Secret #98: The Great Rate Race – Bonding

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Some years ago we met with a contractor and the conversation turned to Surety Bond Rates.  He had just become aware of different (lower) rates that were available from bonding companies.  He was clearly upset: “Do you know how many jobs I have lost over the years by a small margin?!”  Of course I didn’t…  The point was that he felt his bond rate caused him to lose opportunities.

GREAT RACE, JACK LEMMON PETER FALK 1965

Surely every expense and cost element is important when a contractor is pursuing “low bid” work.  The practice in the U.S. is for public bodies like federal, state and local municipalities to award work to the lowest responsible (meaning appropriately qualified) bidder.  Read this as “low dollar.”  It is a tough, competitive environment where margins are usually quite thin or zero!

The contractor’s ability to acquire new work is often linked directly to their control of all expenses, including the bond cost.

My observation of this Rate Race is somewhat overstated.  Here are two important factors that are often overlooked:

  1. Assume the contractor is with Surety A, and Surety B has lower rates. There is no point in comparing the two if Surety B will not agree to bond this account.
  2. The contractor must remember, the extent of their discontent must be the difference between their current surety bond rate and another rate that is available to them. Example: Currently pays 2.5%, has an opportunity to pay 2%.  The discontent is over the rate difference: .5%, not 2.5%!

The first “Aha moment” is when the contractor realizes that every bidder is paying for a bond.  And the difference between the rates is usually quite small, not a significant factor in the outcome of the bid.

The second Aha comes from the realization that, when it comes to bonding companies, contractors may find CAPACITY is a much more important issue.

Contractors are restricted in the amount of work they can acquire.  The bonding company has a certain comfort level, and will withhold their support if the contractor acquires more projects then they feel is prudent.  The concern is that the contractor may become overextended and ultimately fail.  Think about this: Do the rates matter if the surety will not issue the bond?

Conclusion: We agree that bond rates, like all cost elements, must be monitored and controlled.  However, when selecting a surety and managing the relationship, the contractor may conclude that capacity is king and rate is secondary.

A message from Bonding Pros: We have the strong relationships that enable your deals to get done.  Call us when you need a bid, performance, site or subdivision bond.  We have the markets and the relationships that matter on tough cases.  856-304-7348

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