The dispute is still unresolved, but the plaintiffs security shifts from the physical project to the surety bond.

A release of lien bond is not easy to obtain. But if a payment bond was issued, that surety has motivation to prevent a payment bond claim, and issuing the lien release bond could do so.

When the lien release bond is filed, it takes some pressure off the defendant (general contractor). You can assume the unpaid mason hopes the lien will cause the owner (who is the recipient of the lien) to force the GC to respond. When the lien is bonded off, that effect disappears from the project owner – but not the surety.

Stop Notices

California, Mississippi, Arizona, Alaska and Washington use a slightly different procedure. On governmental projects a Stop Notice is filed which freezes a portion of the project funds to protect the claimant. This forces action on the part of the GC, or they can file a Release of Stop Notice bond to keep the project funds flowing while dealing with the dispute.

Understand the Difference

Mechanic’s Liens are filed against the project owner.  The claim attaches to the real property and is recorded against the property title – which therefore restricts the owner’s ability to dispose of the property.  

With a lien, the claimant may be paid regardless of whether the owner paid the GC.  In fact, the owner may have to pay twice: First to the GC then again to the sub / vendor claimant, to remove the lien and clear the property title.

Stop Notices “trap” contract funds, assuming there are funds to trap.

If the claimant files a Stop Notice after the funds have been disbursed, it is useless. 

Other basic differences:

  • Unlike a lien, the stop notice does not give the debt any security.
  • The stop notice is sent to the relevant parties, but it is not legally recorded such as a lien filed against the property title.  The claim is inherently less official and is sometimes even ignored because of it’s less formal appearance.
  • Unlike a Mechanics Lien, the Stop Notice can affect the entire project because it freezes a portion of the contract funds – which the GC may need in order to continue working.

NOTICE: The author is not an attorney and is not giving legal advice.  This article is for entertainment only.  Gimme a break!

mark-twain

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

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

First Indemnity of America Ins. Co.

Secrets of Bonding #118: Bonding Company = Girlfriend

Steve Golia2 Comments

I’ve been in the surety business for a long time.  As a student of the industry, I have observed the dynamics that occur between bonding companies and their clients.  My conclusion: Bonding Companies are like Girlfriends!

(My comments are written from a male point of view, but I’m sure you can flip this to be applicable if the reader is “non-male.”)

Think about relationships you’ve been in.  Don’t they always have a “love / hate” aspect? Jokes about relationships often capitalize on this reality:

Marriage is a three-ring circus. First the engagement ring, then the wedding ring, then the suffering.
– Milton Berle

My wife is a light eater … as soon as it’s light, she starts to eat. 
– Henny Youngman

“I am” is reportedly the shortest sentence in the English language. Could it be that “I do” is the longest sentence?
– George Carlin

And for the ladies:

What’s the difference between a boyfriend and a husband?
About 30 pounds.
– Cindy Garner

As very sophisticated types, we know how to deal with the technicalities of these relationships.  It isn’t always easy, but it’s worth it.   Bonding is pretty much the same!

Step One

How does a construction company gain the support of a surety?  It starts with a flirtation and then “getting to know you.”  The underwriter receives information about a bond that is needed. If there is a spark of interest, an application and financial statements are submitted. 

The construction company wants to look attractive:

  • Here is what we’ve accomplished!
  • This is how much money we’ve made!
  • We can really perform!

Think of this as the dating stage.  It is exhilarating and intense! There are probing questions and well-crafted answers.  Both parties want to achieve success and avoid failure / embarrassment. The same as in romance, the underwriter (girlfriend) will walk away if they find that the contractor (suitor) is dating other underwriters.  This is why bond producers may approach only one market at a time.  No girl wants a playboy who may be disloyal.

Ravishing Wedding Rings Clipart Also Appealing Wedding Rings Clipart Hd Pictures 4 Boostnow Wedd - ~ zxtzdb ~

Step Two

If the relationship blossoms, wedding bells may chime! They tie the knot with a pre-nuptial / general indemnity agreement that says “We’re in this together.  But hurt me and you’ll PAY.” 

Step Three

Eventually they become old married folks.  The contractor gripes that “he/she is never satisfied.”  More info, more questions, more money spent to keep the surety / spouse happy. It NEVER ends.  But the contractor needs the surety and works to keep things on track.

Is the underwriter frustrated?  Yes…  “I have to beat everything out of the contractor.  It’s like pulling teeth!” The contractor may be slow in providing the answers and info the underwriter needs to keep the bond account in healthy condition. “I thought we were in this together!”

There is an element of pain in the relationship, but both parties gain if they keep it together.

Yente  (Click for mood music) cupid

So where does the bond producer / agent fit in?  They are the dating service that brings the parties together.  They succeed by matching the contractor with the right surety.  The role as cupid continues as we shepherd the relationship forward, keeping the info flowing so bonds are available when needed.

The fact is, bonding involves more than paperwork.  It involves people, their perceptions and preferences.  The seasoned bond producer will make the match and guide the relationship forward for the benefit of all parties.  

Sureties, can’t live with them, can’t live without them.

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

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

First Indemnity of America Ins. Co.

Secrets Of Bonding #115: The Most Important Question in Bonding

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When Surety Bonds are needed, there is always a questionnaire to fill out.  Why?  Because the underwriters need some basic info, and quickly.  The app asks for company location, ownership, plus facts about the operation and its history. 

So many questions!  Are they all relevant?  Are they all needed?  Actually… they are not equally important.  In fact there is one question on the app which is undoubtedly 

THE MOST IMPORTANT QUESTION OF ALL

green_shade

 

Let’s test your underwriting skills!  Here are some typical bond app questions.  Are they hot ones, or just background music?  Which question is the most important for bond underwriters?

  1. Q. Date Business Formed This is very important because many surety reinsurance treaties require that all the bond clients have certain longevity – such as minimum 3 years in business.  If the applicant has less than 3 years, some underwriters will stop reading at this point and decline.
  2. Q.Has the company, any affiliate or subsidiary, or any owners / spouse or companies in which they have had an ownership interest or managerial role ever experienced a bankruptcy?  Here is another important question, a deal killer with many underwriters.  They may not want to hear about the circumstances of the BK or subsequent positive developments.  Their reinsurance may forbid supporting such applicants.
  3. Q. Formal Buy-Sell Agreement in place? This question concerns continuity.  In the absence of key people, how will the company survive?  How will the bonded jobs get completed if the boss gets run over?
  4. Q. Is full corporate and personal indemnity by all owners, spouses, and affiliates provided? This is important b/c full indemnity is normally required and some applicants are reluctant to provide it.

Got your answer?  Read on.

 

Conclusion

**All the questions are relevant.  That’s why they are on the questionnaire.**

Let that sink in…

They are ALL important.  So for the underwriter, the question that jumps up off the page is the one left unanswered.

Why do people fill out the app and skip one question?  It has to be either carelessness “Sorry, I skipped over it by mistake,” or intentional “If I answer that question honestly, I may not get the bond approval!”  Both reasons are bad.

We can assume that “N/A” is an option for an irrelevant question, or “Unknown” if you have no info.  But a blank is a problem b/c cause the reader doesn’t know how to take it.

Many facts are double checked during the surety underwriting process.  But for a large portion of the info, the market is simply trusting the applicant to be truthful and transparent.  They depend on having full disclosure, and are entitled to it as the guarantor.

So please, please, please don’t skip any questions.  The app is often the underwriter’s first opportunity to meet the client.  Put your best foot forward by answering completely, and attach additional comments if an explanation is in order.

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.

Secrets Of Bonding #114: Offer a Concrete Solution?

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This Concrete Subcontractor has a big problem.  How would you solve it?

The Facts

  • The bond applicant, we will call ‘Subby,’ is a highly experienced subcontractor who performed concrete work on a school job.
  • Subby was not required to give a Performance & Payment Bond to the GC.
  • The GC, “Gigunda Const.,” has given a P&P bond to the school district.
  • The GC claims that the concrete Subby installed has failed a critical strength test. As a result, Gigunda is demanding a 2 year maintenance bond to cover potential defects.
  • Subby has disputed this claim and feels they are in compliance with the contract.
  • Since the requested maintenance bond will run to the GC and not the school district, it appears the issue must be resolved from within the subcontract terms (not directly with the school district).
  • Subby has an ongoing relationship with a major bonding company: “Wonderful Surety.”
  • Wonderful Surety has refused to provide the maintenance bond.
  • Subby’s agent called us for help. Is it possible we may support it?

Consider the Issues

  1. The work is not covered by a performance bond.
  2. Subby’s current surety has refused to support them.
  3. If Subby ignores the problem, the GC may ultimately have a performance claim on their bond. The GC, and their surety, are responsible for the entire project, including the subcontracted work.
  4. If Subby ignores the problem, the GC may have to fix it – and will back charge them for the costs.
  5. If Subby doesn’t provide the maintenance bond, the GC will withhold the remaining money in their sub contract.
  6. Gigunda’s subcontract may have imposed the GC contract conditions automatically on to the subs (possibly including concrete strength requirements).
  7. It would be normal for the subcontract to state that Subby must protect Gigunda from claims arising from their work.concrete_truck

Possible Solutions

Which One Do You Like Best?

  1. Subby can ask a new surety to provide the maintenance bond.
  2. Subby can rip out the questionable work at their own expense and re-do it to Gigunda’s satisfaction.
  3. Subby can review the subcontract to determine what strength requirements were indicated, and if Subby is actually in violation.
  4. Gigunda can press their surety to issue the maintenance bond. (Although this would be unlikley if Gigunda is the beneficiary.)
  5. Subby could refuse to get the maintenance bond or replace the work (do nothing.)
  6. Subby could ask Gigunda for a contract amendment providing additional money to rip out / replace the questionable work.
  7. Subby could let Gigunda hold money for 2 years in lieu of the bond (the entire bond amount).

So you chose: #_____

 

Conclusion

The step we recommend is #3, “review the subcontract requirements.”

Subby is an experienced concrete company that is convinced their work product is correct. They are not aware of the strength requirements that are the basis of this dispute – but a careful legal review is needed.  

Subby should also ask the GC to cite where these strength requirements appear in the subcontract.

If the work is in violation of the subcontract, Subby will have to choose between paying to replace it now, or face the difficult task of obtaining the maintenance bond. It is possible that no surety will support this without requiring substantial collateral, or maybe even full collateral.  

Pretty tough, but the bond would offer some important advantages even if full collateral is required:

  1. Subby could totally avoid the cost of replacing the work if the concrete performs successfully. Only time will tell, and filing the bond gives them that time.
  2. The bond is better for Subby than letting Gigunda hold funds. If Gigunda concludes the concrete has failed during the 2 years, they will have to go through the surety’s claim department for recovery.  That’s better than just letting the GC use their money if they want. This type of advantage always exists for bond applicants when choosing between a surety bond or putting up cash directly with an obligee / beneficiary.

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.

Secrets of Bonding #109: Surety Letters – You Get What You Pay For

Steve Golia2 Comments

A Surety Letter can be used like a bid bond.  It may be required by private owners (and General Contractors in connection with subcontracts) as a means of assuring the contractor / bidder can provide a Performance and Payment Bond upon award of the project.  Private owners are not the only ones who use this procedure.  You may even run into this requirement on public jobs.

The Surety Letter is a statement of the principal’s (contractor’s) ability to provide a surety bond.  They may seem like an easy and useful alternative to a bid bond.  After all, it’s a letter. That has to be easier than a bid bond!

Cost

Theoretically, bonding companies are entitled to charge for bid bonds.  They are binding financial obligations and sureties occasionally pay out claims on these.  The industry practice, however, is to waive such charges.

When it comes to the surety letter, there is no financial obligation.  They are usually issued for no charge.  You can’t make a claim on one, and they are not a guarantee that a P&P bond will be provided.

So when a surety letter accompanies a proposal, exactly what does the project owner get?

The key points are:

  1. Sufficient Authority  Who wrote the letter? The best letters are written directly by bonding companies on their letterhead.  This is important because the author can bind the surety company. If they say they will provide a P&P bond, you can take that to the bank.  Less effective letters may be written by individuals who are not direct employees of the bonding company and who may not be able to legally bind them. Hint: The letter is stronger if a power of attorney is attached.
  2. Escape Hatch Typically these letters have a disclaimer that says there is no promise to provide a P&P bond. It may say the underwriter reserves the right to approve or disapprove performance bonds based on the client’s circumstances at the time the bond is requested. (Question: Do bid bonds have an escape hatch?  See below *)

What does all this mean? When a surety letter is used, it always proves one thing: The contractor has some form of a bonding relationship.

However, depending on the content of the letter, it may not include any form of commitment.  Such letters are an “indication of bondability” leaving the reader to speculate whether a P&P bond will follow.

dependability

To what extent can the project owner rely on a surety letter?  Considering most are only an “indication,” not much!  Bid bonds are binding obligations assumed by sureties, and claims can be filed against them.  If they both are available for little or no charge, which would you rather have?

* Answer: Bid bonds never contain an escape hatch.  If, upon award, an acceptable P&P bond is not provided, the surety will likely face a bid bond claim.

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.

Secrets of Bonding #108: Work On Hand – So Mysterious and Beguiling

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mysterious-eyesThe confusion is amazing.  Why is this subject so mysterious and perplexing for many professionals?

Let’s start with something really simple: What is “Work On Hand” for a construction company? 

This is a crucial question because when you get bid and performance bonds, there is always an aggregate capacity limit, which is calculated using the Work On Hand (WOH).  So you MUST know how to figure it.

Do you see the correct definition?

  1. The incomplete portion of all bonded projects
  2. The incomplete portion of all projects
  3. The unbilled portion of all bonded projects
  4. The unbilled portion of all projects
  5. All contract costs
  6. Contract price minus costs
  7. Original contract price minus costs incurred to date
  8. Contract price minus approved (by architect or owner) billings
  9. Contract price (including change orders) minus current estimate of total costs
  10. The sum of open (undecided) bids plus the unbilled portion of all projects

You like them ALL?!  They sound pretty good, but unfortunately… none are correct.  The bonding definition (that’s used throughout the industry) is based on the accountant’s approach.  It’s mysterious. And only one answer makes sense and is correct.

Dive In

If you have followed our articles, you know that billings are not part of the answer, even though many contractors like to use this approach.  They may choose #4 “The unbilled portion of all projects” because of their need to monitor cash flow.

To rely on this approach, you must depend on the project owner to PAY CORRECTLY based on the degree of completion.  In other words, when you are 50% complete, you should be paid 50% of the contract amount. To continue this fallacy, therefore, when you make your last billing to reach 100% of the contract price, you must be complete with the actual work.

The problem is that the project owner does not know the cost of the remaining work, which defines the degree of completion.

Challenging question: How reliable would it be to use billings to determine the WOH if the project was unprofitable? (costs exceed the contract amount)

The Truth Revealed

Accountants tell us that the degree of completion and the remaining WOH are defined by costs.  The reason? It is because regardless of the state of the billings, the project is not complete until there are no more costs left to incur.  When the job doesn’t need one more brick or hour of labor, it is 100% complete.

The Secret Formula

WOH consists of the following:

  • Current estimated costs to complete on all projects, plus
  • The full amount of new contracts just started, plus
  • The full amount of undecided bids and contract proposals

Beguiled no more! If a contractor says “The job is going well. We are already 60% billed!” You say “Great, are your cost projections within budget?”

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.