P&P bond

Secrets of Bonding #155: The Double Bonding Conundrum

This is America. Everyone is entitled to their opinion. But on the subject of Double Bonding (Contract Surety) we will not all agree.

So here are the facts. You will decide if this is a great idea or just a waste.

What is Double Bonding?

Also called “back bonding” or “subcontract bonding” an example would be when both a subcontract and a prime (directly with the project owner) construction contract are bonded. The prime contractor is the General Contractor (GC).

The GC gives some of the work to trade contractors such as the plumbing, electrical and HVAC. These firms may be required to give a subcontract bond to the GC guaranteeing their work. In turn, the GC provides a bond that covers everything. In other words, it too covers the plumbing, electrical and HVAC. That’s the “double” part. Sounds pretty dopey so far, right? Why would anybody do that?

Turns out this occurs often. Depending on your viewpoint, it may seem helpful / essential, or just a waste of money. Let’s evaluate it and you decide.

Why Love It:

  • Owner: Subs that have been approved by a surety may perform better.
  • GCs: May have a policy to automatically bond subs over a certain dollar value. This is intended to prevent delays and unpaid bill problems.  In addition, the GC / prime contractor is the direct beneficiary, and the potential claimant against such bonds.
  • Subcontractors: With a surety backing them, they may have an advantage when pursuing new work. These are important credentials that prove they have passed the underwriters scrutiny and have the backing of a professional guarantor.
  • Sureties:  May find it easier to support the GC bond if major subs are bonded. A portion of the risk is then covered by *another bonding company.
  • Third tier subs and material suppliers: May not be protected by a payment bond unless double bonding is in place. The GC’s bond may not go down to the third tier (sub of a sub or third tier suppliers.)
  • The most important reason: It is possible that the GC’s surety may insist that major subs be bonded as a condition of supporting the GC. This can be the key to acquiring the contract.

Why Hate It:

  • Owner: Doesn’t need sub bonds because the GC’s bond already covers all the work.  They may be forced to bear the related premium costs if the sub bonds were anticipated. If they were not, the charges may come out of the GC’s profits.
  • GC: In a competitive situation, the related costs could cause them to lose the project. Sub bonds may help GC with their surety, but they do not reduce the cost or dollar value of the GC’s bond.

Bonus Conundrum

Love it or hate it, double bonding is sometimes done voluntarily, or it may be stipulated by the GC’s surety. There is no denying that the concept is important – so important that in some cases both the GC bond and the sub bonds are written by the *same surety. Why would they do that?!

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KIS Surety Bonds, LLC is the exclusive underwriting department for Great Midwest Insurance Company an “A – 8” carrier licensed in all states plus D.C.

We have in-house authority for Bid and Performance Bonds up to $10 million each.

Contact us for creative solutions and a same day response: 856-304-7348.

Secrets of Bonding #119: Lien On Me

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“It’s what you don’t know that gets you into trouble.  It’s what you know for sure that just ain’t so.”  A famous quote by…?

Let’s go over what you need to know about construction liens.  They can have a big impact on construction contracts and companies.            Click for mood music!

A Mechanic’s Lien is filed when a subcontractor or supplier on a construction project fails to be paid. The lien is a form of claim filed against the project itself. For example, the unpaid mason (subcontractor) files a claim against the building owner. “My bricks and labor are in that façade. I can’t take them back now, but assert that the general contractor has failed to pay me!”

Liens are used on non-governmental projects. Typically, claimants are prohibited from liening a public building – which is where Payment Bonds come in. Issued by surety companies, the payment bond is a resource to protect suppliers of labor and material from non-payment.

So far that’s all pretty straight forward. On private contracts unpaid subs and suppliers can file a lien. On government jobs they make a claim on the payment bond instead.

Here are some implications worth knowing.

Release of Lien

The lien can be released, or “bonded off,” by the filing of a (you guessed it) Release of Lien Bond. This removes the lien from the property in question, which is beneficial for the project owner, while still providing financial protection for the plaintiff (unpaid sub or supplier.) The dispute is still unresolved, but the plaintiffs security shifts from the physical project to the surety bond.

A release of lien bond is not easy to obtain. But if a payment bond was issued, that surety has motivation to prevent a payment bond claim, and issuing the lien release bond could do so.

When the lien release bond is filed, it takes some pressure off the defendant (general contractor). You can assume the unpaid mason hopes the lien will cause the owner (who is the recipient of the lien) to force the GC to respond. When the lien is bonded off, that effect disappears from the project owner – but not the surety.

Stop Notices

California, Mississippi, Arizona, Alaska and Washington use a slightly different procedure. On governmental projects a Stop Notice is filed which freezes a portion of the project funds to protect the claimant. This forces action on the part of the GC, or they can file a Release of Stop Notice bond to keep the project funds flowing while dealing with the dispute.

Understand the Difference

Mechanic’s Liens are filed against the project owner.  The claim attaches to the real property and is recorded against the property title – which therefore restricts the owner’s ability to dispose of the property.  

With a lien, the claimant may be paid regardless of whether the owner paid the GC.  In fact, the owner may have to pay twice: First to the GC then again to the sub / vendor claimant, to remove the lien and clear the property title.

Stop Notices “trap” contract funds, assuming there are funds to trap.

If the claimant files a Stop Notice after the funds have been disbursed, it is useless. 

Other basic differences:

  • Unlike a lien, the stop notice does not give the debt any security.
  • The stop notice is sent to the relevant parties, but it is not legally recorded such as a lien filed against the property title.  The claim is inherently less official and is sometimes even ignored because of it’s less formal appearance.
  • Unlike a Mechanics Lien, the Stop Notice can affect the entire project because it freezes a portion of the contract funds – which the GC may need in order to continue working.

NOTICE: The author is not an attorney and is not giving legal advice.  This article is for entertainment only.  Gimme a break!

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Secrets of Bonding #26: Bond Request Forms (The Gift That Keeps Giving)

For the agent and client, there is plenty of paper to handle on contract surety bonds.  So just when you get through the questionnaire, business plan, resumes, references, WIPs, and financials there is STILL ONE MORE DOCUMENT THAT WE NEED!

Yes, it is true.  Bond Request Forms are the gift that keeps giving because you get the opportunity to do one as each bond comes up.  So, considering these forms are not going away, let’s get comfortable with them.

Why Needed

The Bond Request Form is a summary of key factors concerning the specific contract and bond in question. The form is used for both Bids and “Final” bonds (Performance & Payment). It covers basics such as the name of the contractor and obligee, description of the work and the specific bonding requirements.

The form is used for underwriting and administrative purposes.  The underwriters review the details and may literally sign their approval on the form.  The admin staff will type the bond based on the Request Form – so completeness and accuracy are crucial.

Let’s break it down and go over some key areas:

  • The Principal is the contractor and the Obligee is the party paying for the work.  Sometimes the word “Owner” is used interchangeably with Obligee. If you see Owner on the Bond Request, it is not asking for the name of the owner of the construction company; it means “Obligee.”
  • The description of the work should read as stated on the related contract or bid invitation.  If you are bonding a roofing contract, the description should not be “4th Avenue Elementary School.” It should say “…roofing…”  On a final bond such errors are embarrassing. In a bid situation an incorrect job description could result in a bid protest (by the second bidder) and loss of an award.
  • For Bid Bonds, show the estimated contract price (ECP), not the actual bid amount.  This is to protect the bid confidentiality.  Sometimes we bond more than one contractor on the same bid.
  • Always submit a sufficiently high ECP to allow room for a last minute bid increase. (See Secret # 8.)
  • Show the actual bid date, not the day before for “safety.”
  • Bid results are important to show if they are available.  Typically they are on public work.
  • When indicating the final bond requirements, do not indicate “100% P&P” unless the spec actually calls for this.  Some projects require a Performance Bond but no Payment.  It would be important to not automatically issue a Payment Bond, since they are the most frequent source of surety claims. The Principal and Surety should never voluntarily assume this risk.
  • Work On Hand: The current WOH figure is comprised of the “estimated cost to complete” of all open work – excluding the project in question.
  • Be sure to fully complete the form, include required attachments and sign if necessary.
  • Points of interest:
    • Sureties are usually reluctant to provide a 125% P&P Bond.
    • If the bond is for less than 100% of the contract amount, there may be no reduction in the bond cost.

Bond Request Forms: We love them and you should too!  Every one is a chance to serve your client and  make money.