This is a study in motivation. “What’s in it for me?” When it comes to Performance Bonds for Private Owners, you need to understand the odds and pick your spots carefully in order to maximize your effectivity.
Understand the Basics
A Private Owner is an entity that is not funded by public money. If it was, we’d call it a Public Body. Examples of Public Bodies include the federal government, your state, city or school district.
A Private Owner could be a company that is renovating their office building. Another example would be any subcontract regardless of whether the overall project is public or private (Note: ALL subcontracts are Private Contracts).
There are some distinct differences between public and private work:
- Legal Basis: Public bodies must comply with a variety of regulatory requirements and statutes. Private contracts are made based on business decisions. They are governed by the Uniform Commercial Code and state common laws.
- Funding: On Public work the source is known and presumed to be dependable. On Private each situation is different. It is possible that the Owner signing a contract may not have adequate funding in place to pay for the work.
- Specifications and Bond Forms: With Public contracts this tends to be consistent and predictable. Insurance and contractual requirements are standardized. A 100% Performance and Payment Bond (P&P) typically is required. The approach to the bond forms is known in advance. For example, the federal government has their own mandatory bond forms. With Private, the owner can make any requirements they want, including the use of mandatory, unique, bond forms or no bond at all. (Review Secrets #7 for more insights on this subject)
Now we’ll talk about motivation.
- The Insurance / Bond Agent: Wants to serve the client and earn a commission.
- The Surety: Wants to earn the bond fee or premium.
- Contractor: Wants to acquire the contract and maximize their profits.
- Owner: Wants the work performed correctly by a capable contractor for the lowest reasonable price.
Picking your spots on Private Contracts
Our point of view is obviously that of the Surety. We have been an active writer of Subcontract Bonds and other Private Contracts for many years and here’s what we’ve learned. Private owners know that the first service the surety provides is pre-qualifying the contractor for the work. The surety wants to avoid a loss so there is an extensive review of all the contractors’ capabilities. If there are weaknesses or a likelihood of failure, the surety will refuse to support the project. So a P&P bond is like the Good Housekeeping Seal of Approval for a contractor. The Private Owner knows that a bonded contractor has been thoroughly checked out.
Now bear in mind that the bond cost is included in the contract. The Private Owner that requires a bond, pays the bond cost in the contract amount. Since the bond may be optional on a private contract, some owners use the surety to screen the contractor, but then they do not actually pay to bond the project.
The losers in such cases are the surety and the agent as well as the Private Owner. The surety and agent performed services and incurred expenses – but then don’t get paid. If there is any kind of problem on the project, failing to obtain a P&P bond could cost the Owner dearly. Bonds are an effective and economical way to prevent significant problems down the road.
Bottom line: When private contract specifications do not indicate a MANDATORY P&P bond requirement, agents should be cautioned that the bond could be waived. It is true that there is no substitute for actually having a bond in place (guarantees good workmanship and materials, on time completion, no cost overruns, no liens against the property). But for some private owners, the chance to save a few dollars is irresistible – even if it means engaging the surety’s services under false pretenses.