Bonding Tips for Contractors

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Bonding Tip #49Some Performance & Payment Bond forms are bad news and should be avoided!

ExplanationBond Forms fall into three broad categories… 

  1. Federal or State forms: These documents all tend to be fair and balanced. AIA (American Institute of Architects) bond forms are also readily accepted.   
  2. City and township forms are OK.  However, there are some exceptions. If you are unfamiliar with the document, read and analyze it.
  3. Private owners, GCs: May create their own forms designed to be good for them, and bad for everyone else. Anything is possible with this group.  Be wary of special, mandatory bond forms.

   Here are aspects that would cause a concern:

  1. Bond amount is for more than the contract.
  2. Performance bond claims can be made while contractor is still on project.
  3. Short time specified (i.e. 14 days) for surety to commence with completion of the contract.
  4. Surety waives rights, and upon demand, must immediately complete contract.
  5. Obligee has right to complete work, then charge surety for the costs.
  6. If Obligee decides there is a default, surety must pay bond amount. 

Keep in mind, because of the indemnity obligations, a bad bond form is harmful for the surety and the contractor.

 

Bonding Tip #48: Collateral AND Indemnity?  Some surety bonds are exceptionally difficult to obtain.  One example is a Release of Lien bond.  Another is an unsupported Union Wage and Welfare bond.

  Gaining approval may require the dreaded “c” word: Collateral.  The applicant gives the surety a security deposit equal to the bond amount.  Under these circumstances, it appears highly unlikely that the surety could ever experience a loss.  So why do they also require indemnity?  Seems rather greedy, doesn’t it?

ExplanationThe indemnity of the applicant gives the surety the legal right to use the collateral in the event of a claim or expense.  For this reason, even full collateral bonds require the indemnity of the applicant company.

  If we accept that, here is a more perplexing question: Why is personal indemnity required on full collateral bonds? Surely, with full collateral and the company indemnity, personal indemnity is unnecessary!

  Reinsurance requirements often drive this scenario.  The surety’s reinsurance treaty requires “full indemnity” even with full collateral. Like the Belt & Suspenders, you may be faced with this redundant situation.  You can’t do much about it, but at least now you know why it happens.

 

Bonding Tip #47: $8 million project saved! 

Explanation: Responsiveness and Expertise are the hallmarks of a capable Surety Bond Agent.  When we looked back on this transaction, there were the technical challenges: A new client, an atypical project with multiple obligees, the bond was already overdue - lots of moving parts. 

 

The most amazing thing was not that we accomplished the processing in six days start to finish - but that the Memorial Day weekend was in the middle.  (God Bless our Vets and Armed Service Members!)

 

The approval was actually accomplished in

three business days!

 

Bonding Tip #46: "I plan to hold back my company's financial statement because the bonding company will not like it."

Explanation: For many construction companies, 12/31 is their fiscal year-end, and the reports are normally produced no later than March or April.

 

There is little more than a short term advantage in holding back the statement. Underwriters will assume that the company's accounting records are in disarray, or bad results are being concealed.  For them, no news is bad news! 

 

A better approach is to produce the documents on time, with an explanation regarding obstacles faced, remedial actions taken by management, plus projections for the current year.

 

 

Bonding Tip #45Is my bonding agent "independent" or a "captive"?

ExplanationIt is important to know because it determines how much they can do for you.  To find out, simply ask them. To learn WHY this is important, enjoy our complete article here.

 

Bonding Tip #44Determine Surety Bonding capacity needs.

ExplanationThe aggregate amount of Bonding Capacity needed in order for contractors to have overlapping bids, is generally at least twice the single limit.

 

Read our complete explanation on this subject and learn how to manage the bonding capacity here.

 

Bonding Tip #43 What's In A Name? 

Explanation: Generally speaking bonding companies are less willing to support Developers and Design / Build firms.

 

Therefore, resist naming your company "Lusitania Development Inc." or "Edsel Design and Construction."  If you are active in these areas, consider conducting the business under a different company or operating division and use a more beneficial name for the bonded work.

 

First impressions are important!  You want to avoid the "OMG" factor when submitting your account for approval. 

 

Bonding Tip #42 Exoneration - Why Get Off Performance Bonds?
Explanation: There are several important reasons for contractors to seek the formal release of performance bonds by the obligee.

 

It directly helps the contractor as well as the surety.  How does it, and how do you do it? Read the full explanation!

 

 

Tip #41 Site Bonds: Builders Beware!
Explanation: When the township requires a Site Bond in connection with required public improvements, it is not unusual to expect the builder to obtain the bond. Actually, it is the property owner who should provide it!

 

The builder/contractor should avoid being placed in this position because in the event of the demise of the property owner, they would become obligated to fund the cost of performing the work.

 

Providing Site and Performance Bonds for contractors has been our specialty for more than 30 years.  That's all we do!  Call us today.

 

Tip #40:  Be aware of "Pay When / If Paid" contract language

Explanation: Depending on your side of the fence, you may love or hate this concept.

 

GCs and subcontractors should be familiar with the difference. 

"Pay When Paid" contract language is intended to control the timing of payment, but will not excuse the GC from the payment obligation.

 

"Pay If Paid" can excuse the GC from having to pay the Sub if they do not receive funds.

 

For proper legal guidance and further details, contact your attorney.

 

 

Tip # 39: Go Big or Go Home!

Explanation:  EXCEPT when it comes to marketing your bond account.

 

Here’s the issue.  There are only a small number of highly responsive bonding companies, but there are many bond agents. It only takes one good agent to submit your account to all of the best underwriters / companies.  It is the agent’s job to bring your account to the market in the most beneficial manner.  If your use multiple agents, they all end up sending your file to the same few underwriters.  When the underwriter sees that “everyone” has your file, they assume every other company also has it. This causes them to lose interest (they want to avoid wheel spinning).

 

When setting up or improving your bond account, you need ONE GOOD bonding agent.  Pick someone who specializes exclusively in bonds, such as Bonding Pros.  We have all the best markets and deal with the underwriters every day.  Let a specialist handle your file.  That’s the best way to penetrate the market while protecting the value of your account!

 

Tip #38: How to Get Last Minute Bid Bonds

Explanation: Here is a procedure we have used for years with our contractor clients.

  1. Search for FedEx locations near the bid opening site.

  2. Under “Filter,” select Additional services / Hold package at location for pickup

  3. Now select the most convenient location from the map.

  4. Use that address as your shipping destination.

  5. Indicate “Hold at location” in the shipping instructions

 

The package will be held at the FedEx staffed location awaiting pickup by the person you have designated (they will not deliver it.) Find out when the facility opens to determine the earliest time you can obtain your document.

 

More good stuff: Read this week’s full length article “The Path to Profitable Contracts” www.SecretsofBonding.com

 

Tip #37: Joint Ventures: Who Obtains The Performance Bond?

Explanation: The JV is a unique entity and it can be a surety bond applicant.  The bonding connections of either or both JV members can also be used.  Lots of options and we know how to sort through them! 

 

Call if we can help on local, state or federal projects.

 

Tip #36: Steps to Set Up a New Bond Account

 

Here are the typical steps.  We do not charge for these services:

  1. Initial conversation to determine client needs
  2. We provide a written outline of needed info, usually 8-10 items
  3. Our underwriting department reviews the data and provides a professional assessment
  4. We develop a marketing strategy for the account
  5. Our staff brings the account to the market in a controlled, confidential manner
  6. We work together to address the underwriter’s questions
  7. The account is approved with specific terms indicated
  8. The new bond account is established and now each bond can be processed when needed.

 

Tip #35: Can a dormant company get bonded?  

Explanation: (Assuming it is now becoming active…) Lacking a recent company track record makes it more difficult to obtain surety bonding.  However our underwriters may support an account if prior company or personal history is relevant, beneficial and can be documented.

 

We have successfully made such arrangements many times over the years.

 

Tip #34: Consider Cost Plus contracts. On subcontracts and other private jobs, take advantage of the opportunity to negotiate a more beneficial type of contract.Cost Plus may be better than Lump Sum competitive bidding.  A cost plus contract may eliminate much of the contractor’s risk and facilitate a lower total project price with a guaranteed profit margin.

Tip #33: Contractors: Act NOW if you have a 12/31 fiscal year-end

Explanation: The 12/31 company financial statement can make or break your bonding for the coming year. Instruct your CPA to first produce a “draft” report.

 

Have your bond underwriter review it for any “issues” and to confirm it will support the bonding you desire for next year.

 

Contact us for free guidance, a second opinion or the solution you really want.  We know how to maximize your bonding capacity.

 

Tip #32: ALL prior experience counts

Explanation: Bonding companies resist bonding jobs more than 100% greater than your prior experience. 

 

ALL prior jobs are relevant in this analysis including older projects, Unbonded jobs, and to some extent, even projects performed while employed elsewhere.

 

Tip #31: Contract Addendums should include a bond fee

Explanation: The surety bond cost is based on the contract amount.  If the contract is increased, an added bond cost will be charged.

 

Be sure additions to the contract include an appropriate bond fee. (Check with your bond agent.)

 

Expect to pay this additional charge.  The invoice may come when the project is being closed out.

 

Tip #30: "We've never had to get a bond before. What's involved and how long does it take?"

ExplanationThe answer depends partly on the size and nature of the upcoming contract. In some cases we use a simplified process and provide the first bond within 24 hours.

 

In others, it may take 1-2 weeks. Rest assured, we're good at it! Over the last forty years we have started off many contractors with their first bond.

 

We find it gratifying to be the ones who opened this important door.

 

 

Tip #29: Bid results should be reported to the surety promptly.

Explanation: This helps maximize your available bonding capacity.  The Estimated Contract Amount (not the bid bond amount!) is charged against your available capacity until the Not Low results are recorded.

 

On low bids, reporting the results positions the underwriter for issuance of the Performance Bond.

 

Tip # 28: Check bid bonds for accuracy.

Explanation: There are many ways to issue a bid bond incorrectly, and only one way to do it right.

 

Before filing a bid bond with your proposal, review the written bonding requirements, the typed in details such as your company name, the project identification and all aspects of the execution.

 

It’s better to confirm the accuracy than to assume it is correct and have the second bidder discover an error that invalidates your low bid.

 

For more Tips, visit the Archive.  Click button below.

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