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Secrets of Bonding #36: When Gross Profits are Gross!

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Gross Profit, Net Profit, “I can’t remember which is which.”

Here’s an easy way to remember: Gross profit is the larger number.  A Gross of something is a big amount: Picture 144 baby chicks hopping around…  In this case, Gross means “big” not “bad.”

Net profit is the smaller number. Think of when you pour something through a net or  sieve: Less comes out.

OK, so Gross Profit is found by subtracting Direct Costs from Revenues (or Sales).  These numbers always appear on a company financial statement (FS) in the “Profit & Loss” or “Statement of Income” section, near the top.

For a masonry contractor, examples of Direct Costs are bricks, mortar and the labor to install them.  Some Indirect Costs would be rent, phone expenses and office salaries.

You may have seen a Work In Process schedule which shows the financial status of open contracts. That is literally the same as the Gross Profit analysis but is specific for  each project. (Keep this in mind when you read the cool bonding tip at the end.)

Now in order to be successful, companies need to produce a Gross Profit sufficient to cover all their indirect expenses and then yield a Net Profit (which always appears at the bottom of the page.)

As surety agents, we often see companies that are suffering from lack of work. Their projects are profitable, but they don’t have enough of them.  They show a Gross Profit but cannot cover their Indirect Costs and therefore produce a Net Loss (they lose money for the year.) Maybe if they had laid off non-essential staff, closed an office or reduced other expenses, the Net Loss could have been avoided. The point here is that the contracts were performed successfully, but other expenses were not adequately managed and a Net Loss occurred.

The inspiration for this article was a FS we received that showed a negative Gross Profit. Pretty unusual.  So what did it mean?

In this case the company lost a significant amount of money on one contract.  The loss was so great that it exceeded all the gross profits earned on other projects resulting in a negative Gross Profit (a loss). Next comes the Indirect Expenses which resulted in a significant Net Loss.

When a negative Gross Profit is produced, it is almost impossible for a company to have a profitable year.  In that case, the Gross Profit is Gross – meaning bad!

Here’s an example of what you’d see on the Statement of Income:

Statement of Income

Income

          Current Earnings – $1,000,000

          Current Costs – $1,250,000

          Gross Profit (Loss) – ($250,000)

Indirect Costs

          General & Administrative Expenses – $75,000

Net Loss – ($325,000)

Cool Bonding Tip: The Gross Profit section of the P&L describes the accumulated results of past projects, similar to the WIP schedule which shows today’s projects individually, during their performance.

By comparing the expected GP % of incomplete jobs on the WIP schedule to last years P&L, you can predict if the new projects are likely to result in a NET profit for the upcoming year-end financial statement (assuming other factors, such as expenses and total revenues, are similar to the prior year.)

Business owners facing such circumstances should consider immediately cutting indirect expenses in a proportionate amount  so a fiscal year-end net profit is more likely.

Call us with you next Contract, Site or Subdivision Bond.

FIA Surety / First Indemnity of America Insurance Company
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
Office: 973-541-3417

An “A Rated” Carrier

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Secrets of Bonding #32: Bond Definitions – Take the Quiz!

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Answers appear at the end of the article – good luck!

“You may begin.”

1. Bid Bond

a. Required by Auctioneers
b. A very small bond
c. Bond that accompanies a construction proposal

2. Surety Consent (to accompany bid)

a. Promises to provide the related Performance and Payment Bond
b. Agrees to all conditions in the related contract
c. Agrees that bond claims will be paid within 30 days

3. Bid Bond Percentage

a. Ratio of successful bid proposals
b. Portion of bid bonds used in one calendar year
c. Determines the dollar value of the bid bond

4. Performance Bond

a. Always makes reference to a written contract
b. May not be cancelled by the surety
c. Both a. and b.

5. Balance of Contract Amount

a. The point at which a contract becomes profitable
b. The unpaid portion of the contract
c. Relationship between labor and material costs

6. Payment Bond

a. Used to guarantee loans and leases
b. Guarantees payment of proper union wages
c. Guarantees suppliers of labor and material will be paid

7. Third Tier Sub

a. A class of subcontractors not covered by the Payment Bond
b. Submarines that go very, very deep
c. Low quality subcontractors

8. Subdivision Bonds

a. Similar to Submultiplication and Subaddition bonds
b. Similar to Site Bonds
c. Similar to submarines that go very, very deep

9. Penal Sum

a. Dollar value of a bond
b. Often a source of envy
c. When two penals are added together

10. Site Bonds

a. Guarantees improved vision after Lasik eye surgery
b. Guarantees the construction of public improvements
c. Guarantees a construction contract

11. Single Job Limit

a. The largest job a contractor ever performed
b. The largest job a contractor is interested in undertaking
c. The largest job a surety is willing to bond

12. Work on Hand

a. Remaining “cost to complete” for open projects
b. Underbillings
c. Costs relating to labor performed by hand

Extra Credit:

13. “Full” Indemnity

a. The indemnity of the applicant company including all of its assets
b. The indemnity of the applicant company, all owners and spouses, plus other owned/controlled companies
c. Indemnity equal to the full value of the bond amount in question

Answers:

1: Bid Bond – Bond that accompanies a construction proposal (C)

2: Surety Consent – Promises to provide the related Performance and Payment Bond (A)

3: Bid Bond Percentage – Determines the dollar value of the bid bond (C)

4: Performance Bond – Always makes reference to a written contract AND may not be cancelled by the surety (C)

5: Balance of Contract Amount – The unpaid portion of the contract (B)

6: Payment Bond – Guarantees suppliers of labor and material will be paid (C)

7: Third Tier Sub – A class of subcontractors not covered by the Payment Bond (A)

8: Subdivision Bonds – Similar to Site Bonds (B)

9: Penal Sum – Dollar value of a bond (A)

10: Site Bonds – Guarantees the construction of public improvements (B)

11: Single Job Limit – The largest job a surety is willing to bond (C)

12: Work on Hand – Remaining “cost to complete” for open projects (A)

Extra Credit: “Full” Indemnity – The indemnity of the applicant company, all owners and spouses, plus other owned/controlled companies (B)

Congratulations: You passed!

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 #30: The Greatest Danger

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

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

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

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

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

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

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

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

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

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

 

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

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

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

First Indemnity of America Ins. Co.

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Secrets of Bonding #29: When Federal Contracts Are Not

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In bonding, like insurance, we are always careful to review specifications and requirements when bonding a new contract.  The specs will state if a bond is required, the amount, and other relevant aspects such as acceptable credentials for the surety, and the bond form.

When it comes to contract documents, it is immediately evident if a project is federal. The solicitation or award letter will identify it as such, and an entity like the Army Corps of Engineers, will be named. It would be clear that the Federal Acquisition Regulations (FAR) apply and that you must have a 100% P&P bond on the federal bond form, issued by an acceptable T-Listed Corporate Surety.

So what are the bonding requirements on federally funded contracts? An example would be a local housing association project that has state and federal grant money. Is that a federal contract?  Do all the federal bonding requirements apply?

For the answer, we must review the solicitation or award and determine who is offering the work. A local housing association contract is just that – a local project, not federal. This is an important distinction because, at least partially, it answers the question about the bonding requirements.

  • True federal projects must follow the FAR. http://www.acquisition.gov/far/
  • Local or private contracts may follow aspects of the FAR if the obligee so choses, however it is voluntary.

This is an important distinction for agents to appreciate because it determines which sureties can be called upon to issue the bond.

For Federal, Corporate Sureties that appear on Circular 570 (the T-List) may be acceptable.

On non-federal projects, such as local contracts that include federal funding, the specs may vary – so no assumptions can be made. Chances are they will differ from the federal guidelines.  Only a review of the documents will reveal the answer.

Non-federal contracts can be local public work, such as a state or municipal job, or they could be private. Private contracts are all unique and as a long established surety, we have bonded many of them.  We have the flexibility to support a wide variety of special bond forms and other challenging aspects such as dual obligee riders that name lenders.  For more info about bonding private contracts, review Secret #18.

Summary:

So when are federal contracts not?

You now know merely having federal funds does not make the contract “federal.”  It is only required to follow the FAR if offered by a direct branch of the federal government.

For non-federal contracts, you will not know the bonding requirements until you review the written requirements – and there is no predicting what you may find.

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

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

First Indemnity of America Ins. Co.

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

Secrets of Bonding #27: Beneficiaries of a Bond

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The process starts simply: A construction company needs a bond in order to acquire a new project.  So they contact their agent who surveys the market and seeks a surety that will support the account and provide favorable terms. There are a number of beneficiaries of this transaction:

Bond Agent

The bond agent and agency earn a commission on the transaction.  These revenues not only provide the basis to pay the agency’s sales and administrative staff, they also form a production base that enables the agency to attract more sureties and additional bond clients.  It is a key to their current and future prosperity.

Contractor

Bonds enable contractors to acquire new work – the lifeblood of their business.  The newly issued bond not only provides a profit making opportunity, it also helps build the company’s track record of projects completed under bond.  This is a higher standard of performance than unbonded work because of the additional scrutiny by the surety, paperwork and reporting requirements, and related activity such as accounting and legal requirements.

Having a surety and performing bonded work helps the contractor acquire future work and additional bonds. It is a building process and an important part of the company’s credentials.

Obligee

Some obligees, such as public bodies (city, state and federal contracts), are required to obtain bonds because of their beneficial effect.  They are an effective way to protect the public interests. Other obligees such as owners of commercial property or general contractors may choose to bond their projects. The advantages are numerous.

From the outset, the obligee has a pre-qualified contractor on the project, a better contractor.  Sureties only issue bonds after making a thorough evaluation.  The bond protects the obligee from the contractor’s failure to perform and from non-payment of subs and suppliers – and those potential claimants are equally protected.  Bonds are required on public work because they are such a great means of assuring the correct performance of the project.

Surety

For the surety, issuing the bond means incurring a risk and earning a fee. This is, of course, the surety’s business.  It is the purpose of the company to identify and issue bonds that meet with their underwriting requirements.

Call us with you next Contract, Site or Subdivision Bond.

FIA Surety / First Indemnity of America Insurance Company
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
Office: 973-541-3417

An “A Rated” Carrier

Visit our Free CE school.

Secrets of Bonding #26: Bond Request Forms (The Gift That Keeps Giving)

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For the agent and client, there is plenty of paper to handle on contract surety bonds.  So just when you get through the questionnaire, business plan, resumes, references, WIPs, and financials there is STILL ONE MORE DOCUMENT THAT WE NEED!

Yes, it is true.  Bond Request Forms are the gift that keeps giving because you get the opportunity to do one as each bond comes up.  So, considering these forms are not going away, let’s get comfortable with them.

Why Needed

The Bond Request Form is a summary of key factors concerning the specific contract and bond in question. The form is used for both Bids and “Final” bonds (Performance & Payment). It covers basics such as the name of the contractor and obligee, description of the work and the specific bonding requirements.

The form is used for underwriting and administrative purposes.  The underwriters review the details and may literally sign their approval on the form.  The admin staff will type the bond based on the Request Form – so completeness and accuracy are crucial.

Let’s break it down and go over some key areas:

  • The Principal is the contractor and the Obligee is the party paying for the work.  Sometimes the word “Owner” is used interchangeably with Obligee. If you see Owner on the Bond Request, it is not asking for the name of the owner of the construction company; it means “Obligee.”
  • The description of the work should read as stated on the related contract or bid invitation.  If you are bonding a roofing contract, the description should not be “4th Avenue Elementary School.” It should say “…roofing…”  On a final bond such errors are embarrassing. In a bid situation an incorrect job description could result in a bid protest (by the second bidder) and loss of an award.
  • For Bid Bonds, show the estimated contract price (ECP), not the actual bid amount.  This is to protect the bid confidentiality.  Sometimes we bond more than one contractor on the same bid.
  • Always submit a sufficiently high ECP to allow room for a last minute bid increase. (See Secret # 8.)
  • Show the actual bid date, not the day before for “safety.”
  • Bid results are important to show if they are available.  Typically they are on public work.
  • When indicating the final bond requirements, do not indicate “100% P&P” unless the spec actually calls for this.  Some projects require a Performance Bond but no Payment.  It would be important to not automatically issue a Payment Bond, since they are the most frequent source of surety claims. The Principal and Surety should never voluntarily assume this risk.
  • Work On Hand: The current WOH figure is comprised of the “estimated cost to complete” of all open work – excluding the project in question.
  • Be sure to fully complete the form, include required attachments and sign if necessary.
  • Points of interest:
    • Sureties are usually reluctant to provide a 125% P&P Bond.
    • If the bond is for less than 100% of the contract amount, there may be no reduction in the bond cost.

Bond Request Forms: We love them and you should too!  Every one is a chance to serve your client and  make money. 

Call us with you next Contract, Site or Subdivision Bond.

Steve Golia

FIA Surety / First Indemnity of America Insurance Company
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
Office: 973-541-3417

An “A Rated” Carrier

Visit our Free CE school.

Secrets of Bonding #25: World’s Cheapest Audit

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When it comes to financial statements prepared by a CPA (Certified Public Accountant), there are three levels of presentation:

Compilation – This is the lowest level and does not include any checking or verification of the numbers by the accounting firm. The numbers are merely “compiled” by the CPA.

Review – Some checking and “review” by the CPA.

Audit – The CPA performs analysis and verifications to authenticate the numbers.

Bond underwriters expect better prepared financials for higher amounts of surety credit.  This means contractors that have large bonding lines must provide Audited company financial statements (FSs).  Sureties and bankers are more confident when analyzing an audited FS – we assume everyone would have these high quality financial reports if it wasn’t for the cost.

Because of the time and human resources involved, a Review is less expensive than an Audit, and a Compilation is the least expensive of the three.

So in comes your contractor client who, for a number of reasons, decided to have a Compilation at the last fiscal year-end.  Now a large project needs to be bonded, and from a size standpoint, the underwriter normally expects a Reviewed FS.  If it is not practical to go back and upgrade the Compilation to a Review, what are your options?

The underwriter may be willing to work with the Compilation FS if some key elements are documented and / or verified.  Such an analysis is the heart of the difference between a Compilation and a Review.

At the minimum the underwriter is likely to ask for proof of cash, aged receivables (A/R) and payables (A/P), and a Work in Process (WIP) Schedule.  Let’s go over each one briefly.

Cash: If the FS date is 12/31, the idea would be to provide proof of the cash amount shown on the FS on that date.  If the FS shows $52,125 cash, you need bank or brokerage statements adding up to that figure for 12/31.

A/R & A/P: These reports should be as of the FS date and add up to the receivable and payables listed on the FS.  The A/R should be broken down by age showing how much is current, 60, 90, and over 90 days old. Retainages should be identified since they are not regular “trade receivables.” It is also beneficial to indicate which receivables were subsequently collected after the fiscal date. Payables should also be aged.

WIP Schedule: Needed as of the fiscal date to support the analysis of the company balance sheet.

This strategy is not as good as actually having a CPA Review, but the analysis performed by the underwriter could substitute for a Review and justify issuance of a bond. Plus, such services performed by the underwriter are free!  So, even though this is not really an Audit or Review, you can think of it as the “World’s Cheapest Audit.”  It can be just what you need to get a bond and keep moving forward with the file.

For the future, if similar sized bonds are likely, the client should plan on having a Review performed at the next fiscal year-end – it will help with surety and bank credit.  Added bonus: The company will have better documents for management review and the accountants will provide professional guidance that is not included with a Compilation.

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

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

First Indemnity of America Ins. Co.

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

Secrets of Bonding #24: Manage the Bond Manager

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Q. Who is your bonding company?

A. Jimmy at the Smertz Agency

Am I the only one who thinks this is a strange answer? It always amazes me when contractors have no idea who their bonding company is.  It could mean that the agency is doing a fantastic job of managing the account.  But it is more likely that the contractor is doing a bad job of managing the relationship with the surety.

Who’s on first?

The bond agency plays a vital role in guiding the process forward, advising the client and supporting the underwriting process.  But for the most part, the Bond Manager controls the underwriting decisions – even if some measure of discretionary authority has been granted to the agent.

To put it simply, the Bond Manager has life or death control over the bond account. If there is a bond the manager is not interested in supporting, the contractor can kiss those revenues and profits goodbye. 

For major accounts that produce significant annual premiums and require substantial capacity, the surety will probably make themselves known.  They may ask for an annual meeting to discuss fiscal year-end results and plans for the new year.

For smaller accounts, the contractor is just a name in a computer record.  Flat.  No personality or rapport.  So when that stretch or exceptional bonding need comes up, they have nothing extra going for them.  The gate keeper doesn’t know the contractor from Adam, and there will be no special consideration.  How do you prevent this?

Manage the Bond Manager

The first step toward a good rapport is to establish open communications.  The contractor’s file should make it obvious that full disclosure is provided and the surety is appreciated as a partner – not just a vendor.  Answer all the written questions completely and candidly.  It makes the reader confident that everything relevant (the good and the bad) is all being laid out for review.

During the initial evaluation, the underwriter should visit the contractor’s business.  It is a chance to kick the tires and see the company in action.  Hey, they’re not just a file, they’re real people!

A periodic underwriting meeting with the bonding company is appropriate.  At IBCS, we like to meet with the contractors when a draft of the year-end data is available.  This is a great opportunity to provide guidance before the final version of the financial statements is produced.

Summary

The point is that bonding is based on information and the underwriter’s confidence.  Building a rapport with the decision maker is as important as any piece of information. With the help of the agent, Manage the Bond Manager and maximize the bond account for everyone’s 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.

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

Secrets of Bonding #23: Myth Busting the T-List

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Technically the correct name is “Circular 570.”  The federal Treasury Department produces this list, thus the nickname “T” list. Website: “fms.treas.gov/c570/c570.html”

It is re-issued each July first and contains all the corporate sureties reviewed and approved by the Treasury Department.  It also states the largest single bond amount they may provide on a federal contract. Let’s look at some common assumptions about the T-list.

Myth: The IRS tried to withhold tax exempt status from the Tea-List.

Finding: False! (Just wanted to see if you’re paying attention.)

 

Myth: The government somehow “backs” the sureties on the T-List.

Finding: False! The companies on the list are merely pre-approved for the convenience of the government when administering contracts. The purpose is not to benefit anyone outside the government.

 

Myth: T-listed sureties are the best in the industry.

Finding: False! Acceptance on the T-List indicates that

1. The surety chose to apply for approval, and…

2. They obtained it.

Being T-listed does not indicate the relative strength of one surety compared to another.  For example, there are excellent surety companies that have never sought T-List approval – so they’re not on Circular 570.

 

Myth: It is illegal and / or impossible to waive a T-listed requirement if it is stated in a project specification.

Finding: False! Private obligees, such as a General Contractor offering a subcontract, have complete discretion and can modify the requirements if they so choose.  It is common to reserve the right to waive any technicalities if the obligee feels it is in their best interests.

 

Myth: When projects include federal funding (such as a local housing contract), federal bonding requirements automatically apply.

Finding: False! The party offering the contract may set their own requirements.  They could chose to follow some portion of the federal requirements or simply use their own. Federal requirements (as stated in the Federal Acquisition Regulations) only apply to direct federal contracts such as the Army Corps of Engineers, etc.

 

Myth: When it comes to corporate surety bonds, only the federal government is obligated to use Circular 570 sureties.

Finding: False! If other jurisdictions choose to adopt such a requirement, it would then be mandatory.

Conclusion: The T-list is a convenient tool for federal contracting officers when administering government projects.  It is also helpful for outsiders when evaluating a corporate surety bond.  Circular 570 is easy to access online and it provides a list of sureties accepted by the federal government.

However… NOT being on the list does not necessarily mean anything negative.  Not all sureties find it beneficial to seek approval on the list, so they just don’t do it.  They could still be great companies with strong bonds worth taking.  In fact, they could be the best surety in the country, and still not be on the list.  

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

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

First Indemnity of America Ins. Co.

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

Secrets of Bonding #22: Bonding Started Projects – Adverse Selection or Awesome Opportunity?

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On Performance Bonds (not proceeded by the surety’s bid bond), underwriters commonly ask if the project has started. Why is this relevant and what are the implications?

On private contracts where the performance bond may be optional, there is a concern that the bond is being required retroactively because some performance or payment concern has arisen.  This is where the Adverse Selection comes in. No surety wants to write a bond and immediately have a claim: “No premium is worth a claim.”

However, such bonds can be successfully produced.  It helps if the bond was always a written requirement.  This can be proven by reviewing the project specifications.  The underwriter will also review the financial condition of the project such as a WIP schedule, obtain current lien releases, the last pay application and an All’s Right letter from the obligee (confirming the work is satisfactory thus far.)

What about the Awesome Opportunity? There could be legitimate reasons for requesting the bond late.  Perhaps the contract start date was critical.  The contractor was given notice to proceed even though the bonds was not yet filed.  When this happens, the obligee may insist on the bond prior to paying of the first requisition (monthly payment to the contractor.)  This situation is not that unusual, especially for subcontractors.

Do we like these circumstances? Think of what the bond guarantees: Performance of the contract and Payment of the related bills for suppliers of labor and material.  If part of the performance obligation is completed, that extinguishes a portion of the risk – and the bond fee is still the same!  Bond fees are normally based on the contract amount, not the bond amount nor the uncompleted project amount. So it makes sense that underwriters should embrace these projects assuming they can get past the issues we discussed.

Unfortunately not all do.  But producers who know the red flags, have a fighting chance to address them and gain underwriting support from the surety.

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

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

First Indemnity of America Ins. Co.

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