Surety Bond News

Individual surety ship is said to be the Wild West of contract surety bonds; there is little to no regulation on the bonds. When contractors have trouble obtaining bonds from licensed sureties, they turn to “individual sureties” who are not regulated. These individual sureties can ruin a construction project with their unregulated bonds, just like it did with the Korean Seventh-day Adventist Church.

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Many skaters in San Marcos, Texas were not pleased when a contractor that was supposed to construct a skate park in the city fled the skeleton of a potential park. Fortunately for the city and skaters a like a surety bond was in place incase something like this occurred.

A large crater in the ground with exposed grids of metal rebar was supposed to be a skate park including large bowl and pool-like concrete structures, but development on the park halted last year because the contractor “basically was not able to complete the job”, city Officials said. City attorney Michael Cosentino said San Marcos has made a claim on the performance bond while obtaining a replacement contractor to finish the job. Kristy Stark who is the public information specialist for the Capital Improvements Program, said the contractor never gave notice that the company wouldn’t be able to finish the job. Luckily, DAVCAR Engineering Services, the design engineer for the project, suggested that the city file a claim “due to the contractor’s unsatisfactory progress.” The claim was filed against the performance bond which was written by Western Surety Company.

When this contractor abandoned the skate park job, it demonstrated how important a surety bond can be regarding construction projects. If a performance bond wasn’t obtained for the job, the city would be stuck with the responsibility of funding the rest of the skate park or just be forced to forget the project altogether. Since a performance bond was in place guaranteeing the work, the surety who wrote the bond will finance the rest of the incomplete job; in turn the surety will put a claim out on the contractor who deserted the job. When a city gets stuck with the bill for an incomplete job because it wasn’t protected with a surety bond, so does the public within the Commonwealth being the city will most likely dip in to tax dollars to fund the rest of the job. The performance bond is protection not only for the obligee, which in this case is the city of San Marcos, but also the public within the city.

“The additional cost to complete the work is being borne by the bonding company, not the city. The bonding company is taking up the difference,” Cosentino said.

There are many questionable contractors and companies lurking around; it’s hard to know who will perform faithful work. A surety bond can help ease any worries when it comes to ensuring all sorts of services, including construction projects. The City of San Marcos played it safe; when in doubt, secure a bond simply because it will guarantee the services agreed upon.

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.

In today’s unstable economy and tight market, it has been increasingly harder for some contractors to obtain bid and performance bonds. For small business owners and larger companies alike, it has been more and more difficult both during the current time and over the past couple of years to obtain contract bonds. Even though the market and economy may look dim right now, there are specific steps that contractors can take to ensure that they are doing all they can to make this process easier and more obtainable. Here are ten informative tips to help improve a contractors’ surety program:

1. Find a CPA Who Specializes in and is Knowledgeable about Contract Bonding
Finding the perfect CPA is where to start. CPAs must know about the percentage of completion or completed contract methods of accounting in order to provide the surety agency with all the necessary information that they require, as well as being able to provide the required financial planning and tax advice to the contractor. A knowledgeable and thorough CPA will present the contractor’s financials in a professional way that makes the best presentation to surety companies and agencies alike. Also, it will balance the strong desire to reduce tax liability.

2. Work With a Bank that is Familiar with Contractors
A contractor’s cash flow may be very different than other industries. In fact, they even differ among different varieties of contractors. It’s crucial that a bank’s loan committee and board of directors understand construction and the various lending risks that are associated with general contractors and subcontractors. It would be a good idea for the contractor to meet the decision-makers at the bank and establish a relationship. Account managers are known to come and go, so it is imperative that the contractor maintains close contact with the bank.

3. Establish a Web Site
It’s a new millennium! Some contractors do not have a website, but many are realizing that establishing a web site is crucial for the success of their business. Owners, developers, and clients expect to be able to learn about a potential business partner with a click of a button. Nowadays, a construction company that does not have a website can be viewed as old-fashioned, out of date, and lacking innovation. Companies who do not advertise online have a tough time competing with new and innovative contractors who are able to develop an informative website. Once the website is established, it is important that the website is accurate and updated regularly if any changes are made. A site that is well-developed and regularly maintained can potentially become a portal of communication for contractor’s staff/employees, vendors, clients, and subs.

4. Collection
A contractor MUST pay very close attention to open receivables. The most successful companies make very clear what the payment schedule will be prior to the start of work and enforce their collection rules and guidelines. They can also pre-qualify their clients and confirm what available financing is open to cover the estimated amount of the contract as well as contingencies. This is so important because in today’s construction economy, after getting a job, the most difficult aspect is collecting payment for it.

5. Understand the Law
It is also important that a successful contractor understands their rights, as well as the rights of other individuals involved in a project. This includes all subcontractors, the general contractor, and the owner. Contractors must be aware that lien and stop-notice laws vary from state to state, and they are changed nearly every year. One mistake can cost one of these parties to lose their rights, and possibly thousands of dollars! A general contractor will most likely be held responsible for the payment of wages due to all workers on the project, regardless of who the employer is. State agencies can and will enforce minimum or prevailing wages in many cases and the general contractor will likely be held accountable. It is also very important to know the law and have a knowledgeable attorney review contracts regularly to keep them current with law changes. Due to the fact that this is a payment issue covered by the payment bond, the surety company must be aware that systems are in place to protect the contractor for paying for labor more than once.

6. Meet the Home Office Underwriters
Truth be told, a contractor should have and maintain a very close relationship with their broker and may have the same relationship with the local branch underwriters. Although the branch underwriter can be a strong advocate for the contractor, the ultimate decision maker is at the surety company’s home office. The better the surety company knows the contractor, the more likely they are to make better decisions for the contractor.

7. Hire a Strong Financial Staff
Successful construction company executives view the accounting department as the profit center, not the cost center! A highly-skilled CFO will be an incredible asset to the contractor. Adequate staffing will make paperwork to be processed efficiently and correctly, thus speeding collections.

8. Communicate
Contractors spend a great deal of money on outside services and they should utilize those services to their advantage. The contractor must have strong legal, accounting, financing, risk management, and surety support. These mentioned advisors must be kept informed of any changes in the contractor’s operations and on operating results on a regular basis. These professionals can help keep the percentage of mistakes to a minimum.

9. Reputation
For any contractor to be successful, they must have a good reputation to help them attract potential clients, but what about subs, supplier, engineers, etc? All of these groups communicate with each other. A contractor can’t burn too many clients before word spreads. Nowadays, communication is faster and more efficient than ever and the Internet provides a great deal of information about anything, even contractors.

10. The Surety Broker
And finally one of the most important keys to a successful surety program is the surety broker. They can match the contractor with the proper surety company. In today’s tough surety market, a knowledgeable broker will be advised of all levels of operations and tell the contractor how decisions will affect surety credit. The broker must maintain an excellent relationship with the surety on behalf of the contractor. The number of active sureties in the market continues to dwindle, so there are fewer options and when bond line capacity becomes an obstacle, it is crucial to have all possible options available. “Burning bridges” is never a smart move, but it is more important now than ever to keep all doors open. A skilled surety broker should have the ability to coordinate each issue discussed in this article to maximize a contractor’s surety program.

Bonding companies look at far more than just owners’ personal credit when it comes to contract surety over $250,000. A surety wants to have confidence in their bonded contractors prior to approval. There are numerous different actions a contractor can take to instill confidence in a bonding company. A contractor must be organized and practice restraint when necessary to gain the trust of an underwriter.

For most, the best way to run a company in an organized fashion is to hire professionals they can count on to assist in decision making. A bond producer well versed in contract bonding should be a top priority. If your agent is not knowledgeable enough or does not have the markets to fit your company’s needs, then there is little they can do to help with your bonding needs. An experienced bond producer is a must to ensure you are competitive in your bids and to allow for a bond line size that suits the needs of the contractor. An accountant that understands construction is a must. The business financial statements are the highest weighted item for underwriting a contractor. You can think of them as the underwriter’s window into your company. A contractor must walk away if their accountant does not know how to complete financial statements on a percentage of completion basis. A good relationship with a banker is a rather obvious need for any business that relies heavily on loans to operate. There are numerous other professionals that one could utilize such as a good controller and legal counsel, but we will stop our list here so it still applies to most contractors.

Surety underwriters will want to periodically meet with their medium to larger sized contractors. The underwriter will want to see that the contractor knows their cash flow and their receivables that are over 90 days. The underwriter will also want to see that the contractor can answer all other questions regarding their company. In other words, the underwriter will want to leave feeling confident that the contractor knows their industry and the specifics on their company.

Earlier, I mentioned that a contractor must practice restraint when necessary. By restraint, I mean that they can not be blinded by profits and take risks above and beyond their ordinary work. A surety will not be comfortable approving a bond twice the size of any previously bonded work for a new company. A red flag is raised for any contractor that wants to do work outside of their niche and or territory. If an underwriter is not comfortable with the contract for any reason, they will decline the contractor.

A contractor must keep in mind that they are essentially obtaining surety credit. Underwriters must use the financial documentation provided and personal relationships to decide the risk on a particular account. A contractor that is well organized with a team of professionals to assist them will create a great deal of confidence in a surety’s underwriters.