On 5/16/08, the state of Alabama has enacted HB 442. The enactment allows state agencies to decide if a bid bond is required for service contracts or supplies. The prior law made bid bonds mandatory, which allowed for no flexibility, even when no bonding companies were willing to bond the work.
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Alabama Bid Bond Changes
May 27, 2009 by Tracy KonopkaCategory: Bid Bonds, Surety NewsTags: alabama, bid bond, bond requirements, contract bond, contractors, legislation | Comments (0)
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Stimulus Package Impact On Surety Bond Industry
February 18, 2009 by Michael WeisbrotThe Federal government’s stimulus package will no doubt impact the surety industry. Will it mean business as usual for contract bond agents or a boom like we have never seen before?
The sheer size of the bill is absolutely daunting to put it lightly. The bill includes roughly 130 billion in funds towards construction related projects. It is the largest infrastructure investment seen in this country for the last 50 years. Unfortunately, it is impossible to come up with an exact number for construction spending, as the bill allows some departments freedom to use the funds for non-construction related expenses (see: Revovery Bill).
Stimulus Package Details
The website www.recovery.gov is dedicated by the government to keep Americans in the loop on where funds are being spent; it is currently vague at best with a bar graph including some categories of where funds are to be spent. A link below the graph titled “learn more” shows us the same figues in a bubble chart. I doubt showing the same information in a different chart format will appease many.
In all fairness, the bill was just passed yesterday so it might be a bit early to expect detailed information on the www.recovery.gov site. However, I am sure people will begin to demand more details to be provided since this is suppose to be an attempt at transparency through the use of the web.
The Engineering News Record posted an article on 2/13/09 entitled, The Stimulus Bill Compromise, Sector by Sector. They did a better job at breaking out the spending, specifically what applies to the surety industry. According to ENR, the major categories are appropriated as follows:
Transportation – $49.3 Billion
- Highways: $27.5 billion
- Transit: $8.4 billion
- New discretionary grant program: $1.5 billion for highways, transit, rail, seaports, other projects. U.S. Dept. of Transportation would choose which projects would be funded
- Airport Improvement Program construction grants: $1.1 billion
- Rail: $9.3 billion, including allocations for Amtrak and high-speed rail
- Port, transit, rail security: $300 million
- DHS/Transportation Security Administration, procure, install airport explosives-detection, baggage-scanning equipment, $1 billion
- Coast Guard, bridge alterations $142 million
- Coast Guard, acquisition, construction, improvements $98 million
ENERGY – $30.62 Billion
- Electricity grid, including “Smart Grid” activities: $11 billion
- Home weatherization assistance: $5 billion
- Energy efficiency and conservation grants: $6.3 billion
- Renewable-energy loan guarantees: $6 billion
- Carbon capture and sequestration demonstration projects, $1.52 billion
- Clean Coal Power Initiative, round III $800 million
WATER AND ENVIRONMENT – $20.1 Billion
- DOE environmental cleanup: $6 billion
- EPA Clean Water and Drinking Water funds: $6 billion
- EPA cleanup, including Superfund: $1.2 billion
- Agriculture Dept., rural water and waste disposal facilities: $1.28 billion appropriations, to support $3.8 billion in loans and grants
- Corps of Engineers civil works: $4.6 billion
- Bureau of Reclamation: $1 billion
BUILDINGS – $13.365 Billion
- GSA federal buildings, energy-efficiency upgrades: $4.5 billion
- Border stations, ports of entry: $300 million
- Facilities on federal and tribal lands:$3.1 billion
- Fire stations (federal grants): $210 million
- GSA new Dept. of Homeland Security headquarters, $450 million
- GSA U.S. Courthouses, other federal buildings, $300 million
- Agriculture Dept. bldgs/facilities $ 200 million
- Agriculture Dept. rural facilities $130 million (supports $1.234 billion in loans)
- NIST construction $360 million
- NOAA procurement, acquisition and construction $430 million
- NASA construction (hurricane damage repairs) $50 million
- National Science Foundation academic facilities modernization $200 million
- NSF major research equipment and facilities construction $400 million
- DHS consolidation $200 million
- DHS ports of entry $420 million
- Smithsonian facilities, $25 million
- National Institutes of Health, grants for construction, renovation of non-NIH research facilities, $1 billion
- NIH buildings and facilities (construction, renovation) $500 million
- Social Security Administration, National Computer Center replacement, $500 million
- State Dept. Capital Investment Fund, $90 million
SCHOOLS – Unknown
Roughly $39.5 billion out of the $53.6 billion total for the State Fiscal Stabilization Fund is set aside for local school districts. These funds allow for school modernization, but a precise amount for construction purposes is undecided at this time.
HOUSING/HUD $9.6 Billion
- HUD Public Housing Capital Fund: $4 billion
- HUD redevelopment of abandoned and foreclosed homes: $2 billion
- HUD energy retrofits, “green” projects in HUD-assisted housing projects: $250 million
- HUD Community Development Block Grants (housing, services, infrastructure): $1 billion
- HOME investment partnerships program $2,250
- Lead paint abatement $100
Defense & Veterans – $7.78 Billion
- VA: $1.25 billion for hospital and other medical facility construction and upgrades
- DOD: $4.240 billion for “facilities sustainment, restoration and modernization,” includes energy-efficiency improvements, plus repair and modernization of DOD buildings, including medical facilities.
- DOD: $2.33 billion for facilities projects, including housing, hospitals, child-care centers, other military “quality of life” projects.
OTHER – $100 Million
- Security, border fencing, infrastructure, technology $100 million
Below you will find a chart that breaks out the details of spending towards construction. The size of the chart speaks to the size of the bill, as we could not fit the graphic properly on the blog. Please click here for a full sized version of the chart.
Bull Or Bear Surety Market?
All of this government spending must lead to a large surge in surety premium, right? Of course, but will it offset the slump seen due to the current economic conditions? John Welch, President of CNA stated the following during CNA’s 2008 4th qtr. earnings call on 2/6/09:
“The infrastructure part of the stimulus package from best I could tell looks to be anywhere $70 to $80, $90 billion, which is good and it’s great and we need it, but it still is relatively a small part of the overall construction spending in a full year.”
Does this mean that an expert such as Mr. Welch is bearish on a surety premium boom? Think again…In the same CNA meeting Mr. Welch stated:
“Our production was supported by the continued spending on public construction offset to some degree by the drop off in the private market. While there are strains on public construction spending, talk of a government stimulus package including public infrastructure spending give us some encouragement going forward.”
In other words, we are going to need to wait to see how this all plays out.
SBA Changes
The SBA announced today that they will receive $730 million from the bill. What does this mean for the surety industry? How about a raise on the maximum allowable contract amount for the SBA Surety Bond Program from $2 million to $5 million, a 250% increase. In special circumstances, the SBA can now even consider contracts up to $10 million, or a 500% increase! The additional funds will also be used to expand the program further.
Conclusion
The economy has seen better days. Every day on the news we all hear about more layoffs from industry to inudstry. Hopefully the stimulus bill is the begining of our road to recovery.
As one might guess, there is no clear answer on how the surety industry will weather this recession. Even the experts cannot predict what is going to happen, as this is uncharted territory for our industry and the country as a whole.
Personally, I am an optimist and see the surety industry getting through this crisis better than most other industries. This is something we will all have to watch as it unfolds.
Are you bullish or bearish on the surety industry? Leave a comment below!
Category: Bid Bonds, Contract Bonds, General Bonding, Performance BondsTags: Bid Bonds, Performance Bonds, stimulus package, surety industry | Comments (4)
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Why are Contract Bonds Required for Public Construction Projects?
February 12, 2009 by Heidi WolfPractically all of the public construction jobs in America are done by private sector firms. The jobs are typically rewarded to the lowest reactive bidder through the open competitive sealed bid system. Bid bonds play a crucial role in making this system work.
A bid bond is in place to keep irresponsible bidders out of the bidding process by guaranteeing that the lowest bidder will enter into a contract and supply the required performance and payment bonds. If the lowest bidder fails to follow through with these commitments, the owner is protected, up to the amount of the bid bond, typically for the difference between the low bid and the next higher responsive bid. A performance bond backs up the contractor’s guarantee to perform the job description according to the contract’s terms and conditions, final price, and within the allotted time frame. This type of bond protects specific workers, material suppliers, and subcontractors against nonpayment. Since mechanic’s liens cannot be placed against any public property, the payment bond may be the only protection these claimants have if they are not paid for the goods and services that they provide to the project.
In the majority of cases, contract bonds are required by law for public construction projects. Many bonds are required by a township, borough, or municipality. Since these laws have been in existence for many years, few contractors give much thought as to why such laws are even in place. Some contractors who are unable to obtain the required bonds argue that the laws are unfair because they are denied when applying for types of contract bonds. Let’s take a look at what gave rise to these laws that require contractors to obtain bid or performance/payment bonds in order to perform public construction projects. More than 100 years ago, the federal government became nervous regarding the high failure rate among the private firms it was using to perform public contract jobs. It uncovered the fact that the private contractor often was in debt when the jobs were awarded, or got into debt before the job was finished. As a result, the government was repeatedly left with unfinished projects, and taxpayers were obligated to cover the additional costs resulting from the contractor’s default. Since government property is not subject to mechanic’s liens, the workers, material suppliers and subcontractors were without a solution if they were not paid for their services. To protect itself and those who worked on the projects, the
government attempted to use individuals to serve as sureties. However, most of the individual sureties failed to follow through with their commitments, many times because they did not have the financial resources to cover their obligations. So, in 1894, Congress passed the “Heard Act� to allow the use of corporate surety bonds to protect privately performed federal construction contracts. In 1935, the Heard Act was replaced by the “Miller Act�, which is the current law that requires performance and payment bonds on federal construction projects.It is imperative to note that contract bonds are not intended to protect the contractors that are required to obtain them. These bonds are in place to protect the owner (or obligee) of the construction project against contractor failure and to protect workers, material suppliers, and subcontractors against nonpayment.
Category: Bid Bonds, Contract Bonds, General Bonding, Performance BondsTags: Bid Bonds, contract, Contract Bonds, miller act, Performance Bonds | Comments (1)
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Tips For Creating Surety Bond Requirements
January 26, 2009 by Michael WeisbrotOur agency has been getting contacted by numerous government officials as of recent; state, Federal, military, etc. All of them have questions about how to best handle bonding requirements for upcoming government contracts from the upcoming stimulus package. This is not new territory for us, as we have various government departments revise bond forms and create new requirements throughout the years.
We expect to hear from many more seeking advice in the coming months. The current stimulus package proposal calls for 180 billion for infrastructure. An investment larger than any other since the creation of the interstate! The flurry of requests for advice prompted me to compile this list of tips on what government workers need to think about when creating contracts. This post will be updated as more questions come in. Feel free to ask a question in the comment box below or by using our agency’s contact email form. Should you find this page useful, please be sure to create a link to it on your department’s website to ensure it is reviewed by those who need it.
Break Up Large Contracts
It may require a little more work to do, but breaking up large contracts into several smaller ones is a good idea. Doing so allows smaller contractors to get involved, that would otherwise not qualify due to bond line limitations. This means that there will be increased competition for each bid. The recession has hit the balance sheets of contractors throughout the country, often resulting in reduced bonding capacity. Don’t limit your projects to the largest of contractors by not breaking up contracts when possible.
Less Than 100% Requirements Are A Waste
At times, government policies do not meet real world situations. The intentions may be good, but failures to consult industry professionals result in useless or harmful policy. Requiring a bond less than 100% of the contract amount is a prime example (see: FAR 28.102-2). Bonding companies underwrite and charge based on contract amounts, not bond amounts. Therefore, requesting less than a 100% bond only lowers the maximum amount that can be filed for any possible claims. It does not allow for smaller contractors to participate as intended.Use AIA Standard Forms
A bad bond form can make a contract “unbondable”. Keep in mind, the bond form declares precisely what the bonding company is guaranteeing on behalf of the contractor. Therefore, if they don’t like the terms of it, they will not write it, even if the contractor qualifies for the bond amount. The AIA has standardized bond forms that should be used when possible. Doing so will protect the government from a defaulting contractor properly and ensure a smoother process for all involved.Do you have questions of suggestions of your own? Please feel free to comment below!
Category: Bid Bonds, Contract Bonds, General Bonding, Surety NewsTags: government, infrastructure, policy, regulations, stimulus package | Comments (2)
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Understanding the Surety Process
January 17, 2009 by Heidi WolfThe surety underwriting procedure can often be viewed as being an agonizing ordeal for insurance agents as well as applicants needing to obtain bonds. Many times, the entire process can be very aggravating and stressful if an applicant is under a specific deadline or needs a bond very quickly. Here are some items that the surety company will most likely require. It is important to know what crucial information that a surety company or agency will require in order to be approved for any type of surety bond.
Like insurance, the surety industry is recurring. In the mid 90s, the surety industry was very pliable, and there was little underwriting being performed. A combination of the slowing economy and the poor underwriting practices from years prior caused the surety industry to suffer for the first five of five consecutive years in 2000. However, a booming economy led to more bond approvals and issuance, even for applicants that were less than qualified.Fortunately, these losing years caused the market to fluctuate almost overnight underwriting standards were tightened and premiums increased substantially. Capacity quickly became an issue for contractors, particularly at both the small and large ends of the spectrum. Small, emerging contractors were finding it increasingly more difficult to obtain any bonding capacity and large contractors were also feeling the affects of the more stringent industry. The market has fluctuated over the past couple of years, and contract bonds and some commercial bonds can still be difficult to obtain. Some items that are crucial to obtaining prior to applying for a surety bond are:
A surety bond is a form of credit. The underwriter requiring financial information from an applicant is making a credit decision without ever meeting the contractor or applicant.. There may be a substantial amount of paperwork required; however, it may be the extra paperwork required that will get an applicant approved for a bond. An underwriter will most likely request the following:
Business financials It is beneficial and most often a requirement that these are prepared by a CPA. If it is a new company, submitting the most recent business financials will suffice.
Category: Auto Dealer Bonds, Bid Bonds, Commercial Bonds, Contract Bonds, Contractor License Bonds, Court Bonds, General Bonding, Misc. Commerical Bonds, Money Transmitter Bonds, Mortgage Banker Bonds, Mortgage Broker Bonds, Performance Bonds, Subdivision Bonds, Telephone Solicitor Bonds, Title Agency Bonds, Wage & Welfare BondsTags: application process, procedures, surety process, underwriting | Comments (3)
