Surety Bond Rate Shock, When Low Rates Go Sky High

There are countless clients calling us at JW Surety Bonds who are surprised and even frustrated when they find out how much a bond will cost them. Many of these customers have had bonds years ago claiming they only had to pay a fraction of what they are being asked to pay these days; what many people don’t understand is that the surety industry has a consistent pattern when it comes to bond underwriting.

Commercial and contract bond underwriting was very lax several years ago; but in this article I’ll be speaking on commercial bonding. There was a flat rate that would be charged for most commercial bonds which mostly depended on the type of bond and amount. No matter what the client’s financial condition was, whether good or bad, bond premiums were pretty consistent. As a result of sureties writing bonds so laxly, an influx of claims arose against the bonds. The claims were a lot of stress on the surety companies because they were the ones backing the bonds and any claims that arose. Although the surety company will go to the client with the bond claim for reimbursement, many clients couldn’t pay the claim because of their weak financial condition which was not researched prior to the bond issuance. This made the surety companies become much stricter when it came to assessing clients in search of bonds, specifically when it came to their financial strength and responsibility.

Let’s fast forward a bit to the present. Now, as oppose to charging flat bond rates dependent on the bond type and amount, it’s now based off of the client’s financial strength which is strongly based off of credit, personal, and business financials. The surety company will look at your credit history, which is used as a gauge as to how you handle financial responsibility. Depending on your credit history, the surety will charge a percentage of the bond size (roughly 1-20%). Now should you be a client with bad credit who had a bond a few years earlier before sureties became more stringent, you will more than likely see a large increase in the cost for a bond because it’s no longer a flat rate bond premium but a percentage of the bond amount calculated using your credit history and financial responsibility.

Many people find this increase in bond cost unfair. When it comes down to it your credit history is an efficient way to assess how you handle your financial obligations; this helps assure that if a claim does arise, you‘re not only capable but willing to pay the claim. The surety industry is cyclical; there is a back and forth pattern when it comes to bond premiums and approvals. Sureties will go from being very lenient, selling bonds and approving anybody and everybody, many claims will arise from these bonds costing the sureties thousands, which will then result in sureties becoming much stricter when it comes to bond approvals. Once the surety’s approval process is more conservative, they bring in much less money which forces sureties to slowly become more lax. At the moment, we seem to be somewhere in the middle of this cycle.

Changes in the surety bond industry are few and far in-between, but the conservative/non-conservative bond approval cycle is one consistent element that shifts in the surety industry. Credit based bond premiums are much more sound and accurate when dealing with financial accountability and potential claims. Although it doesn’t happen often in the surety world, change is welcome in our eyes because it has often facilitated innovation within the industry.

How Bid Bonds Keep Government Entities Safe from Bad Business

Whether building roads, bridges, schools or offices, government organizations are one of the largest purveyors of private contracts nationwide. These lucrative contracts are generally handed out to the private firm offering the lowest bid for the project. But how does the government know if a company has the means to take on a project? How do they know a company will complete the project on time? How do they know if a company will operate safely?

In the 1800s, Congress began to realize that a high number of their projects were being abandoned by contractors, and taxpayers were left to cover the bill a second time when another company was hired to finish things off. Companies were underbidding to win projects, taking a few government paychecks and then heading for the hills. To remedy this deteriorating situation, bid bonds were born.

Like most bonds, a bid bond is issued to a private company by a surety. This bond essentially pre-qualifies the company to perform work for the government. The bond does not protect the contractor, but instead protects the owner of the construction project (usually the government) against contractor failure. It also works to protect any subcontractors against nonpayment.

Should the winning contractor fail to perform their duties, the government will hire the next lowest bidder for the job and the surety will pay the difference. Because the surety is not insurance, however, the original contractor is not off the hook and must repay the amount granted to the government.

The established process of requesting and issuing bid bonds works for several reasons: Bid bonds remove the liability from the government. Instead of forcing public groups to pick and choose from a vast pool of project applicants, the field is immediately narrowed by sureties. These private organizations independently verify the legitimacy of a bidder and ensure that they can and will complete the task. This way, the government knows that all bidders are qualified and can feel safe selecting the lowest bidder.

The process of receiving a bid bond makes things fairer for contractors. If a contractor bid on a job with the government and was rejected, they would have nowhere else to appeal the decision. Instead, when a contractor is denied a bond by one surety group, they have hundreds of other groups with which they can apply.

Sureties remove the possibility of political maneuvering behind the scenes. When all contractors are bonded, the government is forced to hire the lowest bidder, not the one with the most political clout.

To learn more about these contract bonds, visit our Bid Bonds page, or contact one of our bonding professionals.

Does Hipmunk Need a Seller of Travel Surety Bond?

Up-and-coming visual flight search engine Hipmunk, known for its color-coded Gantt chart approach to finding airfare, does not actually sell the tickets to the flights it sorts so nicely. Rather, upon choosing an ideal flight, visitors are sent to book through Orbitz while Hipmunk receives $3 per flight sold. A search of the Office of the Attorney General of California reveals that the scrappy San Francisco web startup does not have a Seller of Travel bond.

Since Orbitz does the actual selling (Orbitz does have a Seller of Travel bond in CA) and Hipmunk only provides the slick user-friendly interface which pushes people to Orbitz, the company does not fall under the California Business and Professions Code, Seller of Travel Statute (Hipmunk is both based in CA and sells to residents of CA).

As Orbitz is the company travelers transact with, Hipmunk is not required to “maintain a surety bond of one hundred thousand dollars ($100,000) issued by a surety company admitted to do business in this state.”

Government Bond Program Bleeding Taxpayer Money

Once again amendments have been presented concerning the government run SBA Surety Bond Guarantee Program (SBA Program). Senator Ben Cardin’s (D-MD) staff has been cooperating with SFAA and NASBP in the final stab of the year to enact the Senator’s amendments concerning small contractors. Some wonder whether these changes are moving the program in the right direction.

The proposed modifications boost the maximum contract amount bonded under the SBA Program from $2 million to $5 million and would also provide the SBA Administrator discretion to establish the liabilities of its Bond Program when claims arise; this would allow SBA bonded contractors to either do larger jobs or a larger volume of jobs as well as provide increased bond lines (similar to a line of credit). These provisions were incorporated in the 2009 economic stimulus package (ARRA) but expired on September 30, 2010.

The amendments have been integrated in to numerous bills in the Senate this year including the final tax extenders package that President Obama signed into law but they didn’t make the final draft. While changes must be made to the SBA Program due to its laborious procedures, these amendments may not be the steps that should be taken. Smaller sized contractors are in support of these changes which would end up providing more/larger jobs but it’s also risking tax payer’s money having them work on larger jobs where they have little to no experience. Should a claim arise, the SBA would have to pay the claims for the incomplete jobs.

The SBA Program is difficult to deal with as is and needs an overhaul when it comes to procedure. Most surety companies don’t want to work with the SBA because it is a mismanaged program which limits the surety market quite a bit. When working with the SBA Program you are often required to send four or five copies of the same contract to several departments. Additionally, nothing can be photocopied being everything must be in blue ink which will cause agents to fill out the same form several times; just a couple examples of the cumbersome process. Although success has come from the program giving smaller contractors more opportunities, you can look at it as tax dollars being thrown out the window for the simple fact that the SBA Program is usually avoided. For the agents that do work with the SBA, it’s mostly because the program is a niche market for the wrong reasons being there is so much red tape involved.
SBA Table

Above is a table showing the SBA’s total revenue and liabilities; from 2005 to 2009 the total administrative costs of running the program outweighed the total revenue brought in and this is projected to continue through to 2011. This shows why changes in efficiency and operation need be made to the program.

In the end, these amendments have a risky nature giving more flexibility to smaller contractors that may not have the ability to handle the work load. Given, changes need to be made to the SBA Program they should be more focused on the procedure and efficiency of operation. Money is being misused because we have this government run SBA Program in place but is sparsely being utilized by contractors and sureties alike because of the procedures they have in place. While these amendments are trying to change some of the rules, it’s not necessarily in the right direction. Until the efficiency of the program improves, we will see the same pattern of sureties and contractors avoiding this program that was established to provide more working opportunities.

Historic Chrysler Plant Demolition Protected By Surety Bond

The demolition of structures and buildings always bring about risks. The main risk is the potential damage that can be done to public or private property. Although it is not decided yet, a large former stamping plant may either be partially or completely demolished in Ohio; it seems a surety bond fits the mold to protect this kind of work. Chrysler

“We don’t want anything left on the property that could be environmentally dangerous or cause any kind of damage”, said Councilor Maureen Stauffer.

The doom of the 2.2 million-square-foot building which used to be the Chrysler Stamping Plant has not been sealed yet, but should any demolition take place, city officials want to guarantee the job is done correctly. The city’s main concern is the possibility of infrastructure or land damage during the project; so new demolition rules were enacted on Feburary 22nd. The new rules require job prospects to have a thorough site plan, procedures in place to protect utilities, and have to provide notice of asbestos that must be removed following federal rules. Also, owners of buildings that are larger than 500-square-feet must obtain a $10,000 surety bond to cover any potential damage to city property such as sidewalks and waterlines before demolition can begin. If city regulations are followed, the surety bond payment will be refunded back to the owner of the building which is being demolished.

Officials in Fenton, Miss., told Finch that “a mess” was left behind after the demolition of a Chrysler plant in their city.

The new demolition bond requirement seems to be a great solution all around. The bond will help guarantee the project is completed correctly, and if it’s not the bond will cover any necessary reimbursement. But this doesn’t mean the building owner’s get off scot-free. Should there be any damages to city property a claim will go out on the bond which the surety company who wrote the bond will pay. Subsequently, the surety will go to the owner who purchased the bond for retribution.

On the bright side, if all goes well and as anticipated with the job, the work will be done without damages to public property according to the new regulations. With surety bonds in place, it guarantees the work will be done properly.

Decisions on the demolition of the building won’t be made until the end of 2011 but the bond requirement put in place seems like a great solution to protect the County.

Although sometimes it seems surety bonds just over complicate things, they are here to help and uphold the interests of the public.

Stolen Produce Forces Surety Bond Protection

In the land of the free, there are many honest and hardworking companies trying to get their piece of the American pie. Unfortunately it seems there are many deceptive companies lurking around to offset the honest businesses. Over the past year, many legitimate businesses had their produce stolen by a company in California State.

A company by the name of JC Produce LLC, of West Sacramento, California was cited by the U.S. Department of Agriculture for neglecting to pay 104 sellers of produce for their goods. The total unpaid produce leeched from the various companies reached $2,349,704. As a result, JC Produce LLC is not permitted to operate within the produce industry until Feb. 7, 2012; that’s when it is allowed to reapply for a PACA license which was revoked. The principals of this questionable company, Susan & James Lennane, must wait till the February 2012 deadline and also are required to obtain a USDA approved surety bond in order to open up shop again; because of their actions, they must meet additional bond requirements which are good for anyone that may do business with them in the future.

The surety bond requirement that the owners of JC Produce LLC must satisfy in order to operate again is absolutely necessary. The bond will be there to guarantee the payment of services or goods, in this case produce. Should they not pay for produce with while a bond is in place, a claim will go out on the bond which the surety company who issued the bond will pay. In turn, once the surety pays the claim, the surety would go back to the owners of JC Produce LLC for reimbursement of the claim; if they can’t pay the claim, the bond will be terminated and they will no longer be able to operate their business legally. The bond acts as a safeguard for the business transactions that take place.

Surety bonds can guarantee anything from a construction project to payment of fruits and vegetables; it just depends on the specific type of surety bond. Bonds exist for the benefit of anyone interested in conducting and participating in genuine business.