bond

Completion, Performance, Site, Subdivision Bonds: What’s the DIF?!

Po’boy, hoagie, grinder, heroe, sub: You get the idea. Different names for the same thing. 

So what about these surety bond names?  Over the years I’ve heard them all used for the same transaction. But are they really the same?  No, No, Nooooooooo!  We will explain.

“Who’s” on first: (brief definitions)

Principal – is the construction company whose actions are the subject of the bond

Obligee – is the party protected by the bond

Surety – is the bonding company providing the guarantee

  • Performance Bonds: Issued in connection with a contract that is referenced in the bond.  Guarantees that the principal will complete the project on time and in compliance with all written conditions.  The obligee is the beneficiary of the bond and is the “project owner” of the contract (they are hiring the contractor and paying for the work).  The obligee could be a public or private entity. A Dual Obligee Rider could add parties with a financial interest – such as the construction lender. They would share in the bond amount in the event of a claim.
  • Completion Bonds: Issued in connection with a construction loan. These are issued directly to the construction lender and protect the loan.  The lender is not a party to the construction contract.
  • Another version is a Movie Completion Bond for the film industry – guarantees that the new movie gets produced and “in the can.”
  • Site Bonds: Issued in connection with a specific project.  Could be a business owner modifying the company property, parking lot, driveways, etc.  The public body with jurisdiction over the job site is the beneficiary (obligee.) The bond promises that “public improvements” required by the planning board will be built at the principal’s (property owner’s) expense.  Such work is not paid for by the township.  The township is not party to a construction contract. The principal pays for the work out of pocket, or though a construction loan.
  • Subdivision: This is the same as a site bond, although on a larger scale. The difference is that it involves multiple sites all covered under one bond.  The bond promises that “public improvements” required by the planning board will be built at the principal’s (the developer’s) expense.  These improvements are later deeded over to the township – such as streets, curbs, lighting, water and sewer lines, etc. These bonds do not concern the building of homes or buildings. The guaranteed work is not paid for by the township.

It’s no surprise that folks use these terms interchangeably.  They all involve the contractor’s performance, but with a slightly different purpose.

You can assume all bond people know these differences.  But can you assume all bonding companies provide these bonds?  No, no,  nooooo!

Developers are the applicants for subdivision bonds, but any business can require a site bond. You need to know that FIA Surety is a leading provider of Site and Subdivision bonds. We write them and we’re good at it!

Next time you need a site, subdivision or performance bond, give us a call.

Steve Golia, Marketing Manager: 856-304-7348.

FIA Surety

It’s SO HOT!

Record heat is being recorded in many parts of the country.  But what else is hot?

  1. Floyd Mayweather – Hot earner made $7.6 million per minute for his fight with Connor McGregor
  2. Stephen Curry – Hot contract, NBA’s first for over $200 million
  3. Timothy Berners – Lee (never heard of him?) Inventor of the world-wide web and creator of the first web site. He changed everything. Very hot.
  4. Surety Bonds by FIA Surety!
  5. Bill and Melinda Gates – Hot philanthropists donated $4.78 Billion in 2017. (Don’t worry, they kept some for themselves.)

What was that number 4, Surety Bonds?! Come on!  How can they be hot?

Glad you asked:

Surety bonds are a special area of the business.  They are unique and difficult, an opportunity and sometimes an obstacle.  But they are always a chance to shine: A path to greater success for you and your clients.  All you need… is a way to get there.

What if the surety underwriters were cooperative and production oriented?

Wouldn’t THAT be hot?

You need to ask yourself

  • Do my underwriters promise a same day response?
  • Do they help me find a way to write the business?
  • Are they open to a wide range of underwriting situations?
  • Are they Problem Solvers?

If not, you need to heat up your surety bond production.  Find out why agents bring their contract surety, site and subdivision bonds to us.

We’re flexible and creative.  THAT’S HOT!

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

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.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

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Secrets of Bonding #125: When to Call It Quits

Construction contracts can be terminated by either party under certain circumstances.  Let’s take a look at it from the Contractors point of view.

Federal contracts make it easy for the government to end a project.  The “termination for convenience” clause spells out how the project can be ended (with no fault on the part of the contractor) and provides a method of payment for the work in place. Other public and private contracts may also contain this clause.

Sometimes it is the contractor who is motivated to end the project early. In these situations, it is important to know how and when to proceed.no-work

The Disputes Clause

“The Contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract, and comply with any decision of the Contracting Officer.”

Found in federal contracts, this clause means you must continue to work when facing a dispute. This assures that the contractor doesn’t hold the project hostage while the dispute is under review. 

Other public and private contracts may include language regarding unresolvable disagreements, so it is important to…

Read the Contract

Contractors should only quit a project when they have a legal right to do so.  You need to read the contract and, with the help of your attorney, choose a course of action.

An Unresolvable Disagreements clause may allow the contractor to stop work.  An example could be engineering issues that make it impossible to proceed.

Stop Work for Nonpayment

In these cases, the contractor should send written notification of the overdue payment and allow a time period to collect the funds.  Some contracts require that a second notification be sent before work may be suspended.

Because nonpayment may be a material breach of the contract, it can justify stopping work.  However, state laws vary on this subject.  An attorney can help determine if such action is advisable.

Surety Bonds

If a Performance and Payment Bond covers the contract, it can play an important role.

General Contractors should alert their surety regarding any disputes.  They should also remember that stopping work can result in a Performance Bond claim.  This can hamper the availability of bonds for other projects. The surety will want to understand the dispute and may offer guidance to the contractor and attorney.

Subcontractors have these same issues if they have bonded their subcontract.  In addition, contracts with “pay when paid” wording may justify the GCs nonpayment – another reason to read the contract.

An advantage for subcontractors may be a P&P bond above them, filed by the general contractor.  This Payment Bond is available for claims by subs and suppliers.  It can be a powerful tool to protect subcontractors.  Even a letter to the GC threatening to file a payment claim can shake the money loose in some cases.

Conclusion

Stopping work can be an important remedy for the contractor, providing the action is legally permitted.  When a contractor considers suspending work they must weigh the risk that they may ultimately be found in breach of contract themselves.  On the other hand, the larger situation of the nonpaying party may demand action, such as an impending bankruptcy.

The best approach is to review contracts in advance and negotiate the addition of language that allows work stoppage under appropriate circumstances.  The goal is to acquire the contract while limiting the risks.

Note: we are not attorneys and are not giving legal advice.  If you have a project dispute, call your attorney for help.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

Secrets of Bonding #123: Who Was Edward Aloysius Murphy, Jr. (& Why Contractors Should Care)

(January 11, 1918 – July 17, 1990) An American aerospace engineer who worked on safety-critical systems for the U.S. Air Force. He is best known for his namesake Murphy’s Law, which  states, “Anything that can go wrong will go wrong.”  Murphy regarded the law as crystallizing a key principle of defensive design, in which one should always assume worst-case scenarios.Murphys_Law

Keeping Major Murphy’s principle in mind, what are the critical steps contractors can take to get their projects off on the right foot, and bring them to a successful conclusion – while keeping Murphy’s Law out of the equation?

The first key to having a successful contract is to have a contract. It sounds obvious, but contractors are sometimes induced to start work, or perform change orders / additions to contracts, without an executed document in hand.  Maybe the project owner is in a rush, “We need for you to start right away so we can be completed on time.  We’ll do the paperwork later.”

The contractor wants to maintain good will.  They proceed in the hope that their responsiveness will pay off – and sometimes it does.  There are also times when the contractor incurs costs that are never reimbursed because the contract is not executed.  There could be engineering problems, governmental interference or lack of funding. There are any number of reasons for things to go wrong (as our hero indicated.) And for the contractor, they are all bad.

murphyslaw

On the other hand, let’s say there is no problem with the contract.  The paperwork is signed, the work proceeds, is paid for, and the contractor is completed with a profit in hand. So is that the end?

No, not quite. Just like there is paperwork to get into the project, there is more to get out of it.  The contractor should obtain written acceptance of the work by the job owner (obligee.) 

  • This important document establishes a completion date for the contract and concludes a portion of the liability that is attached to all open contracts.
  • It will close the Performance and Payment bond if there was one. Closing the file restores the contractors bonding capacity. 
  • It may also be beneficial with lenders.
  • If nothing else, a written acceptance may be a defense when the project owner attempts to call back the contractor at a later date or claim the work was not satisfactory.

Edward_MurphyThese simple procedures are basic, good business practices. Contractors who win work competitively, and are paid under a lump sum contract, already face significant risks.  It is important to have the correct paperwork in hand when starting, modifying, and ending construction projects. 

Major Murphy learned this important lesson the hard way – but you don’t have to! 

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

Secrets of Bonding #118: Bonding Company = Girlfriend

I’ve been in the surety business for a long time.  As a student of the industry, I have observed the dynamics that occur between bonding companies and their clients.  My conclusion: Bonding Companies are like Girlfriends!

(My comments are written from a male point of view, but I’m sure you can flip this to be applicable if the reader is “non-male.”)

Think about relationships you’ve been in.  Don’t they always have a “love / hate” aspect? Jokes about relationships often capitalize on this reality:

Marriage is a three-ring circus. First the engagement ring, then the wedding ring, then the suffering.
– Milton Berle

My wife is a light eater … as soon as it’s light, she starts to eat. 
– Henny Youngman

“I am” is reportedly the shortest sentence in the English language. Could it be that “I do” is the longest sentence?
– George Carlin

And for the ladies:

What’s the difference between a boyfriend and a husband?
About 30 pounds.
– Cindy Garner

As very sophisticated types, we know how to deal with the technicalities of these relationships.  It isn’t always easy, but it’s worth it.   Bonding is pretty much the same!

Step One

How does a construction company gain the support of a surety?  It starts with a flirtation and then “getting to know you.”  The underwriter receives information about a bond that is needed. If there is a spark of interest, an application and financial statements are submitted. 

The construction company wants to look attractive:

  • Here is what we’ve accomplished!
  • This is how much money we’ve made!
  • We can really perform!

Think of this as the dating stage.  It is exhilarating and intense! There are probing questions and well-crafted answers.  Both parties want to achieve success and avoid failure / embarrassment. The same as in romance, the underwriter (girlfriend) will walk away if they find that the contractor (suitor) is dating other underwriters.  This is why bond producers may approach only one market at a time.  No girl wants a playboy who may be disloyal.

Ravishing Wedding Rings Clipart Also Appealing Wedding Rings Clipart Hd Pictures 4 Boostnow Wedd - ~ zxtzdb ~

Step Two

If the relationship blossoms, wedding bells may chime! They tie the knot with a pre-nuptial / general indemnity agreement that says “We’re in this together.  But hurt me and you’ll PAY.” 

Step Three

Eventually they become old married folks.  The contractor gripes that “he/she is never satisfied.”  More info, more questions, more money spent to keep the surety / spouse happy. It NEVER ends.  But the contractor needs the surety and works to keep things on track.

Is the underwriter frustrated?  Yes…  “I have to beat everything out of the contractor.  It’s like pulling teeth!” The contractor may be slow in providing the answers and info the underwriter needs to keep the bond account in healthy condition. “I thought we were in this together!”

There is an element of pain in the relationship, but both parties gain if they keep it together.

Yente  (Click for mood music) cupid

So where does the bond producer / agent fit in?  They are the dating service that brings the parties together.  They succeed by matching the contractor with the right surety.  The role as cupid continues as we shepherd the relationship forward, keeping the info flowing so bonds are available when needed.

The fact is, bonding involves more than paperwork.  It involves people, their perceptions and preferences.  The seasoned bond producer will make the match and guide the relationship forward for the benefit of all parties.  

Sureties, can’t live with them, can’t live without them.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

Secrets Of Bonding #115: The Most Important Question in Bonding

When Surety Bonds are needed, there is always a questionnaire to fill out.  Why?  Because the underwriters need some basic info, and quickly.  The app asks for company location, ownership, plus facts about the operation and its history. 

So many questions!  Are they all relevant?  Are they all needed?  Actually… they are not equally important.  In fact there is one question on the app which is undoubtedly 

THE MOST IMPORTANT QUESTION OF ALL

green_shade

 

Let’s test your underwriting skills!  Here are some typical bond app questions.  Are they hot ones, or just background music?  Which question is the most important for bond underwriters?

  1. Q. Date Business Formed This is very important because many surety reinsurance treaties require that all the bond clients have certain longevity – such as minimum 3 years in business.  If the applicant has less than 3 years, some underwriters will stop reading at this point and decline.
  2. Q.Has the company, any affiliate or subsidiary, or any owners / spouse or companies in which they have had an ownership interest or managerial role ever experienced a bankruptcy?  Here is another important question, a deal killer with many underwriters.  They may not want to hear about the circumstances of the BK or subsequent positive developments.  Their reinsurance may forbid supporting such applicants.
  3. Q. Formal Buy-Sell Agreement in place? This question concerns continuity.  In the absence of key people, how will the company survive?  How will the bonded jobs get completed if the boss gets run over?
  4. Q. Is full corporate and personal indemnity by all owners, spouses, and affiliates provided? This is important b/c full indemnity is normally required and some applicants are reluctant to provide it.

Got your answer?  Read on.

 

Conclusion

**All the questions are relevant.  That’s why they are on the questionnaire.**

Let that sink in…

They are ALL important.  So for the underwriter, the question that jumps up off the page is the one left unanswered.

Why do people fill out the app and skip one question?  It has to be either carelessness “Sorry, I skipped over it by mistake,” or intentional “If I answer that question honestly, I may not get the bond approval!”  Both reasons are bad.

We can assume that “N/A” is an option for an irrelevant question, or “Unknown” if you have no info.  But a blank is a problem b/c cause the reader doesn’t know how to take it.

Many facts are double checked during the surety underwriting process.  But for a large portion of the info, the market is simply trusting the applicant to be truthful and transparent.  They depend on having full disclosure, and are entitled to it as the guarantor.

So please, please, please don’t skip any questions.  The app is often the underwriter’s first opportunity to meet the client.  Put your best foot forward by answering completely, and attach additional comments if an explanation is in order.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

Secrets of Bonding #52: “It’s Only a Maintenance Bond”

Maintenance Bonds can be troublesome, even though you could say the risk on them is relatively low.  So what’s the deal on these?

A Maintenance Bond normally follows a Performance and Payment (P&P) Bond that guarantees a construction contract.  In many cases the Performance Bond may also cover defective materials and workmanship for some time period after acceptance of the work.  This is referred to as a maintenance period, and the bond that may specifically cover it carries the same name.

There are times when the obligee (party protected by the bond) wants two years of maintenance.  If that is longer than the performance bond provides, a separate maintenance bond is needed.  There are also cases in which no maintenance period is automatically provided by the P&P bond, so there must be a maintenance bond if the protection is desired.

Why is the Risk Relatively Low on a Maintenance Bond?

Assume “Surety A” provided a P&P bond on a contract.  They already faced the risk of the project not being performed properly.  Having now passed that exposure, it is a small step to guarantee the materials and workmanship that went into the project.  For this reason, a Maintenance Bond following a P&P Bond issued by the same surety, may be much less expensive than the related P&P Bond, and would be freely given.

Sometimes They Play Hard to Get

There are a couple of factors that can make these bonds difficult to obtain.

  • No P&P Bond – If no P&P bond was issued, the underwriter will be justifiably suspicious if a maintenance bond is requested.  Perhaps the obligee regrets not having obtained a P&P bond or was unwilling to spend the money for one.  Now they want a cheap alternative that can still cover the entire project.  Maybe they observed a suspected defect in the work and belatedly want the protection of a surety bond.
  • Different sureties – If Surety A wrote the P&P bond, Surety B will obviously ask why “A” is not also handling the maintenance bond.  Maybe “A” knows there was a problem on the contract and they want to run away from it while they can.  The only good candidate for the maintenance bond is the surety that got paid on the P&P bond.
  • Low percentage maintenance obligation – often the maintenance bond is issued for less than 100% of the contract amount.  It may be for 20%.  You have a low dollar amount, but it still covers the entire project.  This is an unappealing situation for the surety.  But it is one they will tolerate If they already reaped the benefit of issuing the P&P bond.
  • Low rates – Maintenance bond rates are normally lower than P&P bond rates because… (*why do you think?) This makes them less rewarding for the surety.
  • Difficult guarantees – Some maintenance bonds cover efficient or successful operations instead of the normal “defective materials and workmanship.”  This is a far more difficult guarantee for the surety to provide.  Many are unwilling to provide such bonds.

Solutions

The only alternative to a bond may be a “cash” type alternative such as a Standby Irrevocable Letter of Credit issued by a commercial bank. The client may not think this is a great solution, and there will be no commission for the agent, but there are not many options at this point.

One consolation is that maintenance bonds are often written for a small percentage of the contract amount.  So cash in lieu of bonds may be feasible.

Maintenance bond rates may be lower than P&P bonds because the work is already in place and has been accepted by the architect and / or owner.


A special note from the author: Steve Golia

I am an Independent Broker and Surety Bond Specialist. If you wish to co-broker bond business, together we will deliver the best in bonding expertise for your clients.  I have a broad range of markets available and often can solve problems even when others have failed.

Call me now (856-304-7348) or email: Steven.Golia@gmail.com

Secrets of Bonding #49: Bid with a Check?

In Secret # 8 we talked about Bid Bonds.  Bid specifications often provide alternative forms of security to accompany the contractor’s proposal. Cash, a Certified Check, or a Bid Bond may be permitted.

Let’s take a look at the implications of each and when to use them, or not!

First, a quick primer on bids:

When contractors submit a proposal on bonded public work, bid security must be included.  The security assures the bidders sincerity.  They will accept the contract if offered or pay a penalty for walking away.

The contract then requires a Performance and Payment Bond or other form of acceptable security equal to the contract amount.

Typical options for Bid Security are Cash, Certified Check, or Bid Bond

Cash is King, but not when it comes to bid security.  Bid security amounts are usually thousands of dollars so this method is not realistic for many contractors.

Certified Checks are similar to cash.  This means the contractor must estimate the maximum proposal amount and arrange for a check payable to the obligee.  Initially, the bid percentage is known but not the bid dollar amount.  The specifications require security for amounts ranging from 5-20% of the proposal amount.  However the actual proposal amount is often not compiled until close to bid time when all the vendor prices have been received and negotiated.  To use a check, the contractor must estimate an amount sufficiently high so it is adequate to cover the bid figure when it is finally known.

Third choice, a Bid Bond issued by the surety.  The advantage of it is that the bidder’s money is not tied up (as compared to cash or a check). As a precaution on public work, obligees hold the bid security of the second and third bidders until the contract is awarded – which could take weeks.  Their bid security is tied up and the likelihood is that they will not win the contract.

Looking at the three options, a bid bond is the preferred choice. However, a bid bond is not always available when needed. When this happens, the bidder may still have the option to use cash or a check.

Normally there is no requirement to use a bid bond specifically.  The bidder also has the latitude to use one surety for the bid bond and a different one for the P&P bond (although many sureties dislike following someone else’s bid bond.)

Why would a bid bond not be available?

1.  The contractor does not have a surety.
2.  Short notice: Not enough time for the surety to make an underwriting decision.
3.  Short notice 2: The surety has approved the bid bond but there is not enough time to issue.
4.  Bid bond declination: The surety considered the project but will not support it.
5.  Bid bond declination 2: The surety wants to support the project but they are unable to due to their lack of credentials, their insufficient capacity, licensing issues, or other problems on the surety’s part.
6.  When contractors are changing bonding agents or sureties, there could be a gap in service where the new surety is not ready.

In all these cases, the contractor can decide to bid with a check. However, there may be a downside to consider. Let’s look at each of the six scenarios described above.

Risks of Bidding with a Check

1.  No surety: The contractor could forfeit the bid check if they are awarded the project but are unable to bond the ensuing contract.
2.  Short notice: The risk here is the same as #1.  Forfeiture could be the result if no bonding can be arranged for the contract.
3.  Short notice 2: This is one situation where the check may be a reasonable alternative assuming the surety has provided a written approval to bond the contract.
4.  Bid bond declination: This is a particularly troubling situation because the effort to arrange a Performance Bond faces two obstacles:

  • Time: Contract awards demand the issuance of the P&P bond by a specified date.  There could be insufficient time to set up a new surety relationship.
  • The new surety, which hardly knows the contractor, is being asked to bond a project the incumbent surety declined.  The incumbent was willing to lose the account over this project. Can the new underwriters be confident they are making a better decision than those who know the account well?

5.  Bid bond declination 2: This example isn’t as onerous as #4. The problem is that the surety wants to bond the project but can’t.  The new underwriters will be less hesitant than in #4. (So why don’t they just issue a bid bond to help the client get to the next step with another surety?  See answer below.)  If a check is used, a surety must be arranged to prevent forfeiture.
6.  Changing sureties: Handle the same as the short notice situations.

Conclusion

While its true bidding with a check is usually an option, it places the contractors funds at risk unless there is a verifiable means to bond the contract upon award.

Don’t advise your client to consider using a check unless the path forward is confirmed in writing.

Answer to #5: The surety would not want to issue the bid bond if they can’t provide the performance bond.  They make their money on performance bonds which are the main product of the surety operation.  Second reason, if no performance bond is arranged by the client, the bid bond could go into claim.  There is little for the surety to gain in this situation.

Note to our agents and other readers: We are not offering legal advice and do not assume to have covered all possible situations in this article.  When these scenarios arise, talk to your client, their attorney, the surety and feel free to call us for specific advice based on the unique circumstances.

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

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Secrets of Bonding #39: Design/Build vs. Design/Bid/Build

As surety brokers, we are watchful for “Design/Build” contracts.  If you feel like D/B projects are becoming more common, you’re correct!  The concept emerged in the 1980s and was formally codified by the federal government in 1996 after two years of collaboration with the private sector. The Clinger-Cohen Act established a two-step procurement process for such work.

Some sureties balk at the additional risk their clients assume on these projects. Put simply, the contractor becomes responsible for both design and construction.  In the event of a performance problem, this really cuts down on the finger pointing!

Bear in mind, it is the contractor (not the designer) who obtains the surety bond.  On “contractor-led” D/B projects, the contractor hires a licensed and insured architect to perform the design work. Another option is to form a joint venture between the architect and contractor.  In either case, a certain tension exists between these “partners” who have slightly different agendas, and this has implications for the surety – the guarantor of the project.

There is no denying we face unique risks on D/B contracts.  Let’s review them.

  • The designer must agree that their design (and subsequent revisions) will conform to the project budget “as bid.”  Without this, the contractor could be forced to absorb the cost of design changes.  Unprofitable contracts are more likely to go into default.
  • Similarly, designers must agree to conform to the project schedule. They cannot make changes that require construction timelines unsupported by the contract. Such changes could force the contractor to choose between significant unreimbursed expenses or failure to complete on time.
  • The design work must also conform to the project owner’s specifications at all times.

Design/Build contracts require some extra care, but can be bonded successfully.  Underwriters need to have the proper procedures and expertise to make these evaluations.

The alternative: Design/Bid/Build

You may encounter contracts specifically called Design/Bid/Build. So is this another new thing we have to learn?!

No, actually D/B/B this is the traditional construction method where the project owner hires and directs the architect. It is nothing new but may be named as such to identify the project as not Design/Build.

We may not have known it by name, but we have been helping contractors bond Design/Bid/Build for years!


A special note from the author: Steve Golia

I am an Independent Broker and Surety Bond Specialist. If you wish to co-broker bond business, together we will deliver the best in bonding expertise for your clients.  I have a broad range of markets available and often can solve problems even when others have failed.

Call me now (856-304-7348) or email: Steven.Golia@gmail.com