Month: April 2015

Secret #91: Bonding Capacity – Enough is Enough

Brought to you by…

Secrets of Bonding is brought to you by Bonding Pros

Need a bond?  Talk to the Pros!  856-304-7348  www.BondingPros.com

Brokers protected.  Contractors welcomed.

Contractors know Surety Bonding Capacity is good to have and the more you have the better! But how do you determine the amount that is enough?

Primer on Capacity

  • Bonding capacity is normally described as an amount per project and an aggregate total. The amount per contract is referred to as the “single,” meaning the amount available to support a single contract. The aggregate is the incomplete portion of all the current and new contracts on any given day.
  •  Bonding companies look at the contractor’s capabilities when determining the single amount they will support. These include similar jobs successfully completed, available resources such as supervision, labor, and equipment as well as financial liquidity.
  •  To evaluate the aggregate, underwriters look at historical production levels, financial strength and other relevant factors.
  •  They also consider the capacity amount the contractor is requesting. For successful management of the relationship, it is beneficial to provide what the client desires if possible.

So how does the contractor determine the capacity levels to request?

First off, underwriters are unlikely to support new projects more than double the size of prior work. In addition, they generally expect the financial analysis of the last company fiscal year-end financial statement to show adequate levels of strength for such projects. (Read Secrets of Bonding # 4 for a complete explanation regarding working capital calculations.)

The aggregate capacity is generally double the “single” amount although there may be cases where a limited program consists of a single and aggregate for the same amount. This would mean the underwriters only want to support one project at a time with no overlap.

As far as the ability to bid on multiple projects while performing other work, the solution is to have an aggregate amount that is a multiple of the single, for example $1 million single / $2 million aggregate (referred to as “one over two”).

To decide if the aggregate is enough, first determine if it consists of bonded work only or all projects. This enoughvaries by underwriter. It is reasonable and likely they will say “the aggregate includes all work, bonded and unbonded.” This approach takes all the contractor’s obligations into consideration, everything that may tax financial and human resources and therefore affect the bonded work.

The more liberal treatment is to define the aggregate as only including bonded work. This provides unlimited potential to add unbonded work with no scrutiny by the surety.

Capacity Management Tips

One factor that affects the adequacy of the aggregate is the company’s bidding strategy. Stacking up multiple bids in rapid succession consumes the aggregate more quickly.

The prompt recognition / reporting of progress on bonded jobs and their conclusion has the opposite effect. It helps make more capacity available.

Knowing when current bonded projects will complete can be helpful. Underwriters may support bids knowing that the start of the new project will be after the completion of a current bonded job. This is a slightly creative way of stretching the capacity with a view toward the future. Some underwriters will exercise this flexibility.

Conclusion

In our experience we find that capacity is the most important element of a bonding program.

Contractors are always concerned about the competitiveness of their bond rate. But if you don’t have enough capacity to add the new project, the rate doesn’t really matter.

Secrets of Bonding #90: Manage Your Credit Report

Brought to you by…

Secrets of Bonding is brought to you by Bonding Pros

Need a bond?  Talk to the Pros!  856-304-7348  www.BondingPros.com

Brokers protected.  Contractors welcomed.

Love it or hate it, you do have a credit report and potential creditors can view it.

Credit scores have always been important in the evaluation of contractors applying for bid and performance bonds. Today they are even more important because a number of bonding programs we offer use the personal credit score as a primary basis for the bond approval.

Let’s dig into this critical underwriting element, learn about the inner workings and how to manage them.

Here are the main components used in evaluating the credit status (listed in order of importance):Credit cards

  1. Payment history
  2. Amounts owed
  3. Types of credit in use
  4. Length of credit history

Dig Deeper

Each credit bureau has reporting relationships with vendors and lenders. They gather payment info from them each month. It is likely that every credit bureau receives information from the issuers of your major retail credit cards (such as department stores and gas cards.) They may not, however, know all of your creditors. Therefore it is possible that credit bureaus may show different data and credit scores.

Regarding amounts owed, the dollar amount may not necessarily lower your score. It is more detrimental if you are using a high percentage of your available credit. This is viewed as a possible indication of financial stress.

The type of credit you use is not a major factor in determining your score. However, you should refrain from opening new credit cards unnecessarily. It may also lower your score if you do not have any credit cards. Managing credit card debt responsibly helps raise your score.

Applications for new credit can lower your score, especially if you do not have a long credit history. It does not lower your score if you order your own report directly from the credit bureau.

Manage Your Credit Report

Step one is to order a free copy of your credit report and check it for erroneous information. Mistyped social security numbers and name spelling errors can result in other people’s bad information appearing in your report. This happens more often than you might think.

If you do find inaccuracies, write to the credit bureau, provide an explanation and evidence (such as proof that a disputed account was settled) and demand a correction.

Other tips:

  • Set up payment reminders
  • Reduce the amount of debt you owe
  • Pay your bills on time
  • Talk to creditors if you are having difficulty making payments

Conclusion

Your credit score matters for bonding and other purposes. It is worth taking the time to manage, and maximize it.

Disclaimer: We are not credit counselors and are not providing financial advice! We are Surety Bond Specialists.

If you need a credit counselor, contact one.  If you need a bond, call us!  856-304-7348

Secrets of Bonding #89: Beyond the Glass Ceiling

Brought to you by…

Secrets of Bonding is brought to you by Bonding Pros

Need a bond?  Talk to the Pros!  856-304-7348  www.BondingPros.com

Brokers protected.  Contractors welcomed.

There is a glass ceiling in contractors bonding and maybe you have hit it. This is both an obstacle and an opportunity. Let’s look at both.

We offer expedited bid and performance bond programs to cover contracts that are not excessively large, complicated or difficult. A size example would be a contract for $250,000. In this discussion we will assume that this is the maximum size bond available in the program.

Glass Ceiling
If the contractor is bidding a job for approximately $250,000, there may be instances where the final estimate comes in higher. However, if the program has a $250,000 maximum contract amount it cannot be used for a dollar more. How can the contractor solve this dilemma? If their estimating produces a bid amount of $265,000, do they pass up the opportunity or reduce their price to $250,000 in order to obtain the bond?

Failing to bid the project gives the contractor a guaranteed return of $0. If they bid the job at $250,000 there may be opportunities to improve the outcome through contract additions. They may also find labor efficiencies or improve their purchasing resulting in a better profit margin. Nothing ventured, nothing gained!

On the other hand, they could end up with an unprofitable project, one that was underpriced from the start. This not only results in a loss of net worth, it is also detrimental to bonding and banking when the unprofitable contract appears on the completed work schedule.

Underwriters may require a written explanation about the loss before extending additional bonding support. The contractor could have difficulty paying subs and vendors on an underpriced job. This could lead to complaints and even a bond claim. A losing project is always bad news but it is more detrimental when the loss was within the contractors control.

So far we discussed two possible outcomes:

  1. Don’t bid the job
  2. Reduce the bid to the maximum amount permitted in the program, even if it may be inadequate for a successful contract.

Beyond the Glass Ceiling

glass_ceilingThere is a third possible outcome and it is more favorable. Hitting the glass ceiling is an opportunity for the contractor to graduate into a new program with higher capabilities.

This is a natural indication that the time has come for the contractor to move into a traditional bonding program with almost unlimited capabilities.

Granted there are some trade-offs… The traditional programs involve more time, paperwork, and expenses. The benefit is the opportunity to move into larger projects – exactly what the contractor wants.

The bottom line is that the “easy” type bond programs offer advantages but may not be a long-term solution for all contractors. When you hit that ceiling, keep in mind that other bonding solutions are available and your Bonding Pro experts can guide you accordingly.

Secret #88: Ten Biggest Lies in Surety Bonding

Brought to you by…

Secrets of Bonding is brought to you by Bonding Pros

Need a bond?  Talk to the Pros!  856-304-7348  www.BondingPros.com

Brokers protected.  Contractors welcomed.

Here are the ten biggest lies in surety bonding:

  1. “The surety is your partner and we are all in this together.”

OK and I have a bridge in Brooklyn to sell you. This is true until there’s a claim or loss and then the surety is entitled to sue the contractor for recovery. After all, they are a “for-profit” company that must answer to its stockholders.  They are not in business to lose money.

In cases where collateral has been required by the surety, it will not be used to help the contractor finish the project. It is only used to help the surety perform the work with the replacement contractor in the event of default.

  1. “Dividing the project into multiple contracts will make it easier to bond.” pants_on_fire

This falls into the “smoke and mirrors” category.  If it’s one big job for the client, then it’s still one big job.  Experienced underwriters will recognize the true nature of the undertaking and support the client straight up if they deserve it (one contract and bond).

  1. “Slicing up the contract into phases will make it easier to cover with multiple bonds.”

Most sureties will resist this, since it is still one contract.  Their reinsurance treaties probably will not support such an approach (referred to as “stacking”).

  1. “We are requiring a 50% performance bond to save the contractors bonding capacity.”

Misplaced good intentions: Bond underwriters evaluate the contractors amount of remaining work, not the remaining bond amount.

  1. “We stipulated a 50% bond to save money.”

Too bad it doesn’t work that way. Typically the bond cost is based on the contract amount.  So you pay the normal price, but you get a bond for half as much.  Cool!

  1. “The job specifications indicate that a performance and payment bond may be required at the owners discretion and a bondability letter must accompany the proposal.”

Ughhh!  May be a time waster.  This smells like a GC who wants the subs “certified” by the surety for free.

  1. “A private owner requires a 100% Performance and Payment Bond equal to the contract amount.”

In some instances, upon receipt of the bond, they send it back, waive the bonding requirement and allow the work to proceed.  Another misuse of the surety’s services. If there is a performance issue or unpaid bill, who gets the last laugh?

  1. “The client will provide full corporate and personal indemnity.”

In order to get the bond, the client willingly signed an indemnity agreement outlining the handling of the premium and enumerating their obligations to protect the surety from loss. Now that they landed the project, some clients attempt to change the deal / ignore the agreement.

The nature of suretyship requires that underwriters rely on the good character of their clients.  Sometimes such trust is undeserved.

  1. “All company owners must give their indemnity.”

The real truth is that most, but not all do.  Typical exceptions: ESOP and publicly owned companies, low % owners, foreign / overseas owners, pre-nuptial agreements, non-transfer of asset agreements, high % collateral cases, well-heeled companies.

  1. “You got turned down for a bond, because you don’t deserve one.”

Well, often this is just not true.  In our experience, most contractors who are willing to place their own assets at risk to perform a lump sum contract, are worthy of a bond.

The problem may be the agent or the underwriter, not the applicant.  Since 1972 we have specialized in succeeding on contractors bonds even when others have failed.  Agents and contractors who need bid, performance, site and subdivision bonds should call us!

Secret #87: Payment Bonds – You Like It Hard or Easy?

Brought to you by…

Secrets of Bonding is brought to you by Bonding Pros

Need a bond?  Talk to the Pros!  856-304-7348  www.BondingPros.com

Brokers protected.  Contractors welcomed.

If you like to do things the hard way, stop reading. You’ll hate this article.

On unbonded construction projects, it is not uncommon for high dollar vendors to specifically ask for the protection of a Payment bond. When this is presented to surety underwriters, they quickly recognize that the purchase order is the subject of the bond guarantee, not the construction contract. This is a much more difficult underwriting scenario.  Why?

When a Performance and Payment Bond (P&P bond) is written on a project, the principal (contractor) is being paid to perform the work. If they fail and the surety is called in to complete the job, the unpaid balance of the contract price is a financial resource that remains available. Even if the principal has no financial capabilities, the surety still has a source of money that may be adequate to complete the obligation without having to add funds.

easy-hard

Now let’s go back to the vendor scenario. We are assuming there is no P&P bond on the project. When the vendor demands the protection of a payment bond, it will be a guarantee of the purchase order not the construction contract. It is purely a guarantee that the principal will pay the vendor. It is not a promise that incoming contract funds will be used appropriately to pay bills. Big difference!

The point is that in the vendor example, it is considered a financial guarantee – a promise that the principal will pay money when appropriate. The reason these obligations are more difficult may be obvious. If the customer is unable to pay the vendor because they’re out of money, only the surety remains to pay the bill. Solving the bond need of the vendor by issuing a financial guarantee bond on the purchase order is the hard way to solve this problem.

The Easy Way
If a 100% performance and payment bond had been required on the contract, it would have guaranteed (among other things) the payment of all bills for labor and material, including the one in question. Even if the project owner did not stipulate a P&P bond, it does not mean one cannot be used to solve the problem.

The easy solution, the alternative we always suggest, is to order a traditional 100% P&P bond and then simply file a copy of the payment bond with the vendor. It does not name the vendor as obligee the way a financial guarantee bond would. However, it is issued literally for the protection of such vendors and solves the need perfectly, and with less underwriting stress and probably a lower premium!

This can be a great solution that converts very challenging underwriting into plain vanilla.

Consider using this technique when the purchase order is a major portion of the overall contract. If it is not, it may not be economical to bond the entire job, just to cover one vendor. Then it could be necessary to pursue the financial guarantee bond instead.