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Performance and Payment Bonds are required on contracts so a claim can be filed if there are problems. There could be unpaid bills from suppliers of labor or material. Workmanship and / or materials could be faulty. The contract terms may have been violated. There are many things that can go wrong, and the P&P bond is the safety net.
Making a bond claim can be technical and time consuming, but the fact remains – the surety industry pays out millions every year. So bond claims do get paid.
Surety bonds are designed to be cheap protection for taxpayers and other project owners. The system works, which is why bonds are required on nearly all public works projects.
There is another benefit that project owners receive. It exists on all bonded contracts even if no claim is filed. In fact, a “no claim” project is the best example of this important effect.
This effect begins even before the bond is issued. What is it? Let’s call it the “F-Factor.”
The F-Factor is the result of the structure under which P&P bonds are provided. We called them cheap protection – they are, in relation to the exposure the surety assumes. How do bonding companies make money if they are paid little in relation to the risk they face? The answer is that they are very cautious when evaluating the contractors that apply for bonds. Every aspect of their capabilities is considered so the surety can avoid a loss. This is the all important F-Factor:
The surety only supports contractors that present no likelihood of claim or loss on the bonded projects. It’s the only way a bonding company can remain profitable and survive. This filter effect means the project owner can be confident that the contractor passed the surety’s evaluation. The bonding company’s very existence depends on filtering out the weak applicants that may falter. A true saying among bond underwriters is that “No premium is worth a claim.”
Bond underwriters are trained to evaluate all the relevant factors. They look at the company history, its financial records, banking, and credit status. Resumes are reviewed and personal bank accounts are verified. The company, its owners and spouses are all required to promise reimbursement if they cause a bond loss (surety bonds are not insurance policies). The underwriting process is strenuous and comprehensive.
When a bonded contractor is required on a project, the owner is getting a company that has passed the test. They have been processed by a group of analysts trained in the art of evaluating all these elements. Underwriters are expected to produce a 0% loss ratio, meaning no bond claims or losses. Their career depends on it. You can assume that no project owner has the ability to perform this thorough analysis the way a trained underwriter does.
So this is the F-Factor, the Filter Effect. The screening out of less capable contractors is an automatic benefit that occurs on every bond. In the vast majority of cases, the bonded contractor performs as expected and no claim results. However, when the unexpected occurs and the bond kicks in, a paid claim may save the day for owners, subs and suppliers.
Every bond is beneficial, even if no claim is made, especially if no claim is made. The filter, the pre-qualification of contractors, is an important benefit that every project owner enjoys when a bond is required.
About Us: Bonding Pros is a surety specialist that has focused exclusively on bonds for contractors since 1972. We’re getting pretty good at it!
We work with insurance agents as their “virtual bond department” and also directly with contractor clients. If you need a bond, we have the markets and expertise to get things done – even when others have failed.
Talk to the Pros: 856-304-7348