Month: February 2015

Secret #82: Who’s On First? Understand Surety Bonding Terms

The world of surety bonding may seem mysterious and complex. Let’s face it, it’s not like insurance. It’s actually more similar to banking. No wonder the subject is not well understood by the very people who need to know.

abbott-and-costelloIn this article we will cover some of the basics such as who the parties are and what they do so the subject does not seem so foreign.

Who is the “insured”?  The insured is the party buying insurance. Therefore, in bonding there is no insured, instead there is a “principal.”  This is the party whose actions the bond concerns.   If a construction company needs a bond, it is the principal, the bond applicant.

The intermediary who assists the contractor may be a bond producer, a bonding agent, or an insurance agent. In every case, the person is licensed by the state to process surety bond transactions.

The firm the agent works for is called an insurance agency or bonding agency. This entity provides the channel between the principal (bond applicant) and the surety, the bonding company, the provider of the bond and party holding the risk.

In the world of bonding, the term “company” is used to describe the bonding company. The agent and the agency would not be referred to as “the company” even if the name of the firm was the ABC Local Insurance Company Inc.

A reference to “the paper” relates to the bonding company.  “Whose paper is the agency using?” means “Who is the bonding company?”

Since the bonding company holds the exposure on the bond, it is their employee who makes the decision to approve or decline it.  This person is called a surety underwriter or bond underwriter.

It is true that insurance agencies may employ individuals with underwriting expertise, and their title may be “underwriter.” They may even have some decision-making authority that has been delegated to them by the bonding company (referred to as “having the pen.”)  But the fact remains that the the bonding company is responsible for the underwriting decisions.

When a contractor is asked “Who is your bonding company?” sometimes they give the name of their bonding agency. Now you know the difference!

Other areas of confusion: The owner of the construction company is not the applicant for bid and performance bonds. In the eyes of the surety, the construction company is the primary applicant because that is the name on the bonds.  The underwriting process is primarily focused on the company, its history and capabilities. The personal factors surrounding the business owner are considered secondarily.

We cannot overstate the importance of our bonding agent. The agent plays a critical role in gathering, shaping, and presenting the file for review by the underwriter – and they guide the process forward as bonds are needed. 

OK, now it’s time for one of our famous Pop Quizzes!  Choose the most appropriate word in each case:

  1. When Elmer the contractor realized he would need a bond, he got right on the phone and called his (Principal / Agent).
  2. Morty the underwriter had a few more questions and sent them to the (Surety / Bond Producer).
  3. The (Surety / Bonding Agency) was not willing to hold any additional risk on the account.
  4. Surety bonds (are / are not) insurance policies.
  5. LaFawnduh, the (Underwriter / Agent), knew it was time to arrange for a new surety.
  6. Thor, the Bonding Specialist, only used quality (Pens / Paper).

7. Bonus Question (Extra credit!): When all else failed, Moonbeam knew it was time to file a bond claim with the (Carrier / Insured).

Answers:

  1. Agent
  2. Bond Producer
  3. Surety
  4. are not
  5. Agent
  6. Paper
  7. Carrier

FIA is a bonding company (carrier) that has served contractors and their agents since 1979.  We are flexible and creative surety bond experts.  Call us for Bid and Performance Bonds.

Call us for Site and Subdivision Bonds – our specialty!

Steve Golia, Marketing Mgr.  856-304-7348

FIA Surety / First Indemnity of America Insurance Company, Morris Plains, NJ

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Secret #81: The Path to Profitable Contracts

Profits.  Is there anything more important for the success of a company?

path_to_riches This critical factor determines if bills can be paid, if growth is achieved – it is the very essence of survivability.

Ask any business owner and they’ll tell you they make every effort to protect their profit margin.  They are careful about choosing the right contracts, vendors, and employees.  When construction companies pursue competitively bid projects (municipal, state and federal), they meticulously calculate the cost estimate to assure a healthy profit upon completion.

For many firms, competitively bid work is their bread and butter. The plain truth is that such jobs are difficult to win.  All the proposers want the revenues but only the lowest bidder wins. The others get nothing for their effort. In this lean and mean environment, contractors must calculate the minimum profit that is sustainable for their firm.  With so much at stake, good management practices require a diligent effort to protect the company’s financial interests.

Everything we’ve said so far probably seems obvious.  No one would dispute the importance of protecting the life blood of a company’s future. However, over the course of our years bonding contractors, the reality may be slightly different…

Fallacy #1: “If I bid it right, the job will be successful.”  This seems like a good strategy.  But what’s wrong with it?

The problem is that a project estimate is just that, an estimate. The contractor may be confident that all labor and material costs are correct. The company may have successfully completed similar projects. But unpredictable factors such as weather, variances in productivity and outside factors like a subcontractor’s performance can all contribute to the financial success or failure of the job.

Fallacy #2: “If the architect approves my monthly pay requisitions, the job must be on track.”

This fails to consider that the architect is the owner’s representative. The architect wants a completed project even if there is no profit left for the contractor!  It is not the architect’s (or project owner’s) job to protect the contractor from taking a beating.

Fallacy #3: “When I get to the end of the project that’s when I find out about the profits.”

The problem here is the lack of oversight during the life of the job, when the outcome may still be managed.

Bonding companies intend to support well-managed, financially successful construction firms. One very important element is the analysis and management of incomplete contracts.  This process must be performed during the life of the projects.

To be successful, this oversight process depends on three elements:

  1. The accumulation of project specific cost data (labor and material utilized).
  2. The data must be analyzed with sufficient frequency (such as monthly).
  3. The remaining “Costs-to-Complete” must be periodically re-estimated based on actual contract performance.  This means not relying on the accuracy of the original project estimate but instead reviewing the actual labor and material cost experience.  When this is compared to the original estimate, enlightened predictions can be made regarding the ultimate profitability.

By following these three steps, construction companies can effectively predict their revised profit estimate and manage open contracts during their life – while there is still time to affect the outcome.

We can say with certainty, all well-managed construction companies utilize such procedures.  Equally, all surety underwriters expect to see this management approach and can readily detect if it is not being utilized.

Contractors must use these procedures to protect profitability and assure their future success.

Want this expertise and creativity on your next Bid or Performance Bond? FIA Surety is a NJ based bonding company that can help! We have specialized in Bid, Performance, Site and Subdivision Bonds since 1979.

Steve Golia is Marketing Manager for FIA Surety.  Call Steve now: 856-304-7348

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