surety bond

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Answers:

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

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

Call us for Site and Subdivision Bonds – our specialty!

Steve Golia, Marketing Mgr.  856-304-7348

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

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Happy, Healthy, Prosperous New Year!

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Best Wishes from your agency bond department: Bonding Pros!

Let us solve your tough bond opportunities in 2015.  That’s what we do!

Have a great idea for a “Secrets” article?  Tell us what you would you like us to cover. What is that one thing you don’t understand, or something that bugs you?  Comment here, write to info@BondingPros.com or call 856-304-7348 and tell us.

Our next article:  Secrets of Bonding #79: Personal Indemnity, How to Avoid it.

Secrets of Bonding #76: The Second Bidder’s Second Chance

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In this article we will talk about some opportunities that may exist for second bidders.  These are the contractors who have come in 2nd on a competitively bid project, such as a federal or state contract.  These projects are typically awarded to the “lowest responsible bidder” (meaning they must have the proper credentials and meet other requirements.)  As for the 2nd bidder, they get nothing.  They were close, but did not win.  It’s a 100% waste of time and money – unless they DO ultimately acquire the project.  A contract may be awarded to the second bidder under certain circumstances – such as a defect in the low bidder’s paperwork.

There are many documents required in a typical bid proposal: Licenses, certifications, references, non-collusion affidavits, business registration, consent of surety, bid guarantees, etc.  If documents are missing, or issued with defects, the low bid can be declared “non-responsive” at the discretion of the project owner.  The 2nd bidder then becomes the lowest responsible bidder and may receive the contract award.

Here are some of the technical areas to check that can cause bids to be rejected:

  1. Mandatory forms Failure to use mandatory forms, use of obsolete / expired forms, or not following a stipulated format.  Does the bid invitation contain a bid bond form described as mandatory? Bid bonds are all similar but the failure to use the right format or document is a potential cause for rejection.
  2. Bid bond details Check all the typed information for accuracy.
    1. Bidders name
    2. Obligee’s name
    3. Job description and project number
    4. Bid bond percentage or dollar amount
  3. Capped bid bonds If a “capped bid bond” is used, a proposal amount that exceeds the bid bond maximum would invalidate the instrument.  (More info in Secret #68)
  4. T-List requirement If a “Treasury Listed” surety is required, does the bonding company appear on the list, and for a sufficient amount?  http://www.publicdebt.treas.gov/fsreports/ref/suretyBnd/c570.htm
  5. Power of Attorney Is one attached, in the correct name, properly executed and for a sufficient amount?
  6. Notary Acknowledgment Needed for both the surety and the contractor, properly executed.  Is the notary’s commission for the correct state and not expired?
  7. Execution Signed and sealed with the correct seals?
  8. Financial Statement Attached for the surety?  Is it for the correct surety name? Is it as of an appropriate date (not obsolete)?
  9. Consent of Surety This is not always required. However, if stipulated, failure to provide it can cause a rejection. Are all the details on the consent accurate? Properly executed including correct seal?  If there are stated conditions, does the proposal comply? (Example: The Consent may only be valid up to a stated bid amount.)

On public bids (municipal, state and federal), the bid documents are normally available for public review.  Second bidders may be surprised to learn they have a second chance if the low bid is defective.

Another second chance may arise if the low bidder falters on the project after commencing work.  In the event of default, the bonding company must come to the rescue and they want an efficient (fast, economical) way to complete the job. Who better to call than the 2nd bidder?  The 2nd is the natural “completion contractor” to finish the job for the surety.  They already know the project and presumably offered a price close to the low bidder. The 2nd should contact the claims department of the surety that holds the Performance Bond if they see the project is in trouble.

Now a parting comment for LOW BIDDERS: Keep in mind that 2nd bidders don’t give up easily.  They, too, spent time and money pursuing the work, and want to win the contract.  Be sure your quality control prevents bid errors that cause bid bond claims and open the door for 2nd bidders.

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

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

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Secrets of Bonding #73: Substitute Bid Bonds

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substitute teacher

Remember how much fun it was to have a substitute teacher? Well, this is a little less exciting…

In Secret #49 we talked about bidding with a check.  This is a related topic. Substitute bid bonds are an odd part of what we do as surety professionals.  Here’s how you may run into one.

It is common for project specifications to offer a number of methods to provide the bid security that accompanies a contractors project proposal.  The options may include a check made out to the obligee, or a bid bond.

A substitute bid bond may be issued after bid security has already been given with the contractor’s proposal.  This bid bond will replace, or be substituted for the existing security – thus the name.

This may arise when the contractor has no surety at the time of the bid.  They bid with a check.  Now, with a surety in place, their first request is “How about helping us get our cash back?  It’s tied up with that bid.”

What a great way to start off by helping the new client. However, sureties are not always in favor of issuing these, and some refuse to do so under any circumstances.  Why?!

1. Bid Spread: In this case, the contractor is the low bidder, but they are too low. (Read Secret #16 to learn about unacceptable bid spreads.) The contractor may be in line for the project, but the surety does not want to issue the performance bond (aka final bond).  If the bonding company provides the substitute bid bond, they become obligated to issue the final bond or face a bid bond claim (two bad options!) “Sorry, we are not able to provide a substitute bid bond for that project.”

The fallout is that the contractor may blame the surety when they lose their bid security for failing to deliver the final bond. They will also lose the expected income from the project – pretty ugly.

2. Final Bond Optional: The specs may indicate that a Performance & Payment bond is not mandatory. It is optional at the obligee’s discretion. This amounts to adverse selection against the surety.  If the obligee thinks the contractor looks capable: No bond.  If there is some doubt about their ability to perform or the adequacy of the price, better pass the risk over to the bonding company.

For this reason, substitute bid bonds may be declined if a final bond is not mandatory.  Remember, final bonds are where sureties make their money.  Bid bonds are usually free.  The contractor will not lose anything as a result of the refusal to issue the substitute and they are already eligible to win the contract.

3. Not Low Bidder: This is similar to Number 2. Here the contractor is second or third bidder. The common practice is for obligees to hold the bid security of the second and third bidders in case they need to give them the project (maybe the low bidder can’t get their final bond issued?) The bid checks could be held for months!

From the surety’s perspective there is no question about the adequacy of the second or third bidder’s number.  This may be a well-priced contract. The problem is that they are unlikely to issue a final bond.  (Projects are rarely awarded to the second or third bidders.) This has even less chance of making money for them than a normal bid bond request.

To the contractor, a substitute bid bond may seem like a great idea. For the surety, the only desirable situation is when their client is low bidder with an acceptable bid spread and a mandatory final bond. Absent that, don’t be surprised if the surety only wants to get involved after the contract award takes place and the final bond is needed.

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FIA Surety is your go-to market for Site & Subdivision bonds.

FIA Surety / 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

Secrets of Bonding #71: The Best Way to Avoid Low Profits

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In this edition of Secrets we will continue a discussion that began in #70 which covered “Labor, Contracts, and Labor Contracts.”  Last time we concluded by describing a project with unusual characteristics:

Materials: 40%     Labor: 60%     Overhead/Profit: 0%

These percentages describe a job that is predicted to yeild no profit. Why would a contractor bid this way? Some possible reasons:

  • Maintain labor force – The project will enable them to keep their valuable / long term employees working
  • The revenues and cash flow will help with creditors
  • There are design deficiencies that will result in profitable addendums to the contract
  • Protect their relationship with a repeat customer (keep out competition)
  • With the job in hand, additional profits can be squeezed out of the subcontractors and vendors

While these strategies (or others) could make sense to the contractor, it is likely the bond underwriters will be reluctant to support the project.  Why?

Remember, if a default occurs, the surety may be required to step in and complete the project.  Their primary financial resource will be the remaining (not yet paid out) contract funds. If the project was estimated with a 0% profit, it would be easy for increased costs or inefficiencies to result in a losing job – which means the surety would be forced to add funds in order to reach completion of the project.

Contract estimates are just that: Estimates or Guestimates.  A job projected to produce a 10% profit may actually end up at 11% or 9% or Zero! Faced with this uncertainty, and the unavoidable responsibility to finish the work, a 0% profit projection may be too much risk for the surety.

The best way for contractors to avoid low profits is to not accept underpriced work.  Whatever benefits they might perceive, the risks are a huge burden. Construction work is a challenge under the best of circumstances.

Starting with the expectation that you are on the verge of a loss only adds to the exposure faced by contractors and their bonding companies.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

First Indemnity of America Ins. Co.

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Secrets of Bonding #56: (3 of 4) Work In Process Schedules – Own Them!

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Profit Analysis

Every project starts with an estimate that attempts to predict the total Cost of labor and material needed to perform the work.  With this number and the contract price, we can find the Original Estimate of Gross Profit.  (Contract profits are always “gross” because overhead and other expenses have not yet been deducted.)

The same analysis can be performed during the life of the project to determine:

  1. if the contract is expected to produce a profit
  2. if the original project estimate was reasonably accurate in predicting the costs that are being incurred (and therefore the profit prediction is dependable)
  3. if field supervision and the labor force is as productive and efficient as expected
  4. if material costs are coming in as predicted

We use the original percentage of gross profit instead of the dollar amount so the contract performance can be compared over time, even if the contract dollar amount has changed by amendment.bookkeeper3

A short form WIP may not state the Current Estimate of Total Costs, or the Current Estimated Profit, but you can calculate them.

Formula to find Current Estimated Percentage of Profit:

On the WIP schedule, do you see, or can you calculate, the Current Estimate of Total Costs to Complete? (Discussed in “2 of 4”)

Find it by adding the Costs Incurred to Date to the Current Estimate of Remaining Costs to Complete.

To calculate the current estimated profit %, subtract the Current Estimated Total Costs from the Current Contract Amount (gives you the expected profit in dollars), then divide the profit dollars into the contract amount to find the profit %.  Try it on our sample contract.

Contract Price  /  Original % GP  /   Billed    /     Costs to Date  / Remaining Costs

$1,100,000      /     10%               / $550,000 /   $350,000     /  $700,000

Is the current estimated profit $50,000?    Yes, it is!

To find the % divide $50,000 into $1,100,000 which gives you .045 or 4.5%.

This means that now, after this project has commenced, a profit that was projected to be 10% of the original contract amount has now deteriorated to 4.5% of the current contract amount. This is vital info for the contractor to have during the project.  It shows a trend that must be controlled. Prompt action may prevent the project from producing a loss for the company or could even improve the final profit figure. The surety underwriter will monitor such projects, even if they are not bonded.

Critically Important: This analysis is impossible if the contractor fails to record the labor and material costs incurred specifically on each project. They must also make a CURRENT estimate of the remaining costs to complete. They cannot rely on the original estimate of costs and merely hope the profit will be there at the end.

Billings: Overbilled / Underbilled

Now let’s shift gears. The next point to determine is whether the project is billed ahead or behind the degree of completion.  For example, the contractor’s office may be slow in processing the invoices to the project owner, so they may not have collected funds that are rightfully earned (they are Underbilled).  Conversely, they may be billed beyond the degree of completion (they are Overbilled) and therefore have dollars in hand that are not yet earned. This is calculated in dollars by first comparing the % of completion to the % Billed to Date.  Try it on our example contract.

Here are the questions:

  1. What was the % of completion?
  2. What dollar amount is that percentage of the current/revised contract amount?  (This gives you the “correct” amount of billings at this stage in the project.)
  3. Are the actual Billings to Date more or less than this amount?  Are they Underbilled or Overbilled, and by how much?

OK, what did you get?

  1. The % of completion is 33.3%
  2. Therefore the “correct” billings are $363,000
  3. If the actual billings are $550,000, the company is $187,000 Overbilled on this project.

They have succeeded in billing the client beyond their current degree of completion. This may not be bad if the contractor knows they are overbilled.  Management should not be unpleasantly surprised when they are 100% billed but the work is still not complete (Yipes, no more money coming in! Who’s gonna pay for the labor and materials?)

Another issue: Overbillings can become a concern for the surety.  Overbillings (money) may be diverted by the contractor into another project.  In the event of contractor default and completion by the surety, this means there may be funds missing that rightfully belong in the project.  This could increase the surety’s net loss.

Underbillings may indicate an intentional, conservative billing practice on the part of the contractor – leave money in the project and take it out at the end when successful completion is assured.  If it is unintentional, they may be depriving themselves of earned profits that are currently needed.

Underbillings can also be an indication of poor management and / or administrative practices.

The point is that all these issues are important for the contractor and surety, and therefore, the agent.

Our last segment in this series will cover how all this affects the contractor’s financial statement.  Important!

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 #45: Backpedaling and How to Avoid It

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Sureties commonly rely on a variety of elements when deciding if they will provide surety bonds for contractors. All relevant underwriting factors are considered, including the applicant’s financial condition.

In most bonding scenarios, the applicant for the bonds is a construction company – typically a corporation or LLC. An important element of the financial evaluation is the company’s financial statement.

Why so much emphasis on this one document? The financial statement is considered a report card on the quality of management. It shows a range of important indicators. To name a few:

  1. How strong a financial commitment the owners made to the company (capitalization)
  2. The amount of revenues management has acquired in the previous operating cycle
  3. The extent to which construction contracts were realistically estimated and successfully managed
  4. Management of overhead expenses
  5. Tax planning
  6. Adequacy of cash flow
  7. Liquidity
  8. Profitability
  9. Reliance on banks and other creditors to finance operations
  10. Collectability of receivables

The analyst’s favorite financial statement date is the company’s fiscal year-end (FYE), which is “tax day.” We prefer this date for two reasons.

  • Underwriters need to make a periodic review to monitor the applicant’s financial status, so an annual review on the FYE is perfect.
  • The tax day numbers will be realistic and conservatively presented – to minimize the tax exposure. This conservative approach is ideal for the bond underwriters who hope to make a realistic analysis of the applicant.  For most companies tax day is December 31st.

So where does the backpedaling come in?

Company managers rely on their Certified Public Accountant for financial advice, especially tax planning. Limiting taxes is a popular goal, but at what price? Lower taxes may be the result of lower pre-tax profits. Lower profits mean less financial growth and possibly an inadequate net worth. (See Secret #3: Taxes) Why should stockholders continue to support a company that fails in its primary mission: Producing a profit?

Obviously these issues are a great concern to surety underwriters, who want successful, well-managed companies as clients. If tax avoidance is aggressively pursued, it is not unlikely that bonding capacity will be compromised. The surety may limit their support or even terminate the relationship if financial performance is weak.

Once the financial document is carved in stone, company management may face an entire year of backpedaling: “We showed poor results because…” until the next FYE report can show better numbers.

The problem is not uncommon, and the solution is simple if executed properly. Avoid backpedaling by having a draft financial statement initially produced by the CPA. The document will be marked “For Discussion Purposes” and discussion is exactly what’s needed. A review by the underwriter will determine if any elements of the report are detrimental for bonding purposes. Plans for the coming year can be discussed and bonding capacity evaluated.

If the financial statement does not support the desired amount of surety capacity, now is the time to make adjustments before the final version is produced. Backpedaling is avoided!

With some planning and open dialogue agents can help their contractors avoid the missteps that prevent companies from realizing their full bonding and financial potential.

  • Agents, 60 days prior to your client’s fiscal year-end is the time to act. Get the ball rolling!
  • Contractors, tell your accountant a draft fiscal year-end statement will be needed for discussion with the bonding company.

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.  856-304-7348

First Indemnity of America Ins. Co.

Secrets of Bonding #12: This is NOT a Payment Bond!

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Post #11 was about Payment Bonds – how they work and who they help.  Let go one step deeper. We will go over a Payment Bond situation that is presented to our underwriting department at least once a year, so it’s worth mentioning.

The Situation: A Prime Contractor or Subcontractor has a project that includes a major vendor. It could be an electrical contractor buying expensive switchgear from a supplier.  In this example the project is NOT bonded.

The supplier has no prior experience with the contractor so they want their purchase order (PO) covered with a Payment Bond. When you are asked to provide it, you immediately reply “Secrets of Bonding #12 tells me this is NOT a Payment bond!”

Let’s see why not, and how you can help your client.

In a normal contract surety Performance & Payment Bond scenario, the bond makes reference to a contract in which the Principal (bond applicant) is being PAID to do work.  If the principal fails in their obligation, the Surety steps in and is PAID the remainder of the contract funds to complete the obligation.

So, if a bond is written on a PO, which way is the money flowing?  In this instance, the principal (electrical contractor) is PAYING money, not receiving.

If the surety bonds the PO and then has a claim, it could only be for the contractor’s failure to pay the supplier. This bond has a single purpose, to guarantee the principals ability to pay money at a future date.  Therefore it is considered a Financial Guarantee, not a typical Payment Bond. This is a much less desirable obligation for the surety because the money is flowing the opposite direction.  Unlike contract surety, in the event of default there is no money coming in (the remainder of the contract price) to enable the surety to deal with the claim.  In fact, many sureties are reluctant to provide such bonds other than in nominal amounts for well-established clients (i.e. Wage and Welfare bonds).

A possible solution: Remember, this is an unbonded contract.   If there was a P&P bond in place, the purpose of the Payment bond would be to protect vendors such as the switchgear provider.  So one solution could be to issue a P&P bond for the electrical contractor even though none was originally required.  The Performance side of the obligation is not needed; however the Payment Bond would be furnished to the supplier to satisfy their concerns.  It will not name them specifically, but protecting them is clearly the purpose of the instrument.

In this manner you can turn an abnormal situation into a typical P&P bond, the kind underwriters like.  Added benefit: the Payment Bond will be for the entire contract amount – which is for more than the switchgear.  This gives some added comfort to the supplier.

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

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

First Indemnity of America Ins. Co.

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Secrets of Bonding #8: Bid Bonds

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“It’s only a Bid Bond.  If you can issue it now, we’ll complete the underwriting later.”

Unfortunately it doesn’t work that way.  In this article we’ll talk about the purpose of Bid Bonds and how to deal with them effectively.

Every surety bond contains a promise that something will happen.  For example, a Performance Bond guarantees the correct performance of a written contract.

A Bid Bond is often required to guarantee the bidder’s sincerity on projects funded with tax dollars (public work such as federal, state, and municipal projects.)

The promise contained in the bid bond is that one of two things will happen.

  1. If the bidder receives a contract award, they will sign the contract, produce the required Performance and Payment (P&P) Bond and commence with the work.  Or in the alternative…
  2. Pay the difference between their bid and next higher proposal.

For the benefit of the taxpayers, this assures that if the low bidder does not proceed, the work will still be performed for their price – which was the lowest price bid.

Bid Bonds are part of construction bonding or what we call “Contract Surety,” but they are really Financial Guarantee Bonds.  Sureties are always careful when issuing these.  So you can throw away the “It’s only a bid bond” comment.  Sureties view Bid Bonds as part of the acquisition process for Performance Bonds.  If the underwriting is not resolved for the P&P bond, the surety has no motivation to issue a financial guarantee/bid bond.

Other points worth knowing:

  • When ordering a bid bond, the underwriter does not want to know the actual bid price so the confidentiality is protected.  Just round up the number.
  • Award of the contract based on a bid bond indicates the obligees approval of the surety – which presumably is then transferred to the upcoming P&P bond.
  • Bids that are more than 10% below the next bidder will require a written explanation (prior to the P&P bond) to assure there are no calculation errors and an adequate profit margin.
  • Bid bonds are sometimes capped, meaning the bond will not support a bid higher than the bid estimate the underwriter approved. In such cases, it is important to use an ample figure on the Bid Bond Request form.  If there is a last minute bid increase, such as a subcontractor or supplier coming in higher than expected, the bidder will not be able to bid a dollar more than the pre-approved figure.  Remember, there is no downside to bidding less than indicated.
  • Postponements – when bid dates are rescheduled, the obligee may permit the original bids bonds to be used even though the stated bid date will now be incorrect.  Check with the obligee to see if you must re-issue the bid bond to show the new date.
  • When a bid is outstanding (undecided), the contract amount is considered “in use” in regard to their available capacity.  Therefore, “not low” bids should be reported promptly to the surety.
  • Bid Bonds are considered terminated upon issuance of the P&P bond, or after 90 days.
  • The bid security of the low three bidders is usually held until the contract is signed and bonded by the low bidder (see our following comment about using a check!)

One last word of caution: A check may be accepted as an alternative to a bid bond.  However, it is subject to forfeiture if the bidder receives an award but cannot produce the P&P bond.  Always use a Bid Bond if possible!

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

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

First Indemnity of America Ins. Co.

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