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

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.

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