surety

SECRETS OF BONDING #157: Bid Bond Quiz

Is there anything less interesting than a bid bond?

They may not seem too exciting, but the lowly bid bond is an integral part of our surety business.  For contractors, they are often the key to acquiring new revenues.  If you don’t think they are important, watch what happens when a client is waiting for one that never arrives.

As surety underwriters, we spend a great deal of effort assuring these documents are accurate, delivered on time, and we track the outcome on each one.

Everybody knows about bid bonds, right?!  OK let’s see if you do…

True or False:

  1. If you decide to not use a bid bond you ordered, you have to send it back to the surety within 48 hours
  2. They have an expiration date
  3. A bid bond precedes every performance bond
  4. The surety can cancel the bid bond
  5. The dollar value of the bid bond equals the amount of the proposal it accompanies
  6. The surety must know the exact dollar value of the bid bond before they will issue it
  7. The premium for them must be paid in advance
  8. They remain active for up to six months
  9. It is better to use a check for security than a bid bond
  10. The same surety that issues the bid bond must issue the performance bond

OK team, how’d you do?  # of True______? # of False____?

They are all False!

  1. An unused bid bond has no value but it makes a great liner for your bird cage
  2. Never has an expiration date
  3. Some contracts are negotiated (no bid bond) or may require a surety capacity letter instead
  4. Like a performance bond, these surety instruments cannot be cancelled
  5. Most often the penal sum of the bid bond equals a percentage (10-20%) of the proposal amount
  6. Most bid bond amounts are expressed as a percentage of the proposal amount, not a dollar amount, to protect the confidentiality of the proposers bid. In such cases the exact dollar value is unknown in advance.
  7. Sureties are entitled to charge for them, but usually don’t
  8. Although not stated, most sureties consider them void after 90 days
  9. Wrong! If the performance bond is not produced, the check can be forfeited
  10. Nope! Two different sureties can be used, even if a “Consent of Surety” was issued with the bid bond.

Bonus Question: If the bid is rejected because the surety’s credentials are found to be inadequate, can this result in a bid bond claim?

Answer: Theoretically, it should not. If the bond is declared inadequate, how can it be sufficient for a claim?

When flexibility and aggressive underwriting are needed, give us a call. We have in-house authority for Bid and Performance Bonds up to $10 million each, and guarantee a same day response.  Find out what you missing when it comes to surety bonds.  

KIS Surety Bonds, LLC is the exclusive surety underwriting department for Great Midwest Insurance Company an “A – 8” carrier licensed in all states plus D.C.  “steve@kisbonds.com” or call 856-304-7348.

Secrets of Bonding #151: It’s Time For…Timing!

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With Surety Bonds, Timing can be critically important.  There are certain things that must happen first.  You can’t get them out of order. Here are some examples.  Do you know which comes first, and why?

Cover the answers with a piece of paper as you scroll down. (Paper is white stuff people used to write on. Really!)

  1. Bid Bond / Performance Bond
    • OK that was an easy one. They get harder. Bid bonds always come first – if there is one.  Not all performance bonds are preceded by a bid bond. Negotiated projects would be an example.
  2. Bond execution / Indemnity Agreement execution
    • The Indemnity always comes before the bond. It is the promise to pay back the surety in the event of a claim / loss. Sureties want this protection in place before they assume any risk.
  3. Surety Consent to Final Payment / Obligee Status Inquiry Form
    • The Status Inquiry form comes first. It is the obligees statement that the work is acceptable.  The surety requires to see this before agreeing to release the final payment.  If there are unresolved issues, the contractor must address them before the last contract funds come over. (That’s true motivation!)
  4. Payment Bond Release (exoneration) / End of Lien Period
    • Since the bond guarantees the payments that may be owed during the lien period, the time for liens must end before the bond is concluded.
  5. Contract Acceptance / Maintenance Bond Issuance
    • Sureties want the contract accepted first and the P&P bond released before assuming the risk associated with a Maintenance bond. Some obligees require issuance of the maintenance bond simultaneously with the P&P bond at the start of the project, but underwriters resist this.
  6. Bid Results / P&P Bond Issuance
    • Underwriters want to evaluate the adequacy of the contract price prior to bond issuance. They do this by evaluating the bid results, comparing the various proposals from different companies.  In some cases, the bid results are not published, in which case they have wing it!
  7. P&P Bond for Started Project / All Right Letter
    • The All Right letter is the obligee’s assurance that there is not already a problem on the contract that will result in an immediate bond claim. Sureties require a clean bill of health before bonding a started project (unless the degree of completion is very low i.e. 5%).
  8. Award Letter / Notice to Proceed
    • Award letter comes first, then the contract signing and Notice to Proceed is issued. Then “Grab ya hamma!”
  9. Tough Bond Problem / Call Bonding Pros!  856-304-7348
    • You can call us for discussion or general info any time. However, when a tough bond problem arises, that’s your cue to call in the experts.  Getting with us is as easy as making that call.  We have the markets and the expertise.  Bonds are all we do – since 1972!

Insurance Agents and Contractors: Love the “Secrets” articles? You’ll really love it when we solve your tough bonding problem! We have the markets and the know-how to succeed even when others have failed.  Call us with your next surety bond need.  We guarantee a same day response.  856-304-7348

Not available in all states.

Secrets of Bonding #148: The Greatest Impediment to Bonding

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

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Surety bonds are hard to get. Contractors and their insurance agents know that underwriters are conservative. They ask lots of questions. Then they ask more questions. Then they say they can’t help you. It’s a fun-filled process.

Some contractors can’t get bonded because they have a poor credit history. Others have weak or insufficient financial statements. There are plenty of reasons for an unhappy ending, but what is the single biggest reason – and what can you do about it?

Crappy credit: This is a very common problem. The company may be struggling to get enough work, resulting in a weak credit report. So they decide to move into public work for additional revenues – but the bad credit report makes this impossible. Sometimes the report can be improved by correcting errors and updating the info. This is not the greatest impediment contractors and their agents face.

Weak or insufficient financial statement: There are innumerable potential problems. No financial statement, only an internal statement, only a compilation, an interim FS, a net loss, no working capital – the pitfalls are endless! It’s not the biggest impediment though.

Unsavory circumstances: Excessive bid spreads, inadequate prior experience, bad bond forms, harsh contract terms, too much other work. They are all bad, but they are not the king.

The Greatest Impediment

Picture how the process starts. When the contractor decides to go after bonding, a list of information is requested. The underwriter wants business and personal financial statements. A current work in process schedule is needed. Prior tax returns, resumes of key people and a bank reference letter are desired.

The contractor wants to pursue this, but MAN, that’s a lot of stuff!

He has not needed to make company financial statements, so how to come up with them now?

The company owner never needed to make a resume, always been self-employed. How do I write that up?

The WIP schedule: I don’t have that info available. I know where I am on all my jobs. Why would I take the time to fill out a bunch of forms anyway?

I can get the bank reference letter completed and make copies of prior tax returns (they want the WHOLE THING?!) But if I do that, who’s gonna do the estimating so we don’t run out of work? And I have to visit the projects or everything will grind to a halt. The workers want to milk every job like it’s their last. They’ll suck the profits out of everything if I give them the chance.

Conclusion 

The greatest impediment is the applicant themselves! In my 40+ years of surety bond underwriting, I have concluded that MOST contractors deserve to be bonded, but many fail to acquire surety support. It is because they stop trying, or never really start.

People must make choices. They have to put bread on the table. If they can succeed by doing what they know, why try some experiment that may fail? Sometimes it’s just easier to keep doing the same thing – even if you are discontent.

Our observation is that bonding takes perseverance and patience. It is a journey, a path with unexpected twists. There can be obstacles, but we have solutions! If contractors or agents expect it to be fast and easy… they may be disappointed.

Applicants for bonding must plan to devote some time and energy to achieve a goal they know is worthy. It says a lot to have a surety backing you. They are vouching for your ability, and putting up their own money to prove it. It’s a big deal and not always easy, but always worth it in the end.

Insurance Agents and Contractors: Love the “Secrets” articles? You’ll really love it when we solve your tough bonding problem! We have the markets and the know-how to succeed even when others have failed.  Call us with your next surety bond need.  We guarantee a same day response.  856-304-7348

Not available in all states.

Secrets of Bonding #146: Financial Statement Sniff Test

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

Brokers protected.  Contractors welcomed.

Here is a list of my business and accounting courses in college:

  1. _______
  2. _______
  3. _______

I was an Education Major (teaching), so I didn’t get anything on financial statements “FSs”.  When I started as a surety bond underwriting trainee, I realized that I had no idea what a Balance Sheet was – but I learned. 

If your first reaction when you look a FS is “Duh,” we will fix that right now.  Keep reading! This will be a view from 30,000 feet.  Big picture but it will help.

To be complete, every financial statement must include at the minimum:

  • Balance Sheet
  • Profit and Loss Statement

The Balance Sheet

This document is a one-day snap shot of the funds in the company (Assets) and who owns them (Liabilities).  The assets and liabilities are equal “balance” because every dollar in the company is shown from two points of view: the Asset side and who owns it, the Liability side. 

The Balance Sheet has three important parts we can review initially.  Let’s identify them based on their functionality.

Current Assets: This line item is a subtotal found near the middle of the Asset column. It represents those assets readily convertible to cash within the coming fiscal year (such as Accounts Receivable).

Current Liabilities: Found near the middle of the Liabilities column, these are debts to be paid in the coming fiscal year (such as Accounts Payable).

Total Stockholders Equity, aka Net Worth: Usually the last subsection near the end of the Liabilities column. This is the company’s Net Worth that would remain if they shut down and liquidated everything.

The Profit and Loss Statement

This is a historical summary of all the money taken in (Sales aka Revenues) and money spent (Expenses) during the preceding period, usually one year. At the bottom of the column is the Net Profit, which is the money the company “made” for the year after paying all the related bills and taxes.

Now that you can pick out a couple of strategic numbers on any FS, what shall we do with them?

Calculate Working Capital

This is a primary measure of financial strength used by all analysts, including sureties, banks and other credit grantors.  It is found by subtracting the Current Liabilities from the Current Assets. It is an indicator of expected cash flow in the coming year. 

Here is a quick, simplified Sniff Test to use when considering a particular bid or performance bond.  The evaluation is made based on the expected contract (not bond) amount. This is an instant indication of the adequacy of the finances in regard to the upcoming project.

Part One – The Working Capital target amount is 15% of the contract amount.  For example, if the contract amount is $1,000,000, sureties hope to see Working Capital of at least $150,000.

Part Two – The Net Worth target amount is 20% of the contract amount or about $200,000 in our example.

Certainly there is more to surety underwriting than this simple analysis.  However, by using this method, you can get a quick idea of whether the financial statement easily supports the bond, or may be a stretch.  If your analysis reveals negative numbers, which are shown in parenthesis on financial reports, that’s obviously a bad sign.

Also keep in mind, applicants that do not meet these criteria may still qualify for bonds based on other factors – and the reverse is also true. Surety underwriting takes many factors into consideration.  In this article we are offering a very simplified version of the process although it is valid as a quick review. This procedure will enable you to make a fast financial evaluation, and relate it to the upcoming surety exposure.

Summary

This article doesn’t make you a bond underwriter, but now when you get a new FS instead of “Duh!” you can say “Let me analyze this!”

Running a quick analysis plus the Sniff Test will indicate the likelihood of obtaining surety support. You learned a lot in three minutes, but when you have a bond that fails the Sniff Test, that’s where our expertise and market access comes in.  Call us!

Insurance Agents and Contractors: Love the “Secrets” articles? You’ll really love it when we solve your tough bonding problem! We have the markets and the know-how to succeed even when others have failed.  Call us with your next surety bond need.  We guarantee a same day response.  856-304-7348

Not available in all states.

Secrets of Bonding #143: Surety Bonds and Brain Surgery

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

Brokers protected.  Contractors welcomed.

Your doctor says “You have a problem.  We need to call in a specialist.” How do you determine who to call? What do you expect from the specialist? The choice could not be more critical.

We are faced with important decisions every day.  And there are plenty of people trying to influence the outcome.  You need the skills to sort through the “BS” and make the choice that is most beneficial to you. 

Here is an example you have seen in many different forms:

“Our doctors have over 25 years experience”

What exactly does that mean?  You could select that firm and get a doctor with ONE year of experience.  They may have 25 doctors, each with one year in the saddle. Ugh, how misleading!

Another example:

“Dr. Mavromoustafakis has specialized in brain surgery since 1980.”

OK, Dr. Mavromoustafakis  has over 25 years experience as a brain surgeon.  See the difference?

Next question: Does the difference matter?

To answer that, think about why expert help was required.  If there is a special need, and an experienced, expert problem solver is desired, then… Yes! 

That’s how it works with brain surgery and also surety bonds.  Some situations are more complicated.  They require unique solutions and strategies.  The key may be to know a special underwriting technique, or a special underwriter.  The surety business is all about relationships. So your best problem solvers have many years under their belt and deep relationships with the right underwriters.  They deal with them every day.

Conclusion
Surety Bonds: They’re not brain surgery.  But when you need expert assistance, real experience does matter. Pick up the phone and take advantage of our long devotion to this one product. 

Steve Golia’s personal surety bond expertise dates back to 1972 (started in grade school.) Solutions to every problem you’ve seen, and some you haven’t.  Our experience is the key to your success and our service is the best.  We have the market access and expertise to handle bonding problems large and small. 

When you need a bond, call the Pros!  856-304-7348

Insurance Agents and Contractors: Love the “Secrets” articles? You’ll really love it when we solve your tough bonding problem! We have the markets and the know-how to succeed even when others have failed.  Call us with your next surety bond need.  We guarantee a same day response.  856-304-7348

Not available in all states.

Secrets of Bonding #135: Surety Bond Challenge Question!

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

Brokers protected.  Contractors welcomed.

What kind of surety bond can be written with another bond as it’s subject?

Our articles have covered some of the oddities of the surety world: Seemingly crazy bond forms and rating procedures.  Out of all of them, one is the strangest. An agent colleague called us on one this week, so let’s talk about this ugly baby.

Characteristics:

  • Inexpensive, but hard to get.  Often collateral for more than the bond amount plus full indemnity is required.
  • The bond penalty (dollar amount) may not be fixed.
  • Banks and insurance companies can be both the applicant and beneficiary of such bonds.
  • This bond “renews” for free – for years.
  • It is a surety bond that can have another bond as it’s subject.

Sounds pretty weird? Raise your hand if you know.

It is a Lost Instrument Bond.

So what do these do? No, you don’t get one when you can’t find your tuba.tuba

These bonds are required when an instrument such as a cashier’s check or stock certificate has been lost, and a replacement is desired.  The bond protects the interests of the issuer, and is subject to claim if both the original and the duplicate are cashed.  The bond applicant would be responsible for the financial loss – thus the common need for collateral.

The subject of the surety bond can be a government issued investment bond.  So this is the one surety bond that covers another bond!

Bonding companies are not fond of these because they make a one-time annual premium charge, but the bond must remain in effect for a statutory term, typically years (ugh!)

drummerUnderwriters may refuse to provide a bond immediately after the instrument is lost.  The concern is that the original may be found and the bond returned for a refund.  The surety may require a cooling off period to see if the original is located (90 days?)

Instruments with a changing dollar value, such as shares of stock, are covered with an Open Penalty bond.  This means the dollar value will automatically increase to cover the current value of the instrument, in the event of a claim. This is one more reason to make underwriters reluctant – and require more than 100% of the initial value in collateral.

Lost Instrument Bonds: The ugly babies of the surety world.  So now you know.  They aren’t ugly, they’re just “different!”

(BTW, the author thinks ALL babies are beautiful!)

Secrets of Bonding #133: “Please Sign Here” (with caution!)

 

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sign-here-arrow-2

We have written about indemnity agreements before (enjoy Secrets #19 and #79) but recent activity with our clients has inspired yet more on this vital subject.

As a follower of the “Secrets” series, you may already know what a General Indemnity Agreement (GIA) is, and that it is a requirement all bond applicants face.   Basically, it contains a payback obligation to the surety similar to a promissory note.

As a bond applicant, why should you be cautious when signing such documents?

The first reason is that it may include companies or individual people who are inappropriate. Some examples:

  • An affiliated company in which the bond applicant has a minority interest. These should be excluded if the bond client doesn’t have a controlling interest.  
  • Another example would be an individual person with little or no ownership in the company who is not married to an officer, key person or major company owner.

The second reason is that there may be clauses in the indemnity agreement that may be subject to negotiation – although underwriters tend to resist such modifications. Nevertheless, if you see something objectionable such as “Confession of Judgement” which is not even permitted in some states, you should ask for it to be removed. 

This would also be the time to ask for additions to the document, such as a dollar limitation on personal indemnity of certain individuals (Spouses? Minority owners?) or Trigger Indemnity which is only activated under specific circumstances.  No harm in trying.

The third reason is because of the gravity of the indemnity obligation. Through the GIA, the bond applicant company and its owners agree to repay the surety for losses and expenses.  They are literally putting everything on the line. sign-here-arrow-204x300

What is the dollar limit of this obligation?   Is it:

a) The contract amount? 

b) The Payment Bond amount?  or

c) The T-list of the surety? 

Answer: The liability amount is unlimited

This is a big deal. Keep in mind (see Secret #1!) “Bonds Are Not Insurance.”  The surety is a guarantor of the principal’s performance. If the contractor fails to perform, the bond is not insurance to protect them from the consequences of their failure.

In conclusion, the bond applicant should approach the signing of a GIA with some caution.  Certainly it is a document to read and manage where possible but this brings us to the final point: If you want surety bonds, it is mandatory that the surety be indemnified.  Regarding the indemnity of spouses not active in the business, they too must sign.  We tell contractors “Nobody likes it, but everybody has to do it.”

sign_here_manIf you want bonds, be cautious, but get ready to sign on the dotted line.

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

Not available in all states including Idaho.