year end financial statements

FIA Surety Success Story

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This was a tough case.

The contractor needed a performance bond. We reviewed the bond request form and noted the bid results: They were 100% below the second bidder!

We obtained the company’s fiscal year end financial statement. Our analysis revealed a negative working capital and their net worth had slipped below zero due to a net loss for the period. Pretty tough…

The agent was not a bonding expert, so it was up to us to find a way to help this account.

Collateral was not an option because of their weakened condition. If it hurts the contractor, it can’t be good for us.

We dug deeper to fully appreciate all of the applicant’s attributes:

  • The bid spread resulted from the fact that the project was specialty work and the second bidder was a general contractor. They would have to hire someone like our client to perform the job. This contributed to their significantly higher price. Also, the applicant documented a good profit margin in their price.
  • There were specific reasons for the net loss. Corrective actions were taken and current financial results were improved.
  • We identified the applicant’s additional financial resources – there were multiple credit lines available (unused) and personal cash.

We wrote the bond! The difference is that FIA has a team of seasoned professionals with many years of experience (since the ’70s!). We know how to get through these tough cases.

Site, Subdivision, Performance and Payment Bonds.

Now you know who to call.

Steve Golia, Marketing Mgr. 856-304-7348

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

We are currently licensed in: NJ, PA, DE, MD, VA, NC, SC, WV, TN,  FL, GA, AL, OK, TX

181. How to Get Rid of Surety Bonds and Why You Should

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“How can I miss you if you don’t go away?”

Performance Bonds are issued by insurance companies – but they are not insurance policies.  When you get to the end of your auto insurance, it will expire if not renewed.  Plus, the company can cancel it in the middle of the year.  Boom, it’s done!  Insurance policies are not “forever.” Click for mood music!

With surety bonds it’s different.  First off, they’re harder to get.  Then, when you finally have it, they don’t expire! And the bonding company can’t cancel a performance bond. So how do they end?

The fact is, people focus on getting surety bonds because they are a mandatory element of many transactions, but they think little of getting rid of the bond – eventually.  Let’s go over why you want to close out a performance bond, and how to do it.

Every performance bond is married to a written contract that is identified in the first part of the bond.  They are married until death – until the contract is completed. If you have a two year contract covered by a Performance and Payment Bond, you have a two year bond, unless the contract is extended. If the contract is amended to a term of 25 months, the bond automatically follows.  If the contract dollar amount is increased, the bond automatically follows.  The point of the bond is to guarantee the Obligee’s (the beneficiary of the bond) satisfaction with the performance of the contract.  So the bond remains in force until the obligee / contract owner accepts the completed contract.

To close out the surety’s obligation, a release or acceptance of the contract by the obligee is needed.  The applicant / principal (contractor) can’t cancel or close the bond.  Only the obligee can end it.

Closing evidence can consist of a Status Inquiry form completed by the obligee.  The questions would be:

If the project IS completed:

Completion date: ___________  Acceptance date: _____________ Final contract amount: $___________

If the project IS NOT completed:

Approximate percentage or dollar amount completed: $_____________________________

Describe any disputes or performance issues on the project: _______________________________

Do you know of any unpaid bills for labor or materials? ____ No ____ Yes  If Yes, please describe: _____________________

Current estimated completion date: ____________________________________

Now that we know how to close out a performance bond, why bother to do it?  There are some very good reasons…

The Surety

  • The surety (bonding company) will conclude the liability on their books when the bond is released.
  • They also immediately earn all the remaining premium. Two good reasons!

The Contractor / Principal

  • That portion of the company’s bonding capacity will be restored to support a new contract.  This helps them qualify for more projects and larger ones. That is the source of their company revenues.
  • The “acceptance” of the work, by the obligee, is the official conclusion of the contract.  It ends the principal’s obligation – except for a “tail” such as a maintenance obligation.
  • When completed, the project is added to the company’s credentials.  They can now list the contract as a successfully completed job.  That’s how their resume is built.
  • The applicant company, it’s owners and spouses have a legal liability that arises through the indemnity agreement (a hold harmless issued to protect the surety.)  It is literally a liability which must be disclosed on their financial statements.  When the bonds are released, this company and personal liability ends.

The Bonding Agent

  • The agent wins too because more bonds can be issued.  And that’s how they make their living.

Conclusion

Everybody wins when the job is closed out and the bond gets released. This is a necessary process that should not be ignored.

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: 856-304-7348

For more cool bond stuff follow this BLOG in the upper right corner!

185. Surety Bonds Are Not Fair!

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

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

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

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

Performance Bond

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

Wage and Welfare Bond

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

It’s Just Not Fair!

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

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

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

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

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

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

A. The surety (a net loss)

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

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

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

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

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

Bond Underwriting Challenge

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This is a real case that was handled by our surety bond experts… a doozie! See what you can make of it.

The facts:

  • This is a Performance Bond request for a multi-million dollar subcontract
  • The applicant / principal is a long established company
  • They have successfully completed similar sized projects
  • The company has a modest net worth, but is on a profitable trend. Ratios are OK.
  • Personal financial statements of the stockholders add more net worth to the picture
  • The company is owned by a father and son. Son is the primary stockholder.
  • We noted their SS numbers are only a few digits apart
  • Father has a substantial net worth. Son has a small net worth as indicated on his personal statement.
  • The applicant has started the subcontract
  • The GC / obligee has a mandatory bond form – very tough. It effectively makes it a forfeiture bond (obligee completes the job and sends you the bill.)
  • Father has a living trust
  • Son also indicated he has a trust

A lot of moving parts. What are the issues?

  1. Low company net worth. Too low for the size bond requested.
  2. “Close” SS numbers imply these individuals are immigrants (received SS numbers at about the same time). Are they U.S. citizens?
  3. Started subcontract. Why were they allowed to start without a bond? Degree of completion? Work acceptable? Bills paid? On schedule?
  4. Do we want to write a forfeiture bond form (financial guarantee?)
  5. What assets are in the trusts? Can they give indemnity? Will we rely on the indemnity of a trust?

– Think of your possible solutions – 

Here is the approach crafted by our underwriters:

  1. Low company net worth. We do not prefer to require collateral because it may be counter-productive, making it harder for the client to complete the project. Instead, the client agreed to add capital to the company – an investment in their future. The funds could be a subordinated stockholder loan, or a stronger method: Additional Paid-in Capital. The latter is more permanent and therefore desirable. The client agreed to permanent capital that would be verified in writing by their CPA and supported by a current interim balance sheet.
  2. Close SS numbers. Why would we inquire about anyone with a social security number? It is because the number itself does not prove citizenship – nor does the filing of a US tax return. Non-citizens authorized to work in the U.S. can get a SS#. “Tax residents” are permanent residents and green card holders who are non-citizens required to pay U.S. taxes. All sureties are cautious when taking the personal indemnity of a non-citizen. They may easily flee the country to avoid their obligations. On this account we determined the father and son were immigrants as we suspected, and naturalized U.S. citizens.
  3. Started subcontract. This would be clarified by obtaining our All’s Right Letter from the obligee, stating the relevant facts on the project (degree of completion, on time, no problems, etc.)
  4. Bad bond form. We had previous dealings with this major GC and negotiated a bond modification that made the bond operate more normally. They agreed to use the bond mod again.
  5. Trusts. It turned out there was only one trust. The son was the beneficiary of the fathers trust, no separate trust of his own. A review of the father’s trust showed it was not prohibited from signing the indemnity agreement. However, living trusts are revocable, meaning the terms can be changed and assets moved out – making them unreliable indemnitors. And it contained the single most important asset, the father’s residence. How to overcome this last obstacle? Our solution: We will place a lien on the property giving us access regardless of changes in the trust.

There you have it. Did you come up with solutions to match ours? It was a tough / complicated case, but we worked hard to solve it.We’ll work hard to solve your bond cases too. Bid bonds, performance and payment, and also site and subdivision!

Include us in your bond production efforts. We can make it happen.

 

Steve Golia is FIA Surety’s Marketing Manager.

The insurance company provides Bid, Performance, Site and Subdivision Bonds with speed and creativity. Contact us today and let’s discuss how we can help. Call 856-304-7348.

Visit us Click! FIA Surety / First Indemnity of America Ins. Co., Morris Plains, N.J.

Surety Bonds: How I Voted

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Last Tuesday was the big day: 

  • “The most consequential mid-terms of our lifetime!”
  • “Your mid-term vote is a chance to affirm / reject (choose one) the president’s agenda!”
  • “The end of life as we know it!”
  • “Blah-blah-blah!”

I’m not making a joke about voting.  I think it is a privilege.  As citizens of a democracy, we owe it to all who have suffered and died defending this noble right.

So on Tuesday, I awoke bursting with patriotism and planning to cast my ballot.  But I decided to do it differently.  You’ve heard the expression, “Vote With Your feet.” This time I’ll do it!

I identified myself to the voting lady and she sent me to booth #2.  I quickly removed my shoes and socks.  It was hard getting the curtain open.

I entered the booth and reviewed all the choices.  Here it comes.  I steadied myself and placed my big toe on the lever.  I need to flip the lever, slippery, hard to turn it… I got it!

It became easier as I proceeded.  At the end you push a button to register your choices.  My big toe wouldn’t fit so I used the side of my “pinky toe.” Awesome!

I must admit, voting with your feet is harder than I expected, and a lot less fun. Why do people like it so much?  Eventually… it dawned on me what the expression means.  My “foot voting” was a fiasco!

You don’t have to make the same mistake. It’s not too late for you to vote with your feet – the right way.  Choose what’s better for you.  You can do it on Surety Bonds:

  • Circular 570, T-Listed bonds in excess of $10 million
  • Increased commissions
  • Superior, 365 service.
  • Same day response on new submissions.

You can have all this.  You should have it all! Vote with your feet and come over to KIS Surety for all these benefits.  Give us a call with your next Bid or Performance Bond.

Steve Golia, National Surety Director, KIS Surety

856-304-7348

Secrets of Bonding #166: Meet the Weatherman

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Tonight’s forecast: Dark!

We like to joke about the TV weather team: “I wish I had a job where I could be wrong 50% of the time!” *  But in reality, we still tune in and watch.

   Question: Is a surety bond underwriter just like a weatherperson?  How are they similar?

Both are paid to make predictions.  They gather and analyze information: “Crystal ball gazers.”  There is a hope / expectation that they will achieve some degree of accuracy.  Whether you are forecasting the POP, or the completion of a construction project, isn’t it just about the same?

You know forecasters use computer models.  They have the National Weather Service and there are Canadian and European Models.  They could just put that up on the TV screen!  We don’t really need the “local weather talent,” do we? 

What about bonding? Many sureties already use computer based programs.  These provide instant or quick answers on surety bonds that fall into certain categories.  Is that all we need?  Should we get rid of the Surety Underwriter / Weatherman entirely?  We say “No!”  Here’s why…

  • The Underwriter does more than predict the future. A good underwriter contributes to the outcome.  Their efforts positively affect many people. 
  • When bonds are approved, the bond agent makes money.  The construction company achieves new revenues. So do their suppliers and subcontractors.  Think of the ripple effect!
  • The bonding company and their reinsurers make money. 
  • Presumably something of value is built for the owner; a useful asset is created. 

Really good underwriters are more than “yes / no” decision makers, they are facilitators. The experienced underwriter sees a path forward that may not be obvious to others.  How can this deal (performance bond) be supported while protecting the interests of the surety, the guarantor of the project’s success?  Here’s where knowledge, experience and attitude come in. 

Does the underwriter want to make the deal happen, and have the know-how to do it?

These high level underwriters aren’t weathermen, they are Rain Makers!  They work actively to produce profits and success for all they touch. Without their expertise, projects would not be supported and built.  Doors get opened and companies reach new, higher levels of mutual success. 

This is a combination of science and art with a dash of experience.  And you don’t find it too often.  But when you do, grab an umbrella and watch good things happen.

Steve Golia is a long established surety bond provider and expert. Call us with your next bid or performance bond. 856-304-7348 

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

*  Actually, weather forecasters average more than 80% accuracy.  Good job guys!

Secrets of Bonding #164: The Phantom of the Underwriting Department

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When it comes to surety bonds, you know your underwriter. You know the process.  There are questions and answers, then a decision.  Simple, right?

You rely on your rapport with the surety and know how to monitor the status of the underwriting.  Maybe you understand the underwriter you see.  But what about the invisible surety underwriter, a shadowy phantom who exists in every transaction, and whose opinion always affects the outcome. Call this mysterious one “The Phantom of the Underwriting Department.” 

For mood music, Click!

You cannot talk to the Phantom…  Invisible.

There are no emails, no Q. and A. 

And yet, the Phantom analyzes, reviews and influences every bonding decision.  Let’s pull back the curtain on this ethereal being.

Contractors Questionnaire

It all starts here.  Your underwriter looks at the basic info: How long in business?  Largest prior jobs? What do they do, what do they sub?

But the phantom yearns for more. What company ownership structure was chosen?  Is it a proprietorship, corporation or LLC?  Did the founders make prudent decisions? These choices affect taxes, profits and future liabilities.  They can help or hurt the company… and its surety.

If criminal history, litigation, tax problems or surety bond claims / losses are indicated, these may require further investigation.  The Phantom will make a deeper review.

Continuity of Ownership: Who succeeds the current stockholder in the event of death? Will the company maintain operations and complete its projects? These arrangements show that management has an eye toward the future.

The Work In Process Schedule

These are requested often.  They show the contracts in progress, their billing status and costs. The underwriter wants to know how much “work on hand.” Then, silently, the Phantom digs deeper.

The current expected profit is compared to the original estimate. What does this show? Is the profit expectation as predicted or better? Is the estimating department in sync with the field organization?  Is job site supervision highly efficient? Can an undeclared underbilling asset be added to Working Capital?

Is the expected profit sufficient to produce a net profit at year end?  The Phantom will compare the projected job profit percentage to the company Profit and Loss Statement. Based on historical expense trends, the likelihood of an upcoming profitable fiscal year-end can be verified.

Company Financial Statements

He loves these.  There is so much.  They talk to him. The Phantom takes full advantage of this document to determine more than just “the numbers.”

Beginning with the accountants cover letter, who has the contractor chosen for this important assignment? Are they using a construction expert? Did they pay for a quality presentation?  Is the best accounting method in use? Is the fiscal date at an advantageous point in their business cycle?

Obviously, underwriters look at working capital, net worth, ratios, profitability. But there is so much more.  The financial statements show how the stockholders / managers treat the company.  What does it mean to them? Do they nurture and respect it, growing the tiny acorn into a mighty oak?

Past borrowing practices are revealed.  Also, the relationship between financial performance and the ambitions of management.

Growth of the revenue stream is observed and management’s success in monitoring / controlling expense levels.

The Phantom reviews financial statements and tax returns to appreciate the owner’s commitment to the bonded company.  This commitment is a cornerstone of the underwriter’s confidence.

Banking Relations

Very important! There are similarities between banking and surety bonds.  The banker’s opinions help reaffirm the underwriting position.

The banking history can reveal good cash flow and prudent business practices.  It can indicate stability, reliability and good management skills.

Credit Reports

The pay record is just the tip of the iceberg.

Now there is a historical review which indicates the adequacy of cash flow, the quality of money management, planning and the applicant’s good moral character.

The Phantom is always there, making this deeper analysis that may never be discussed, but can always make a difference.

Meet Our Phantom

Now, Remove the Mask!

Sorry, we don’t actually have any Phantoms.  All our underwriters are regular people, with real experience and know-how when it comes to bid and performance bonds. Our surety professionals review the facts promptly and efficiently. 

Their deep analysis enables us to support opportunities that may have been declined elsewhere.

We hope you found this article entertaining, but more importantly, informative!  With us, the underwriting is deep and detailed, giving the applicant the highest likelihood of approval.

Call us with your next bid or performance bond, and speak to a real person. 856-304-7348 

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

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.

Bucket List: Update

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Great news!!  Today you can check off one more item from your Bucket List!

Current Bucket List:

  1. Learn to bartend like Tom Cruise in “Cocktail”
  2. Visit Abbey Road in London and re-create The Beatles’ cover
  3. Hug Mickey Mouse
  4. Write my name in wet cement
  5. Bury a time capsule
  6. Ride a Vespa
  7. Find a Bonding Company as Good as I Want
  8. Make a tie dye shirt
  9. Be the house on the block with the most Christmas lights
  10. Try every cheesecake at The Cheesecake Factory

Today you can finally check off #7: “Find a Bonding Company as Good as I Want” There are two big questions and we will answer them now.

Question

What do you want from a bonding company? They must have capacity.  If the company is too small, they can only write tiny bonds.  They are of little use to Surety Bond Agents and their Contractor clients.

Good credentials.  The bonds must be widely accepted so contractors can use them on various contracts, in any state.

Flexible underwriting.  The process of getting the bond approved must be willing and aggressive, like the underwriters actually want to write the bond.

Speed.  You can’t wait forever for an answer.  How long should it take the underwriter to respond?  Basically, your Bucket List surety will give you a same day response.

What about speed? Our underwriting expertise originated in the early 70’s!  We have lots of experience solving problems for our clients efficiently and with a same day response.

Hooray!  You nailed #7.  When you need the next bid or performance bond call us: 856-304-7348.

Now, here is a link to help you with #1: Click!

Secrets of Bonding #162: Burn Baby, Burn!

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In the surety underwriting business, we are forward looking.  Bond decisions are based on a variety of factors including “The Four C’s of Bonding” (read our article #5).  Underwriters make a detailed analysis, then set surety capacity levels to administer the account. That all makes sense.

However, the forward looking analysis makes assumptions – that may or may not be correct.  If incorrect, the outcome could be devastating for the contractor and surety.

In this article we will delve into an aspect of evaluation used extensively by investors, but not so much by bond underwriters.  It is called the Burn Rate.  Mood Music: Click!

 

Here is the internet definition:  

Burn Rate is the rate at which a company is losing money.  It is typically expressed in monthly terms; “the company’s burn rate is currently $65,000 per month.” In this sense, the word “burn” is a synonymous term for negative cash flow.

It is also a measure for how fast a company will use up its shareholder capital.  If the shareholder capital is exhausted, the company will either have to start making a profit, find additional funding, or close down.

Very interesting. The reason our underwriters use the Burn Rate is because of the assumption it does not make…

Think of the typical decision-making process.  Working Capital (WC) and Net Worth are calculated then compared to the requested bonding limits. The underwriter wants to predict if the company’s financial strength is sufficient to support the amount of surety capacity.  (A 10% case?) This evaluation is important, but it assumes the client will have enough future work to fill the bonding capacity limits. But what if they don’t? Can we predict the company’s ability to survive with inadequate revenues and in the absence of profits?  Would this not be an important measure of financial strength and staying power?

The Burn Rate enables us to determine:

Runway

 A company’s “Runway” is the time it can survive on existing capital without new funds coming in.

Here’s how to calculate a company’s financial Runway. This is a hard core analysis that eliminates all expectation of new revenues. The formula requires two elements:

  1. Working Capital “As Allowed” by the underwriter’s analysis
  2. Average monthly fixed expenses

Working Capital (WC), as you may recall in Secret #4, is a measure of the company’s short term financial strength.  It calculates the assets readily convertible to cash in the next fiscal period.  Every underwriter identifies this number during their financial statement review.

If future revenues are inadequate, what is the company’s survivability?  The Fixed Expenses help us determine this fact.  These are the expenses that don’t go away, even if there are no new revenues.  Every month, you pay the rent, utilities, administrative staff, telephone, maintenance, insurance, etc.  These expenses are coming regardless of how much or how little sales are achieved.  In the absence of future revenues, it is Working Capital that must pay these monthly bills.  The Runway is how long the company can operate in this mode.  The Burn Rate reveals this survivability.

An actual client:

12/31 Working Capital As Allowed from the Balance Sheet = $1,099,000

1/31-12/31 Total Expenses from the Profit and Loss Statement (not including Cost of Goods Sold, aka Direct Expenses) = $1,243,000

Burn Rate: Average Monthly Expenses = $1,243,000 / 12 = $104,000 per month

Runway: WC Divided by Average Monthly Fixed Expenses

$1,099,000 / $104,000 = 10.6 months

Based on current expected cash flow, the company can cover it’s fixed (unavoidable) operating expenses for 10.6 months even if it has no income/ profits from new revenues.  The Runway is 10.6 months. This measure of survivability can be compared from period to period, by year, or from one company to another.

Don’t forget, when the mood music stops, the party is not over.  Our national underwriting department brings this high level of expertise and willingness to all your bid and performance bonds. 

Call us when you need a corporate surety with excellent credentials and capacity on surety bonds up to $10,000,000.  Excellence in underwriting, aggressive, creative, fast. Underwriting the way you wished it would be.

Steve Golia is a long established surety bond provider and expert. Call us with your next bid or performance bond.

856-304-7348 

Secrets of Bonding #161: No More Performance Bonds!

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This is the Bonding Company’s worst nightmare…

In this article we will cover the situations in which no Performance or Payment Bond is needed!  Some of the projects are big and federal, some are private, ALL are unbonded.  Here we go!

As a point of reference, you may expect that federal, state and municipal contracts demand a Performance and Payment (P&P) Bond equal to the contract amount.  Normally they do.  General Contractors working for a private owner, such as the construction of an office building or apartment project, may face the same requirement.  This can apply to subcontractors, too.

Federal Projects

This area includes all branches of the federal government. Examples: Army Corps of Engineers, General Services Administration, Dept. of Energy, etc. Their contracts are administered following the rules of the Federal Acquisition Regulations (FAR).

Suprisingly, the FAR says that no P&P bond is required on contracts under $150,000.

For contracts $150,000 and higher that require security, there are times when the bond requirement may be reduced below 100% or waived entirely.  These include:

  • Overseas Contracts
  • Emergency Acquisitions
  • Sole-Source Projects

If 100% security is mandatory, the FAR lists acceptable alternatives to a P&P bond:

  • US Government (investment) Bonds
  • Certified Check
  • Bank Draft
  • Money Order
  • Currency
  • Irrevocable Letter of Credit

Here’s another option: For contracts performed in a foreign country, the government can accept a bond from a non-T-Listed surety. (Circular 570) Crazy!

State and Municipal Contracts

The bonding requirements may vary by state, but generally their flavor is similar to federal.  They, too, may accept alternative forms of secutity such as an ILOC.

Private Contracts

Anything goes.  On private contracts, the owner has complete discretion to set the bonding requirements – including no bond needed.  Keep in mind, the cost of the bond is added to the contract, so the owner can save some money by not requiring a bond.  They may take other precautions to protect themselves.  Some examples:

  • Require a retainage. These are funds that are held back from the contractor and only released when the project is fully accepted (reduces the risk of Performance failure)
  • Lien releases may be required each month to prove suppliers and subcontractors are being paid appropriately (reduces the risk of Payment failure)
  • Funds Control / Tripartite Agreement – a paymaster is employed to handle the contract funds (Payment risk)
  • Joint checks are issued to the contractor and payees below them – to assure the funds reach the intended parties (Payment risk)
  • Physical site inspections to verify progress (Performance risk)

The Nightmare

In these articles we talk a lot about how contractors can obtain surety bonds and manage them.  But it is interesting to note: A construction company could go forever, performing state and federal projects – and NEVER get a bond.  It’s true!

If everyone did this, it would be the surety’s worst nightmare.  But in reality, there are financial advantages to using P&P bonds, so bonding usually is the first choice. 

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.)