Month: March 2015

Secret #86: Exoneration Nation – Why Get Off Performance Bonds?

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When it comes to performance bonds for contractors, the emphasis is always on getting them. They are normally required on public work. If you cannot bond the job, being a well-qualified low bidder is not enough. Once a contractor gets the performance bond, work commences and they may think they are done with the bonding company.  Actually, every bond has its own life cycle.  Issuance is the birth – but when and how does it end, and why should the contractor care? 

After a project is bonded, the surety may not require any further paperwork from the contractor. Sometimes the obligee wants the surety to provide a Consent to Final Payment or Consent to Release of Retainage. In such case the underwriter may ask for documentation regarding the health and status of the project. But absent that, the contractor may not think it is necessary to communicate with surety at the conclusion of the job. Why is doing so beneficial?

  1. Each bonded contract represents partial use of the contractors’ aggregate capacity. By officially closing out the project the surety capacity is restored. This is obviously important to enable the pursuit of new work.
  2. From the surety’s standpoint, any coverage for the warranty does not commence until the work is accepted and the performance bond is released. It is beneficial for both the contractor and the surety to start, and promptly conclude, the warranty obligation. While outstanding, the warranty is a risk for both.
  3. The third reason involves the payment bond. The recognition claims by suppliers of labor and material is affected by the last date of their supply or performance on the project. Officially closing the contract and performance bond creates one point of reference for evaluation of such claims.

Closing out the bond file is also important for the surety. It enables them to book any remaining unearned premium and concludes their liability. Both the contractor and surety are exonerated from the risk/obligation.

ex·on·er·ate   verb
past tense: exonerated; past participle: exonerated
– to relieve of a responsibility, obligation, or hardship
– to clear from accusation or blame

“The results of the DNA fingerprinting finally exonerated the man, but only after he had wasted 10 years of his life in prison.”

How to Close the Bond File

At the end of the project, whether requested by the surety or not, the contractor should obtain a letter from the obligee stating that the contract has been completed / accepted and the surety bond is released. The contractor retains a copy and sends this evidence to the bonding company. It’s just that simple.

Contractors should assume the responsibility for this action because not all sureties are diligent in requesting closure evidence for their files. It is true that in every case, it is beneficial for the contractor to submit this information to the bonding company.

Exoneration Nation: Be part of it!

The experts at Bonding Pros can help insurance agents and contractors when tough bonding situations arise. We have the markets and the know-how to succeed even when others have failed.

Give us a call today!  856-304-7348

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Secret # 85: No Bid Bond, No Problem!

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Contractors may be relieved when a bid bond is not required during their pursuit of a new contract. It could be a private contract, a subcontract on public work or even a prime, federal project.

A thorough review of the specifications may reveal that a performance bond “final bond” is mandatory or optional.  In some cases, it is simply requested out of the blue!

If the contractor does not already have their bond account set up, they may lose the project if they are unable to bond it. This can lead to lost revenues plus wasted expense dollars spent on the acquisition effort. There is no reason for contractors to face this problem.  Let’s look at how to prevent it.  

Bonding is a lot like banking. Set it up before you need it. It’s hard to get bank credit when your cash is low, receivables are old and profitability is waning. The time to get it is before you need it.

The same with bonding: It is also best to set it up in advance. So assuming the contractor has accomplished this, it is easy to pre-approve the new contract even if no bid bond is indicated.

no prob

Procedure:
We recommend the contractors submit the project in advance, as if bid security is required.

The bond request form is submitted with a notation that no bid bond is needed. The underwriters will review the opportunity in a normal manner. This process includes a view toward the upcoming performance and payment bond. Sureties will never issue a bid bond unless they are comfortable with the prospect of providing the P&P bond the contractor needs upon award.  By following this procedure, the contractor becomes prequalified for the final bond and can be confident that the acquisition effort is not wasted.

Work On Hand Analysis
Technically, the surety has no current obligation in connection with the potential new job. They have no bid bond exposure, and the final bond will only be issued at their discretion. Even if the new job doesn’t ultimately need a P&P bond, the project will affect the contractor’s total work load and available aggregate capacity. (* How is the available capacity calculated?)

Alerting the underwriters in advance allows a view of the client’s upcoming activity and helps them make their current decisions with the potential future workload in mind.

Obtaining the pre-approval of the contract clears a path for smooth processing when the performance bond is needed.  No bid bond, no problem!

*Undecided and low bids for the full estimated contract amount, awarded jobs, started contracts, plus the remaining portion of open contracts (bonded and unbonded).

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Secret #84: Manage the Bid Bond Account

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For many contractors, the main thing they want to know about Bid Bonds is that they have them when needed.  However, the successful management of the bid bond account requires controlling a number of elements. Let’s review them.

The bid bond facility consists of a single and aggregate limit. The “Single” is the maximum size project that can be bonded (without a special exception), and the “Aggregate” is the maximum combined exposure on the bond account at any given time.

It is important to note that the single limit refers to the project amount not the penal sum (dollar value) of the bid bond. If a contractor is bidding a $500,000 federal project with the 20% bid bond requirement, the amount of capacity involved is $500,000, not the bid bond amount which would be $100,000 (.2 x 500,000 = 100,000).  The underwriting decision is always based on the contract amount.

Bear in mind, the bonding company does not want to know the actual bid amount prior to the bid opening. When requesting a bid bond, the underwriter is given the approximate bid / contract amount in order to preserve the bid confidentiality.

Let’s stay with the $500,000 example. If the contractor’s bid calculation is actually $485,000, it would be appropriate to round up and make the bond request for $500,000. If the actual bid calculation is $510,000, again, it should be rounded up to allow for last-minute increases. A bid bond request for $525,000 or more would be advisable.

While it is true that the penal sum of the bid bond, if expressed as a “percentage of the attached bid,” will automatically adjust up or down to the actual bid amount, a problem arises if the bonding company issues a “capped” bid bond.  This means it cannot adjust upward beyond the amount stated on the approved bond request. If a capped bid bond is used, the contractor will invalidate the bond, and their proposal, if the bid exceeds the amount approved by the surety.

maestro1. The first rule in managing the bid bond account is to request the bond for an amount sufficiently high to accommodate last-minute increases.  This avoids the temptation to bid above the approved amount – a practice that is damaging to the surety relationship.

2. The second important guideline concerns the aggregate capacity.  The aggregate calculation is made on a daily basis and includes the incomplete portion of open projects, jobs signed but not started, awarded projects, low bids, plus undecided bids. As a result, a portion of the available aggregate will be unnecessarily consumed if bid estimates are rounded up unnecessarily high. In our example, if the contractor calculated a $510,000 bid and requested approval for $600,000, they may needlessly consume capacity that could have remained available to support another bid.

3. Another point, submit the bond request early enough to allow time for discussion and processing.  Usually a couple of days is needed.

In conclusion, when requesting bid bonds, round up the estimated contract amount to allow for last-minute increases, but remember to preserve aggregate capacity for future bids.

Allow sufficient time for processing and keep in mind, to the decision makers, it is not “just a bid bond.”

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