Frequently Asked Questions
Is bonding similar to insurance? Absolutely not.
Insurance coverage is a two-party system providing protection for the
insured based on actuarial tables.
Bonding, is a prequalification function more similar to banking as it
relates to the credit process. It entails three parties, Surety, Obligee
What are bid, performance and payment bonds? A bid
bond, usually representing five to twenty percent security on a bid,
guarantees that the principal will enter into a contract if
awarded. Should the principal fail to do so, he and the surety could be
penalized to the extent of the bid security. Performance bonds guarantee
the principal will complete the contract according to
the specifications and the payment bond provides protection to all
subcontractors and suppliers to
the extent allowable under the law.
Are bonds preferable to Irrevocable Letters of Credit (ILOCs)?
Most definitely. For the Obligee, bonds represent a prequalification of
the contractor, unlike ILOCs. For the
contractor, while the cost may be comparable, the bank will undoubtedly
offset to the detriment of the contractor his/her availability of credit
for providing an ILOC. Most importantly, the
Obligee has complete control in the event of a dispute and can draw down
on the ILOC at it's discretion, whereas a bond claimant must go through
due process before receiving any payment.
What are the options in the event an owner declares default? As mentioned above, the Obligee must prove a default exists before obtaining relief from the bonding company. When this occurs, the surety may (depending on the language of the bond form):
(1) Finance the contractor if it appears to be a cash flow issue.
(2) Replace the contractor with another acceptable to all parties.
(3) Re-let the balance of the contract
(4) Pay the bond penalty
What if a contractor makes an error on his bid? Most Obligees will allow withdrawal of the Principal's bid within 72 working hours for anything other than a subjective error. In most cases, owners do not want to start off with a contractor that makes an error and such notification should immediately be done, both verbally, and in writing.
Are there differences in underwriting by surety companies? Yes, although there is a traditional pattern of underwriting, it varies depending on such factors as experience, financials and the personalities of the parties involved. Some sureties target certain sizes and particular trades but, representing most of the leading bonding companies in this area, we have a wide selection of choices.
What is needed to set up a bond program? For bond requirements under $500,000 we have markets that are credit driven and require much less paperwork and time than the standard bond facilities. For those below such level, we have included forms and a list of information needed (click HERE)
How long does it take to obtain a bond? It depends on the type of bond and availability of the information needed. We pride ourselves as having the best turnaround time in our industry. If the necessary paperwork can be readily furnished, we can market and issue the bond(s) within a couple of days. We recently wrote a bond for a new client supplying and erecting the largest tower crane in the United States amounting to $2.3million in just two days. Certain cases may require a bit more time.
What do these bonds usually cost? There is no fee for
bid bonds as these instruments are required frequently as a means of
prequalification. The rate for performance and
payment bonds from the express programs listed above usually run 2.5%-3%
of the contract price. Standard market rates differ depending on the
trade involved, experience, financial
strength of the principal in terms of profitability, working capital and
equity on the balance sheet among other variables. These rates may be
surcharged for contracts over two years and any
that entail design-build features. There is usually no expense involved
in setting up these programs.
What are the functions of the bonding company and agent?
The agent represents the surety and usually has it's power of attorney for approval on their behalf to prepare and execute the needed bond(s). The agent is expected to have knowledge of the principal's character and experience before recommending accounts to the company. After gathering the information required, the agent submits the paperwork to the company for the program desired by the principal. The surety, in turn, undertakes certain analysis and credit evaluations before committing to the agent and his client. The bonding company then provides the guarantees enumerated in the bonds to the Obligee which remain in effect until liability has ceased.
Do you work with other agents requiring our expertise on their accounts? Yes, as long as we can develop a direct relationship with their clients. Our reputation for integrity affords many agents the comfort for us to serve as their "Bond Department" allowing us to compliment and protect their insurance customers.
What if the contractor becomes involved in a dispute with the obligee or a claim is filed against him with the surety company?
Through the terms of the indemnity
agreement, which all customers are obliged to sign, the company will
call upon the principal to provide a written statement of his
position and review it accordingly in a timely manner. Based on their
conclusion, the Surety will either deny the claim or encourage the
Principal to settle the matter by virtue of the
indemnity agreement. Should the Principal and Surety be sued, the
bonding company will ask its principal to hire an attorney and add their
name to his/her defense.
Can I obtain some indication of my bondability without submitting all the paperwork? Yes, since the financial condition of the company represents the better part of the decision process, we can provide a qualified opinion based on submission of the latest annual financial statement and our experience in such matters.
Is the bonding industry highly profitable? Not really. Contractor failure is one of the highest risks of any business. The profitability is usually cyclical depending on the economy in general. We have been in a tight market since 2008 due to a lack of new construction resulting in extreme competition and the negative results are just now being impacted by sureties. When this occurs, underwriting becomes more intense and restrictive which will eventually aid the more qualified contractors from a competition standpoint. Such conditions seperate us from other bond agents due to our thirty-plus years of experience and close relationships with our underwriters.
How can I learn about the new lien laws? We are providing a link for procedures and forms HERE and are receptive for any questions that may occur on this subject.