Competitively bid work is always hard to win. During times like these, when not enough work is available, it’s even harder. Margins are thin and contractors are looking at every cost element. Where can a little bit be shaved that might make the difference in winning a new project?
You have the big elements such as the cost of equipment, and subcontracting that may be hard to manage. Then there are internal items, such as the cost of “our” labor and supervision, overhead and maybe even some profit! You hope to exercise some control over these. The cost of the bond is one such item. It’s hard to miss. You know the bond rate, and it gets added on at the end of the bid calculation. So how do you manage the bond rate and get your best deal?
Let’s take a step back and think about what that “best deal” looks like. It is not just a bond rate. What if you have a low rate, but the surety refuses to support the project in question? That’s a BAD deal. So we have to say capacity is an important aspect of the best deal. You need to be sure the bonding company will support the size contracts you are pursuing.
Service is equally important. Sometimes contractors request bonds and no answer is given – they miss the opportunity to bid. That may sound incredible, but believe me – it happens!
So while we’re thinking about the bond rate, we are also looking for good capacity and customer service.
Now let’s talk rate. The bond cost is normally based on the contract amount, and the rate could be a percentage ranging from 1%-3%. A typical rate may be 2.5% of the contract amount. The rate can be fixed (straight up) or could be a sliding scale that is less expensive on larger projects.
When we talk about the competitiveness of bond costs, keep in mind, we’re not considering a 2.5% or 3% rate. We’re comparing the difference in rates paid by contractors. If 3% sounds unacceptably high, it may only be .5% above the competition – meaning it may have a very small effect on overall competitiveness.
Racers know “You can’t finish first unless you first finish.” For contractors, if they don’t have capacity, they’re not in the game. And rate doesn’t matter if you don’t get the bond in time. So I suggest that rate may not be the most important thing when it comes to bonding.
While you let that sink in, let’s answer the rate question. Generally, bonding companies have one bond rate. This means contractors may find it necessary to change bonding companies in order to get a reduction. Changing sureties is usually a painful process. Contractors are not inclined to switch unless all elements, including capacity, are improved.
The process of acquiring a lower rate is typically a gradual one in which the contractor shows ever improving credentials such as longevity, profitability and general financial strength. Maintaining a long term relationship with one surety can be a key element, assuming the company has the ability to offer rate concessions.
• The difference between the rates paid by different contractors is typically very small.
• By building up the company, contractors can gradually achieve lower rates with their current or new bonding company.
• Everyone wants the lowest possible rate. But equally important, you must locate a surety that is willing to provide sufficient capacity and service. The true “best deal” has all three!
KIS Surety is the national contract bond underwriting department for Great Midwest Insurance Company, a national, corporate surety with an A-8 rating. We throw all this underwriting talent at your bond opportunities and support contracts up to $10,000,000.
If you have a contract surety case that needs a fast, creative response, call us: 856-304-7348
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