tripartite agreements

Secrets of Bonding #161: No More Performance Bonds!

This is the Bonding Company’s worst nightmare…

In this article we will cover the situations in which no Performance or Payment Bond is needed!  Some of the projects are big and federal, some are private, ALL are unbonded.  Here we go!

As a point of reference, you may expect that federal, state and municipal contracts demand a Performance and Payment (P&P) Bond equal to the contract amount.  Normally they do.  General Contractors working for a private owner, such as the construction of an office building or apartment project, may face the same requirement.  This can apply to subcontractors, too.

Federal Projects

This area includes all branches of the federal government. Examples: Army Corps of Engineers, General Services Administration, Dept. of Energy, etc. Their contracts are administered following the rules of the Federal Acquisition Regulations (FAR).

Suprisingly, the FAR says that no P&P bond is required on contracts under $150,000.

For contracts $150,000 and higher that require security, there are times when the bond requirement may be reduced below 100% or waived entirely.  These include:

  • Overseas Contracts
  • Emergency Acquisitions
  • Sole-Source Projects

If 100% security is mandatory, the FAR lists acceptable alternatives to a P&P bond:

  • US Government (investment) Bonds
  • Certified Check
  • Bank Draft
  • Money Order
  • Currency
  • Irrevocable Letter of Credit

Here’s another option: For contracts performed in a foreign country, the government can accept a bond from a non-T-Listed surety. (Circular 570) Crazy!

State and Municipal Contracts

The bonding requirements may vary by state, but generally their flavor is similar to federal.  They, too, may accept alternative forms of secutity such as an ILOC.

Private Contracts

Anything goes.  On private contracts, the owner has complete discretion to set the bonding requirements – including no bond needed.  Keep in mind, the cost of the bond is added to the contract, so the owner can save some money by not requiring a bond.  They may take other precautions to protect themselves.  Some examples:

  • Require a retainage. These are funds that are held back from the contractor and only released when the project is fully accepted (reduces the risk of Performance failure)
  • Lien releases may be required each month to prove suppliers and subcontractors are being paid appropriately (reduces the risk of Payment failure)
  • Funds Control / Tripartite Agreement – a paymaster is employed to handle the contract funds (Payment risk)
  • Joint checks are issued to the contractor and payees below them – to assure the funds reach the intended parties (Payment risk)
  • Physical site inspections to verify progress (Performance risk)

The Nightmare

In these articles we talk a lot about how contractors can obtain surety bonds and manage them.  But it is interesting to note: A construction company could go forever, performing state and federal projects – and NEVER get a bond.  It’s true!

If everyone did this, it would be the surety’s worst nightmare.  But in reality, there are financial advantages to using P&P bonds, so bonding usually is the first choice. 

Your first choice should be KIS Surety when fast, creative underwriting is needed on bonds up to $10,000,000.  We are the national contract bond underwriting department for Great Midwest Insurance Company, a corporate surety with an A-8 rating.  

We can help you solve your next contract surety need.  Call us now: 856-304-7348

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

Secrets of Bonding #160: Deep in the Weeds with Set Aside Letters

In this article we will peel back the onion on Set Aside Letters (SAL) issued by banks in connection with construction loans.  What are they, when they are useful for bonding companies and when are they not?

Here is the essence of such documents:

“The agreement covering the project will provide that the funds in said impound account are … to be disbursed for payment of the (Name of Project) mentioned above and only after (Bank) has satisfied itself that the work paid for has actually been performed… In the event (Borrower) fails to complete the project described herein… all funds remaining in said impound account shall be immediately available to Surety to complete and pay the costs of said project, and in such event, (Borrower) waives any claim or interest in the remaining funds. Surety shall not in any way be obligated to repay said funds so used to (Bank).

This is an irrevocable commitment of funds which is not subject to recall or offset by (Bank).”

Pretty interesting!  This letter / agreement keeps the loan in play to fund the completion of the project  – even if the borrower (bank customer) fails / defaults.

When Are Set Aside Letters Used?

These documents are a common underwriting tool when a Site or Subdivision Bond is issued by a surety. If the bond applicant (who is also the developer and borrower) is relying on a construction loan to fund the bonded work, the SAL protects the surety by providing funds for the completion of the work in the event of a default.

What a great idea.  So why don’t we use these on everything?  Let’s look at another example.

Commercial Projects

The project owner hires a bonded contractor and a bank loan will fund the project.  The bank needs a guarantee that the asset / project (which backs the loan) will be built as intended.  A Performance and Payment Bond accomplishes this and assures there will be no Mechanics Liens against the property for unpaid bills.  These two aspects benefit the project owner and the lender.  Keep in mind, in a borrower default situation, the bank becomes the new owner of the property.

It is common for the bank to stipulate that a bonded contractor be used, and they may want to be a named beneficiary on the P&P bond – accomplished by issuing a Dual Obligee Rider.  In turn, should the underwriter require a SAL from the lender?

On Commercial projects, the normal practice is to NOT obtain a SAL from the lender.  Why not?  Why is this different?

Choose one:

a. The bank is a secured lender

b. The bank can subrogate against the borrower’s assets

c. The Dual Obligee Rider serves a purpose similar to the SAL

a. and b. are true, but the answer is c.

Welcome to the Weeds

We’re going in now. The Dual Obligee Rider adds the lender as a beneficiary with all the rights and obligations of the obligee named on the bond (the project owner).  And what are they?  Obviously they are entitled to make a performance claim and have the project delivered as indicated in the contract.

The named obligee also has obligations, one of the most primary is to PAY the builder. Important: The obligee is prohibited from making a performance claim if they have failed to pay the contractor.

Therefore, when the bank is included under a Dual Obligee Rider, they accept the benefits and obligations.  If the borrower defaults, the lender cannot make a bond claim unless they continue to pay the construction loan to the surety.  (Now the bank owns the project and the surety has become the contractor.)

Summary

Is this starting to make sense?  When a borrower defaults on a commercial project, a lender included by Dual Obligee Rider cannot make a claim unless they continue to pay the project funds to the surety.

Deeper Weeds

On Site and Subdivision there is a unique risk – the lender can take a free ride on the surety by having the bonding company pay out of pocket to complete the project.

Site and Sub-D bonds have the local municipality as obligee, not the bank.  The bank doesn’t want a Dual Obligee Rider because they automatically receive a financial benefit if the municipality makes a bond claim to demand completion of the project.  If the borrower has defaulted, the bank has the opportunity to withhold the balance of the loan (the borrower is gone), and watch the surety pay to complete a project they now own.  And they were not even the bond claimant…

This is the risk sureties avoid on Site and Subdivision Bonds by requiring the SAL that keeps the loan in play, even if the bond applicant / borrower has failed.

Admittedly, this is a pretty obscure subject, but also interesting to us “bond nerds.”  It never hurts to understand how things fit together.  These skills help us solve your complicated bond opportunities.  Take advantage of our expertise when the next one pops up.

KIS Surety is the national contract bond underwriting department for Great Midwest Insurance Company, a national, corporate surety with an A-8 rating.  We throw all this underwriting talent at your bond opportunities and support contracts up to $10,000,000.

If you have a contract surety case that needs a fast, creative response, call us: 856-304-7348

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

 

Bonding Companies Are ALL The Same.

OK, you know that’s not true.  In fact, your success may depend on knowing the differences between sureties.  Each one has a certain appetite, a niche.  We are all the same, and yet we are all different.

So here is a little bit about us.

What We Do

  • OUR GOAL is to be your high capacity market that provides fast, reasonable, (maybe even wonderful) underwriting responses!
  • Exclusively contract surety.  That means bid, performance and payment, and maintenance bonds.
  • We bond construction, including subcontracts, plus service and supply contracts.
  • Sovereign nation contracts are supported
  • Also demolition, abatement and remediation
  • We will consider young companies
  • Production Underwriters: We can support companies with less than perfect credit – even with liens and bankruptcies. We’re not shackled by “bonding company bureaucracy.”
  • We are flexible regarding financial statement presentation on bonds up to $10 million each.
  • We have our own contractors questionnaire, bond request form and WIP schedule because after doing this for forty-five years, we know what info helps get your deal done.
  • Our standard bond forms are unmodified AIA forms, readily accepted throughout the construction industry.
  • Our rates are flexible / competitive.
  • We are licensed to write in every state, including D.C., and can also consider overseas projects.
  • We respond to all new business submissions on the day received.
  • We are offering new agency appointments.  No volume commitment is required.
  • Our underwriting staff is available every day of the week, including evenings, 365. (You can call us right now! 856-304-7348)

What We Don’t Do

  • Fidelity bonds or surety other than contract.  For example, we do not support license & permit, court & probate, or site & subdivision.
  • Waste your time.  We only develop files we expect to write.

We not bragging.  We just wanted you to know.

Our strong financial position (Best rating: A-8) makes us a perfect fit on a wide range of opportunities.  Aggregate programs to $15 million and fast service.  How can we help you succeed today?

 

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!

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 KIS Surety!  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. 

KIS Surety is the national contract bond underwriting department for Great Midwest Insurance Company, a national, corporate surety with an A-8 rating.  We throw all this underwriting talent at your bond opportunities and support contracts up to $10,000,000.

If you have a contract surety case that needs a fast, creative response, call us: 856-304-7348

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

Secrets of Bonding #147: Surety Challenge Question “If It Quacks Like a Duck…”

Up for a challenge?  Here is the scenario:

A Performance and Payment Bond has been approved on a project. The lender (funding the contract) is requiring it.

There is a discussion regarding the procedures that will be used to control disbursement of the contract funds – they are extensive.

A licensed architect is being used and they will oversee the processing of each monthly payment to the contractor.  To protect the lenders interests, they will not only review the paperwork that is submitted (called a Pay Requisition), they will also conduct a physical inspection of the site.  The point of this is to assure that the contractor is only paid for work actually in place.

If approved by the architect, the pay requisition then goes to the lender for their review and handling.  Finally, the money is paid to the general contractor (GC) who then pays subcontractors and suppliers.

The GC has additional controls in place.  They monitor the status of all their subcontractors and suppliers.  Each month lien releases are obtained which is a guarantee that all the people downstream are being properly paid.  This step prevents future claims against the contractor, project owner or surety for non-payment.

Everything is checked and double checked. Each month these controls assure that the funds are handled properly. 

So here is the Surety Challenge Question:

The bond underwriter has required “Funds Control” as a condition of the bond approval. Do the multiple procedures we described satisfy this requirement?  If it quacks like a duck, is it a duck?

Answer: No!

It seems hard to believe, because no one would deny those controls are all good – and highly beneficial. But actually there is a missing piece we must add to have true “funds control.” It comes at the end of the money handling, the disbursement.

From a surety viewpoint, the funds administrator must be the Paymaster for the contract. It pays everyone, including the general contractor.  The problem with our example scenario is that the GC is paying all the subs and suppliers.  This is just what the surety does not want.

True “funds control” aka “funds administration” gives the underwriter confidence that the money will stay in the project and not get diverted to the contractor’s other work.  It also prevents claims against the Payment Bond by assuring that suppliers of labor and material are paid properly and timely.

Funds Control is a specialized process conducted by a party separate from the surety company. When utilized, applicants must be prepared to pay an additional fee for these “back room” services, and follow the required procedures for prompt money handling each month.

Learn the difference between Funds Control and Tripartite Agreements: Click!

KIS Surety is the national contract bond underwriting department for Great Midwest Insurance Company, a national, corporate surety with an A-8 rating.  We throw all this underwriting talent at your bond opportunities and support contracts up to $10,000,000.

If you have a contract surety case that needs a fast, creative response, call us: 856-304-7348

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

Secrets of Bonding #136: The Case of the Vanishing Bid Bond

For mood music, click here.

Here are the facts:

DR-11

Perry Mason is an American legal drama series broadcast from September 21, 1957, to May 22, 1966.

  • Late Friday evening we got a call from an existing client “Presidential Construction, Inc.” They want to go after a public contract next week and a bid bond will be needed. The proposals go in next Thursday, in four business days.
  • The new project is particularly large and we set a strategy for success. Due to the job size, updated financial statements are needed. They rely on their CPA firm for such info.
  • On Monday, Presidential intends to call their accountant and try to rush the financials. They will also gather prices from subcontractors and material suppliers to formulate their bid estimate.
  • Due to the short timetable, there is no guarantee that they can produce the financial info, gain approval of the bond, and have it issued prior to the bid date.
  • On Tuesday the municipality, the entity offering the work, released an addendum stating that “No bid bond shall be required.” (Strange because such public work is normally always bonded.)
  • Presidential was relieved and still intends to bid the project. No more rush on the financial info! They will “worry about the final bond later.”

Our client thinks this a lucky break. Is it? Let’s review the implications when a bid bond requirement… vanishes.

Presidential was concerned that they may incur the expense of preparing their proposal and then not be able to bid in the absence of a bid bond. Now they are willing to proceed without first establishing their surety support. The new risk is that they could face embarrassment and loss of the contract if they cannot produce a Performance & Payment bond when required. (This job is large and beyond their normal bonding capacity.)

Keep in mind, the bid bond is the predecessor of the P&P bond and establishes the surety’s willingness to support the new contract.

Secondly, as a bonded contractor, Presidential now loses a competitive advantage over unbonded firms. With the bond waived, more bidders can come in, potentially driving down the profitability of the contract or likelihood of winning an award. Assuming there will still be a P&P bond required, waiving the bid bond really doesn’t help anyone.

What’s the best move for our client? We recommended continuing to pursue the surety support with the knowledge that no bid bond is stipulated. This is exactly how we handle private contracts when there is no bid security, but a final bond is required to cover the project. Using this approach, the surety can give their pre-approval so the contractor knows they can qualify for the final bond.

Conclusion:

So where did the vanishing bid bond go? Turned out the next addendum postponed the entire project. No revised bid date has been announced.

The good news: We approved Presidential so they are ready to go when this job is again offered for bid. Case closed!

KIS Surety is the national contract bond underwriting department for Great Midwest Insurance Company, a national, corporate surety with an A-8 rating.  We throw all this underwriting talent at your bond opportunities and support contracts up to $10,000,000.

If you have a contract surety case that needs a fast, creative response, call us: 856-304-7348

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

Secrets of Bonding #134: How to AVOID the T-List

cat-hiding-in-snowFamiliar with this?  “T-List” is the bond vernacular for the Treasury List or more formally: Circular 570. The document is produced annually and maintained by the Bureau of Fiscal Service, US Department of Treasury.  Why do some contractors want to avoid it?

Their web page says it is the Treasury’s “Listing of Certified Companies”  https://www.fiscal.treasury.gov/fsreports/ref/suretyBnd/c570_a-z.htm

The purpose of the list is to establish a pool of surety companies that the government finds acceptable to bond federal projects.  Having this group established in advance avoids the need for federal contracting officers to vet the bonding company during each contract award process.  It helps speed things up except for one problem: Not all bonding companies are on the list.

Why is this?  Does it mean they are not strong or ethical?  Does it mean their bonds are no good?  Not necessarily.

Remember, when it comes to corporate sureties, they are subject to state regulation even if they are not on the T-List. So not being on the list could mean:

  • The surety has applied for approval and is still being processed
  • They applied and were declined or deferred to a future date.
  • They have chosen to not apply to be on the list.

Point is – it does necessarily mean anything bad.

For some contractors, they may have a surety relationship in place, but when they go after a federal job, they learn that their surety is not T-Listed.  Must they avoid federal work or find a new surety that is on the approved list?

dog-hiding-in-a-drawerNo…. It turns out there are situations in which the federal government does not require a T-Listed surety.

For construction contracts from $35,000 to $150,000, the government can accept alternative methods of payment protection other than a surety bond. These are: 

  • Irrevocable Letter of Credit issued by a commercial bank
  • Tripartite Agreement managed by a federally insured bank
  • Certificate of Deposit
  • Deposit of acceptable securities (Reference F.A.R. section 28.102-1)

For work performed in a foreign country, the bond can be waived entirely if the contracting officer concludes it is impracticable for the contractor to provide a surety bond. (Reference F.A.R. section 28.102-1)

Individual Surety bonds are an alternative to corporate sureties and they are never on the T-List. (Reference F.A.R. section 28.201)

Other forms of security may be used such as

  • United States Bonds or notes
  • Certified or Cashier’s Checks
  • Bank Drafts
  • Money Orders
  • Currency
  • Irrevocable Letter of Credit

Conclusionhiding

Being T-Listed is not always mandatory for federal contracts, although it is in the majority of cases.  Nevertheless, it is interesting to note that there are a series of exceptions, and these are always in play.

Armed with this info, contractors can go after federal work while avoiding the need for a T-Listed surety, or (heaven forbid!) any surety at all.

KIS Surety is the national contract bond underwriting department for Great Midwest Insurance Company, a national, corporate surety with an A-8 rating.  We throw all this underwriting talent at your bond opportunities and support contracts up to $10,000,000.

If you have a contract surety case that needs a fast, creative response, call us: 856-304-7348

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)