Month: November 2014

Secrets of Bonding #77: Fire, the Wheel, Surety Bond Rates

These were among caveman’s greatest inventions.  But unfortunately, bond rates have changed little since the Paleolithic Era!

That may be a slight exaggeration, but it is true that bond rates and rating methods are not revised often.  Here are some of the peculiarities worth knowing, primarily in the area of contract surety:

  1. All sureties are entitled to charge for bid bonds, but most do not.
  2. They may charge for performance bonds in advance, but many wait 45 days for payment even though the instrument is uncancellable.
  3. A performance and payment bond costs the same as just a performance bond.
  4. A 100% performance and 100% payment bond costs the same as a 100% performance and 50% payment bond.
  5. A maintenance bond may be cheaper if the same surety preceded it with a performance bond.
  6. A 20% performance bond may cost the same as a 100% bond even though the surety has 1/5th as much exposure.
  7. In cases where a bid bond or surety consent letter is required, but then the work is awarded without requiring a final bond, the surety is entitled to make a charge for the unissued performance bond.

Now here is my favorite crazy bond rule.

Situation: You have a $1,000,000 private contract on which a P&P bond is optional.  The project owner asks the contractor to price an “alternate” to include a bond.

Let’s say the bond rate is 2% of the contract amount. So what is the bond price?

  1. $20,000
  2. $40,000
  3. $20,400
  4. $40,200

I know you love #1. It just looks so right.

But alas, that is not the answer, which is why this wins the wacky award!

#3. is the correct answer. The reason is that the bond fee is actually calculated on itself.  When determining the bond fee, it is not correct to remove the bond cost from the contract amount.  Like the cost of insurance and all costs related to the project, the bond cost is included in the contract amount.

Therefore, the correct basis for the calculation is $1,020,000 x 2% = $20,400.

Q. So what about the additional $400? Should the calculation actually be $1,020,400 x 2%? (Then, wouldn’t you have to recalculate it again, and again, and again…)

Q. And who pays the extra $400? It’s not in the $1,020,000 contract amount.

A. Beats me. You better ask that Neanderthal in the corner office!

 

Secrets of Bonding is brought to you by Bonding ProsNeed a bond?  Talk to the Pros!  856-304-7348  www.BondingPros

Brokers protected.  Contractors welcomed.

Bonding Pros Success Story

November 12, 2014 to Bonding Pros:

“Steve, Good to see it came thru OK. We would like to offer our sincere appreciation and gratitude for your efforts. Thanks so much! Talk soon, (Contractor)”

Frankly, we even impressed ourselves on this one!

The client had a series of obstacles in their file, any one of which could have caused a declination.  With their good cooperation we crafted a file that brought out the key elements of their strength, and effectively addressed issues we knew could be deal killers.

We got them capacity with a highly rated, T-listed surety… with NO COLLATERAL.

This is where our long experience as bonding specialists pays off.

You know insurance, but we know bonds.  Use us as you agency bond department.  We’re problem solvers and our markets are the best.  When you need a bond, talk to the Pros!

We protect our brokers, pay a commission on every bond fee and keep you in the loop.  Try us!

Secrets of Bonding is brought to you by Bonding Pros

856-304-7348  www.BondingPros.com

Secrets of Bonding #76: The Second Bidder’s Second Chance

In this article we will talk about some opportunities that may exist for second bidders.  These are the contractors who have come in 2nd on a competitively bid project, such as a federal or state contract.  These projects are typically awarded to the “lowest responsible bidder” (meaning they must have the proper credentials and meet other requirements.)  As for the 2nd bidder, they get nothing.  They were close, but did not win.  It’s a 100% waste of time and money – unless they DO ultimately acquire the project.  A contract may be awarded to the second bidder under certain circumstances – such as a defect in the low bidder’s paperwork.

There are many documents required in a typical bid proposal: Licenses, certifications, references, non-collusion affidavits, business registration, consent of surety, bid guarantees, etc.  If documents are missing, or issued with defects, the low bid can be declared “non-responsive” at the discretion of the project owner.  The 2nd bidder then becomes the lowest responsible bidder and may receive the contract award.

Here are some of the technical areas to check that can cause bids to be rejected:

  1. Mandatory forms Failure to use mandatory forms, use of obsolete / expired forms, or not following a stipulated format.  Does the bid invitation contain a bid bond form described as mandatory? Bid bonds are all similar but the failure to use the right format or document is a potential cause for rejection.
  2. Bid bond details Check all the typed information for accuracy.
    1. Bidders name
    2. Obligee’s name
    3. Job description and project number
    4. Bid bond percentage or dollar amount
  3. Capped bid bonds If a “capped bid bond” is used, a proposal amount that exceeds the bid bond maximum would invalidate the instrument.  (More info in Secret #68)
  4. T-List requirement If a “Treasury Listed” surety is required, does the bonding company appear on the list, and for a sufficient amount?  http://www.publicdebt.treas.gov/fsreports/ref/suretyBnd/c570.htm
  5. Power of Attorney Is one attached, in the correct name, properly executed and for a sufficient amount?
  6. Notary Acknowledgment Needed for both the surety and the contractor, properly executed.  Is the notary’s commission for the correct state and not expired?
  7. Execution Signed and sealed with the correct seals?
  8. Financial Statement Attached for the surety?  Is it for the correct surety name? Is it as of an appropriate date (not obsolete)?
  9. Consent of Surety This is not always required. However, if stipulated, failure to provide it can cause a rejection. Are all the details on the consent accurate? Properly executed including correct seal?  If there are stated conditions, does the proposal comply? (Example: The Consent may only be valid up to a stated bid amount.)

On public bids (municipal, state and federal), the bid documents are normally available for public review.  Second bidders may be surprised to learn they have a second chance if the low bid is defective.

Another second chance may arise if the low bidder falters on the project after commencing work.  In the event of default, the bonding company must come to the rescue and they want an efficient (fast, economical) way to complete the job. Who better to call than the 2nd bidder?  The 2nd is the natural “completion contractor” to finish the job for the surety.  They already know the project and presumably offered a price close to the low bidder. The 2nd should contact the claims department of the surety that holds the Performance Bond if they see the project is in trouble.

Now a parting comment for LOW BIDDERS: Keep in mind that 2nd bidders don’t give up easily.  They, too, spent time and money pursuing the work, and want to win the contract.  Be sure your quality control prevents bid errors that cause bid bond claims and open the door for 2nd bidders.

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Need Bid or Performance bonds? We’re available to help you right now!  Brokers Welcomed.

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Secrets of Bonding #75: How come HE can get a bond?!

We have been dedicated exclusively to providing bonds for contractors for 40 years, and we’ve heard this question at least 40 times!

It’s frustrating for contractors.  Everyone knows surety bonds are hard to get, but it is really maddening when your less capable competitors are bidding public work and you can’t get across the goal line.  What is the missing ingredient?  Can we name the secret that answers this question?

The process of qualifying for bid and performance bonds is based on people and paper.  The contractor is interviewed and evaluated.  That’s the people part.  A file is gathered and the paperwork is reviewed.  What can cause a perfectly capable contractor to not qualify for bonding?  The answer may be the paperwork.

Secret #5 was “The Three C’s of Bonding – Plus One!”  It touched on this important point. In our experience, the most common area where capable and bond worthy contractors fall down is in the creation of their file.

The people part of the process is obviously important.  If the underwriter is uncomfortable with the applicant, guess what: No bonds.  The paperwork doesn’t matter if the human element fails.

However, it is equally true that the paperwork must achieve its goal.  And what is that goal?  It is CREDIBILITY.  The difference between two equally capable contractors, where only one is bonded, may be the failure to present a convincing file.

When reviewing a new account, bond underwriters know what is normal and believable.  Contractors who fail to meet these expectations will be rejected. Think of an extreme example: If you were evaluating the file, would you be more likely to believe an applicant’s self-serving comment that they have $100,000 in the bank, or an independent CPA firm that issued a report confirming they verified such an asset? HOW the info is presented can make all the difference.

It’s just that simple.  The purpose of the file is to establish the contractor’s CREDIBILITY for all who read it, including those who will not actually meet the applicant.  For them, their decision-making is based solely on the credibility and content of the file.

What are some of the most common paperwork deficiencies that derail contractors?

  1. Lack of credible financial information. They don’t have a year-end financial statement.  Maybe the accounting method is unacceptable or they should have a CPA prepared report but don’t. Sometimes the financial reports contain arithmetic errors and have sections missing.
  2. Bad advice. Actions taken by management can make it harder to obtain bonds. Borrowing money, investing and even the choice of accounting methods can have an impact.
  3. Incomplete files. Many contractors start but fail to complete.  Their energy is focused on “making money,” so they never take the time to complete their bond submission.

We don’t want to over simplify the process.  Each company is different, and there are nuances to developing each applicant to assure their strengths and capabilities are showcased.  We are not intending to explain HOW to establish credibility.  Out point is that unless it is established, there are no bonds – regardless of how capable the contractor may be!

Secrets of Bonding is brought to you by Bonding Pros

Need Bid or Performance bonds? We’re available to help you right now!  Brokers Welcomed.

Talk to the Pros: 856-304-7348  www.BondingPros.com