surety bond

Secrets of  Bonding #103: “Expert” Surety Quiz

Steve Golia5 Comments

If you have been reading our surety articles (well over 100 have been published), you may know SOMETHING about surety bonds by now.  So let’s see if you know more than the basics!

(Answers and your Award appear at bottom.)Test

Begin!

  1. When calculating Working Capital “as allowed,” what portion of an HVAC contractor’s Inventory is included when analyzing an audited Balance Sheet?
    1. 50%
    2. 75%
    3. 100%
  2. Why do underwriters prefer to NOT issue Performance and Maintenance bonds simultaneously?
    1. The bond premiums cannot be accurately calculated
    2. It is not yet known if the project will be built correctly
    3. Performance Bonds may automatically cover one year of defective materials and workmanship
  3. Which accounting method is not acceptable to sureties and why?
    1. Completed Contract, because it excludes open projects
    2. Percentage of Completion, because unearned profits are excluded
    3. Cash, because Accounts Payable, Receivable and other items are excluded
  4. Which if the following assets is treated as Long Term by accountants and Current by surety analysts?
    1. Cash Value of Life Insurance
    2. Face Value of Term Insurance
    3. Pending liability claims
  5. What is the % of bid spread? 1st $125,000  2nd $ 168,000
    1. 34%
    2. 26%
    3. 34%
  6. The purpose of a Dual Obligee Rider is:
    1. Prevents claimants from Dueling over the proceeds of the bond
    2. Protects the surety from paying the bond amount more than once
    3. Assures that all “interested parties” can make a claim
  7. A “Capped Bid Bond”…
    1. Has a definite expiration date
    2. Has a maximum aggregate
    3. Has a maximum penal sum
  8. Which of these financial statement assets would be disallowed by surety underwriters in their analysis?
    1. Stockholder Loan Receivable
    2. Stockholder Loan Payable
    3. Stockholder Deferred Bonus
  9. What is the Debt to Equity Ratio and how will the surety respond? Total Liabilities and Stockholders Equity: $1,450,000 Stockholders Equity: $250,000
    1. $1,200,000 “Too low!”
    2. .17:1 “Let’s write bonds!”
    3. 4.8:1 “Sorry, we’ll pass.”
  10. When is the surety exonerated on a Labor and Materialmen’s Payment Bond?
    1. Upon fulfillment of the contract provisions and expiration of the applicable lien period
    2. One year after completion of the work
    3. When the original bond document is returned to the surety

 

Answers:

  1. C, because with an Audit, the CPA has confirmed the asset
  2. B, they may want to avoid continuing their obligation if the project encountered difficulty during construction
  3. C
  4. A
  5. A: 168,000 – 125,000=43,000. 43,000/168,000=25.6 or 26%. The low bid is 26% below the second bid.
  6. B
  7. C
  8. A
  9. C (Trick question: You must first calculate “Total Liabilities” which is 1,450,000-250,000=1,200,000.)  Then 1,200,000/250,000=4.8 or 4.8:1
  10. A

Awards

All correct:

7-9 correct:

Less than 7 correct:  

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 #102: Little Bonds That Bite

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 “The water looks great!  Let’s go in!” 

Like nasty little fish with razor sharp teeth, there are many small surety bonds that can cause BIG problems.  Here are some to watch out for.

piranha2Appeal Bonds – Anyone can be sued.  If a judgement was rendered and you wish to appeal the decision, you will need one of these.  ALL bonding companies are reluctant to provide them.  Plan on putting up liquid collateral in an amount greater than the judgment.  The alternative: Don’t appeal the decision, pay it.

Other Court Bonds: Replevin, Injunction, Release of Lien, all can be hard to obtain.  The Release of Lien normally requires full collateral.

Fuel Tax Bond– Any bond with “Tax” in its title can be tough.  These are guaranteeing future payments.  Financial obligations are the most difficult for sureties to support.  Plan on a rigorous underwriting process with the likelihood of collateral required PLUS full indemnity.

Dealer Bonds– Used Car Dealers, Milk Dealers, are some examples.  These guarantee compliance with applicable laws and proper handling of funds.  If the applicant is a new company and lightly financed, underwriters run for cover.piranha1

Customs Bonds– There are many different kinds.  Import / Export companies may be set up to qualify for these but other firms can have trouble. A Single Entry Bond is needed to import a shipment without delay, i.e. perishable or time sensitive goods.  The applicant’s financial data must be appropriately dated, correct in form, and show adequate strength.  Not everyone is prepared for this.  If you can’t get the bond, your pomegranates may rot on the dock.

Utility Deposit Bond– Required by the power company on new commercial accounts. In the absence of demonstrated financial strength, collateral will be required.

Lost Instrument Bond  “Hillary, have you seen my saxophone?”

Actually, these concern lost or destroyed FINANCIAL instruments such as a check or security.  These bonds have a long term, only one premium is normally collected, and they can be the subject of fraud.  Sureties are “not fond of them.”piranha3

Bid Bonds– Their dollar value may be low – resulting in the expectation that they are easily obtained. Wrong! The underwriting is based on the potential Contract Amount which may be five or ten times larger.  The process can be difficult if the company is young or financial strength / credit is lacking.

Wage and Welfare Bonds-These are needed when contractors set up relations with a labor union.  For underwriters, this is the least desirable part of the account.  A company that can get a $250,000 performance bond may find that the same surety requires full collateral for a $20,000 labor union bond.  Ugh!

Solution
The fact is, there are many nasty little surety bonds.  They can disrupt a company and its relationships when they are hard to obtain.  Failure to get them can be fatal!  These small bonds can have a big impact.

The best step is to deal with an expert in handling such transactions.  Go to a bonding pro for advice and market access.  Specialists often know how to resolve these problems.

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 # 95: PLASTER – Not The Solution To Bond Problems

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apply-plasterIn construction there are physical problems you can solve by plastering over them.  In the world of surety bonds, managing, massaging, covering over, (plastering) is sometimes undertaken to deal with negative facts or situations that are hindering the issuance of surety bonds.

Bond underwriters all know the great earnestness with which bid and performance bonds are requested.

“We need a bid bond because we need the project to get the revenues to meet our obligations and have a successful year!”

The pressure’s on! Sometimes that high level of motivation leads people to take extreme measures… Where do you draw the line?

Let’s talk about some real life examples and you decide (our opinion to follow):

  1. Joe, the founder / owner of ABC Company has an unavoidable problem with bad results.  It could be the bankruptcy of their largest client, forcing ABC into bankruptcy.  It could be an accident resulting in a lawsuit and devastating judgement against the company.  As a result, a new company is formed with Joe’s adult child as owner and President.  Joe is not an officer and officially functions as a consultant to the company, even though he really runs the show.  Is this legit?
  2. Smith Co. cannot get the bonding capacity they need because of poorly or improperly prepared financial statements from their accountant.  They decide, as of the next fiscal year, to engage a Certified Public Accountant experienced with construction clients. Is this appropriate?
  3. For Ajax Inc. the first half of the year did not meet expectations, but the year in total should be OK. When the bonding company asks for their 6 month financial results, the company makes up an excuse saying they have a software problem and cannot produce the statement. The plan is to stonewall the underwriter and only provide the fiscal year-end. Does this really hurt anyone since the 6 month statement is relatively less important?

Before deciding on these specific circumstances, let’s look at the big picture. What is the nature of the relationship between the contractor and surety?

The surety is paid to take a risk on behalf of the contractor, they become their guarantor.  It is a true partnership in the sense that they succeed or fail together. Everyone loses if the contractor defaults on a project.

The surety bases their underwriting decisions on info as provided by the applicant, and depends on them to be “forthcoming.” To put it bluntly, intentionally misrepresenting or concealing relevant facts may be considered fraudulent.  Then there is the gray area.

In our three examples, did you find #1 objectionable? This situation does occur, and we appreciate the motivation. The underwriter might choose to accept it on the condition that the consultant gives personal indemnity, even though he is not a stockholder.

#2? This seems like an appropriately timed, logical response to the problem. A-OK!

#3? The sin being committed is the violation of trust with the surety.  If there is a real partnership, they will proceed based on full disclosure, knowing all the good and bad. Even if the info being withheld is irrelevant, it is inappropriate for one party to intentionally conceal it for their perceived benefit.

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 #93: Let’s call the whole thing off! (All about Agents)

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 Independent Agent, Captive Agent, to-may-toe, to-mah-toe: Let’s call the whole thing off! *

  •  What’s the difference between independent and captive agents?
  • How does an insurance company differ from an insurance agency?
  • Why does it matter?

In this article we will sort out the differences and explain why it is important to know.

The bonding company is like the manufacturer of the product. The bonding agent is the manufacturer’s rep, the sales person who performs the retail side of the transaction.

When it comes to bid and performance bonds, most contractors obtain their bonds from bonding agencies. However, some may be dealing directly with bonding companies and not appreciate the difference. Actually, there are important implications.

The “Big I” is the symbol of the national organization: Independent Insurance Agents and Brokers of America Inc. You can also find their information under the “Trusted Choice” logo. This is a national organization with 140,000 member insurance agents. They serve the retail function as intermediary between the insurance company and the retail customer (contractors and others).

The alternative arrangement is to do business directly with the insurance company.

man-in-chains
Chained!

In this scenario, the customer is dealing with a captive agent directly employed by one insurance company and whose products are all that the agent may offer. They are chained to the one company.

The difference is significant and important for customers to understand. The Trusted Choice (Independent Agents) tagline is Free To Do What’s Right For You. That’s the whole point: An independent agent is free to offer the products of many insurance/ bonding companies, and find the one that’s best for you in the process. To put it simply, captive agents must fit you into one of their company’s products or risk not making a sale.

When it comes to surety bonds, the same holds true. The independent bond agent has access to a number of sureties (insurance companies) and can find the best one for the customer. The companies may even compete for the business resulting in better terms for the client.

The captive agent must offer the products and programs of their employer, even if the client is a square peg in a round hole.

Let’s stop for a moment and review what we have learned:

  • There are insurance companies and insurance agencies
  • The insurance company is the provider of the product and they hold the risk
  • The insurance agent, also known as the bond producer, is an intermediary and the channel between the customer and the insurance or bonding company
  • Insurance/bonding agents come in two flavors: independent and captive
  • Independent agents represent a number of companies and can shop the entire market to find the most beneficial solution for the customer
  • Captive agents work for one insurance or bonding company and only offer their products

At this point, it may all seem pretty clear. You understand the differences and may have decided which you like better: independent agent or captive. Now, the only point of confusion is to recognize which one you’re dealing with.  Independent agents are likely to point out that they represent a broad range of markets (insurance companies) but a captive agent may not mention they only have access to one company.

Conclusion
Do you have a to-may-toe or a to-mah-toe? Do you have an independent or captive agent?

 Ask!

“What markets do you represent?” If the answer is a single company, you are talking to a captive agent who does not provide access to a variety of markets that may compete for your business.  If they rattle off a list, “We have Company A, Company B, Company C, etc…” that’s an independent agent.

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.

*  “Let’s Call the Whole Thing Off” is a song written by George Gershwin and Ira Gershwin for the 1937 film Shall We Dance where it was introduced by Fred Astaire and Ginger Rogers as part of a celebrated dance duet on roller skates.  The song is most famous for its verses comparing different regional dialects.  Watch it!

 

 

Secret #91: Bonding Capacity – Enough is Enough

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Contractors know Surety Bonding Capacity is good to have and the more you have the better! But how do you determine the amount that is enough?

Primer on Capacity

  • Bonding capacity is normally described as an amount per project and an aggregate total. The amount per contract is referred to as the “single,” meaning the amount available to support a single contract. The aggregate is the incomplete portion of all the current and new contracts on any given day.
  •  Bonding companies look at the contractor’s capabilities when determining the single amount they will support. These include similar jobs successfully completed, available resources such as supervision, labor, and equipment as well as financial liquidity.
  •  To evaluate the aggregate, underwriters look at historical production levels, financial strength and other relevant factors.
  •  They also consider the capacity amount the contractor is requesting. For successful management of the relationship, it is beneficial to provide what the client desires if possible.

So how does the contractor determine the capacity levels to request?

First off, underwriters are unlikely to support new projects more than double the size of prior work. In addition, they generally expect the financial analysis of the last company fiscal year-end financial statement to show adequate levels of strength for such projects. (Read Secrets of Bonding # 4 for a complete explanation regarding working capital calculations.)

The aggregate capacity is generally double the “single” amount although there may be cases where a limited program consists of a single and aggregate for the same amount. This would mean the underwriters only want to support one project at a time with no overlap.

As far as the ability to bid on multiple projects while performing other work, the solution is to have an aggregate amount that is a multiple of the single, for example $1 million single / $2 million aggregate (referred to as “one over two”).

To decide if the aggregate is enough, first determine if it consists of bonded work only or all projects. This enoughvaries by underwriter. It is reasonable and likely they will say “the aggregate includes all work, bonded and unbonded.” This approach takes all the contractor’s obligations into consideration, everything that may tax financial and human resources and therefore affect the bonded work.

The more liberal treatment is to define the aggregate as only including bonded work. This provides unlimited potential to add unbonded work with no scrutiny by the surety.

Capacity Management Tips

One factor that affects the adequacy of the aggregate is the company’s bidding strategy. Stacking up multiple bids in rapid succession consumes the aggregate more quickly.

The prompt recognition / reporting of progress on bonded jobs and their conclusion has the opposite effect. It helps make more capacity available.

Knowing when current bonded projects will complete can be helpful. Underwriters may support bids knowing that the start of the new project will be after the completion of a current bonded job. This is a slightly creative way of stretching the capacity with a view toward the future. Some underwriters will exercise this flexibility.

Conclusion

In our experience we find that capacity is the most important element of a bonding program.

Contractors are always concerned about the competitiveness of their bond rate. But if you don’t have enough capacity to add the new project, the rate doesn’t really matter.

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 #88: Ten Biggest Lies in Surety Bonding

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Here are the ten biggest lies in surety bonding:

  1. “The surety is your partner and we are all in this together.”

OK and I have a bridge in Brooklyn to sell you. This is true until there’s a claim or loss and then the surety is entitled to seek recovery for their loss. After all, they are a “for-profit” company that must answer to its stockholders.  They are not in business to lose money.

In cases where collateral has been required by the surety, it will not be used to help the contractor finish the project. It is used to help the surety perform the work with the replacement contractor in the event of default.

  1. “Dividing the project into multiple contracts will make it easier to bond.” pants_on_fire

This falls into the “smoke and mirrors” category.  If it’s one big job for the client, then it’s still one big job.  Experienced underwriters will recognize the true nature of the undertaking and support the client straight up if they deserve it (one contract and bond).

  1. “Slicing up the contract into phases will make it easier to cover with multiple bonds.”

Most sureties will resist this, since it is still one contract.  Their reinsurance treaties probably will not support such an approach (referred to as “stacking”).

  1. “We are requiring a 50% performance bond to save the contractors bonding capacity.”

Misplaced good intentions: Bond underwriters evaluate the contract amounts, not bond amounts.

  1. “We stipulated a 50% bond to save money.”

Too bad it doesn’t work that way. Typically the bond cost is based on the contract amount.  So you pay the normal price, but you get a bond for half as much.  Cool!

  1. “The job specifications indicate that a performance and payment bond may be required at the owners discretion and a bondability letter must accompany the proposal.”

Ughhh!  May be a time waster.  This smells like a GC who wants the subs “certified” by the surety for free.

  1. “A private owner requires a 100% Performance and Payment Bond equal to the contract amount.”

In some instances, upon receipt of the bond, they send it back, waive the bonding requirement and allow the work to proceed.  Another misuse of the surety’s services. If there is a performance issue or unpaid bill, who gets the last laugh?

  1. “The client will provide full corporate and personal indemnity.”

In order to get the bond, the client willingly signed an indemnity agreement outlining the handling of the premium and enumerating their obligations to protect the surety from loss. Now that they landed the project, some clients attempt to change the deal / ignore the agreement.

The nature of suretyship requires that underwriters rely on the good character of their clients.  Sometimes such trust is undeserved.

  1. “All company owners must give their indemnity.”

The real truth is that most, but not all do.  Typical exceptions: ESOP and publicly owned companies, low % owners, foreign / overseas owners, pre-nuptial agreements, non-transfer of asset agreements, high % collateral cases, well-heeled companies.

  1. “You got turned down for a bond, because you don’t deserve one.”

Well, often this is just not true.  In our experience, most contractors who are willing to place their own assets at risk to perform a lump sum contract, are worthy of a bond.

The problem may be the agent or the underwriter, not the applicant.  Since 1979 we have specialized in succeeding on contractors bonds even when others have failed.

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 #87: Payment Bonds – You Like It Hard or Easy?

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If you like to do things the hard way, stop reading. You’ll hate this article.

On unbonded construction projects, it is not uncommon for high dollar vendors to specifically ask for the protection of a Payment bond. When this is presented to surety underwriters, they quickly recognize that the purchase order is the subject of the bond guarantee, not the construction contract. This is a much more difficult underwriting scenario.

Why?

When a Performance and Payment Bond (P&P bond) is written on a project, the principal (contractor) is being paid to perform the work. If they fail and the surety is called in to complete the job, the unpaid balance of the contract price is a financial resource that remains available. Even if the principal has no financial capabilities, the surety still has a source of money that may be adequate to complete the obligation without having to add funds.

easy-hard

Now let’s go back to the vendor scenario. We are assuming there is no P&P bond on the project. When the vendor demands the protection of a payment bond, it will be a guarantee of the purchase order not the construction contract. It is purely a guarantee that the principal will pay the vendor. It is not a promise that incoming contract funds will be used appropriately to pay bills. Big difference!

The point is that in the vendor example, it is considered a financial guarantee – a promise that the principal will pay money when appropriate. The reason these obligations are more difficult may be obvious. If the customer is unable to pay the vendor because they’re out of money, only the surety remains to pay the bill. Solving the bond need of the vendor by issuing a financial guarantee bond on the purchase order is the hard way to solve this problem.

The Easy Way
If a 100% performance and payment bond had been required on the contract, it would have guaranteed (among other things) the payment of all bills for labor and material, including the one in question. Even if the project owner did not stipulate a P&P bond, it does not mean one cannot be used to solve the problem.

The easy solution, the alternative we always suggest, is to order a traditional 100% P&P bond and then simply file a copy of the payment bond with the vendor. It does not name the vendor as obligee the way a financial guarantee bond would. However, it is issued literally for the protection of such vendors and solves the need perfectly, and with less underwriting stress and probably a lower premium!

This can be a great solution that converts very challenging underwriting into plain vanilla.

Consider using this technique when the purchase order is a major portion of the overall contract. If it is not, it may not be economical to bond the entire job, just to cover one vendor. Then it could be necessary to pursue the financial guarantee bond instead.

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 #86: Exoneration Nation – Why Get Off Performance Bonds?

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When it comes to performance bonds for contractors, the emphasis is always on getting them. They are normally required on public work. If you cannot bond the job, being a well-qualified low bidder is not enough. Once a contractor gets the performance bond, work commences and they may think they are done with the bonding company.  Actually, every bond has its own life cycle.  Issuance is the birth – but when and how does it end, and why should the contractor care? 

After a project is bonded, the surety may not require any further paperwork from the contractor. Sometimes the obligee wants the surety to provide a Consent to Final Payment or Consent to Release of Retainage. In such case the underwriter may ask for documentation regarding the health and status of the project. But absent that, the contractor may not think it is necessary to communicate with surety at the conclusion of the job. Why is doing so beneficial?

  1. Each bonded contract represents partial use of the contractors’ aggregate capacity. By officially closing out the project the surety capacity is restored. This is obviously important to enable the pursuit of new work.
  2. From the surety’s standpoint, any coverage for the warranty does not commence until the work is accepted and the performance bond is released. It is beneficial for both the contractor and the surety to start, and promptly conclude, the warranty obligation. While outstanding, the warranty is a risk for both.
  3. The third reason involves the payment bond. The recognition claims by suppliers of labor and material is affected by the last date of their supply or performance on the project. Officially closing the contract and performance bond creates one point of reference for evaluation of such claims.

Closing out the bond file is also important for the surety. It enables them to book any remaining unearned premium and concludes their liability. Both the contractor and surety are exonerated from the risk/obligation.

ex·on·er·ate   verb
past tense: exonerated; past participle: exonerated
– to relieve of a responsibility, obligation, or hardship
– to clear from accusation or blame

“The results of the DNA fingerprinting finally exonerated the man, but only after he had wasted 10 years of his life in prison.”

How to Close the Bond File

At the end of the project, whether requested by the surety or not, the contractor should obtain a letter from the obligee stating that the contract has been completed / accepted and the surety bond is released. The contractor retains a copy and sends this evidence to the bonding company. It’s just that simple.

Contractors should assume the responsibility for this action because not all sureties are diligent in requesting closure evidence for their files. It is true that in every case, it is beneficial for the contractor to submit this information to the bonding company.

Exoneration Nation: Be part of 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.

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 #84: Manage the Bid Bond Account

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For many contractors and their agents, the main thing they want to know about Bid Bonds is that they have them when needed.  However, the successful management of the bid bond account requires controlling a number of elements. Let’s review them.

The bid bond facility consists of a single and aggregate limit. The “Single” is the maximum size project that can be bonded (without a special exception), and the “Aggregate” is the maximum combined exposure on the bond account at any given time.

It is important to note that the single limit refers to the project amount not the penal sum (dollar value) of the bid bond. If a contractor is bidding a $500,000 federal project with the 20% bid bond requirement, the amount of capacity involved is $500,000, not the bid bond amount which would be $100,000 (.2 x 500,000 = 100,000).  The underwriting decision is always based on the contract amount.

Bear in mind, the bonding company does not want to know the actual bid amount prior to the bid opening. When requesting a bid bond, the underwriter is given the approximate bid / contract amount in order to preserve the bid confidentiality.

Let’s stay with the $500,000 example. If the contractor’s bid calculation is actually $485,000, it would be appropriate to round up and make the bond request for $500,000. If the actual bid calculation is $510,000, again, it should be rounded up to allow for last-minute increases. A bid bond request for $525,000 or more would be advisable.

While it is true that the penal sum of the bid bond, if expressed as a “percentage of the attached bid,” will automatically adjust up or down to the actual bid amount, a problem arises if the bonding company issues a “capped” bid bond.  This means it cannot adjust upward beyond the amount stated on the approved bond request. If a capped bid bond is used, the contractor will invalidate the bond, and their proposal, if the bid exceeds the amount approved by the surety.

maestro1. The first rule in managing the bid bond account is to request the bond for an amount sufficiently high to accommodate last-minute increases.  This avoids the temptation to bid above the approved amount – a practice that is damaging to the surety relationship.

2. The second important guideline concerns the aggregate capacity.  The aggregate calculation is made on a daily basis and includes the incomplete portion of open projects, jobs signed but not started, awarded projects, low bids, plus undecided bids. As a result, a portion of the available aggregate will be unnecessarily consumed if bid estimates are rounded up unnecessarily high. In our example, if the contractor calculated a $510,000 bid and requested approval for $600,000, they may needlessly consume capacity that could have remained available to support another bid.

3. Another point, submit the bond request early enough to allow time for discussion and processing.  Usually a couple of days is needed.

In conclusion, when requesting bid bonds, round up the estimated contract amount to allow for last-minute increases, but remember to preserve aggregate capacity for future bids.

Allow sufficient time for processing and keep in mind, to the decision makers, it is not “just a bid bond.”

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.