Temporary work camp housing and procedures for installing and removing the structure will be provided through this bill. The housing put up through this bill must be removed within 120 days of it being vacated. A surety bond must be posted by the owner and provide this to the city or county where the work camp housing is installed. This is for the expenses that the city or county could incur by removing the housing, this includes any above-grade or below-grade infrastructure. The amount and form required for the bond or other security will be determined by the city or county.
Contract bonds (also known as construction bonds) are required in most jurisdictions. A lot of times the benefits are overlooked and they’re seen as a hassle. But in fact, contract bonds provide essential guarantees to both parties involved in the contract.
Contract Bonds Provide Value to Clients:
They ensure the original bid.
A bid bond is a type of contract bond that guarantees a contractor will stick to the terms they originally bid. This type of surety bond is submitted along with the bid, guaranteeing the entire process, from start to finish.
They require the contractor to accept responsibility for mistakes.
We all know a project can require maintenance even after it’s complete. A maintenance bond serves as a warranty against defective materials or shoddy workmanship. Maintenance bonds are not always required, but it’s never a bad idea to protect your company from sticky situations once the contract ends.
They provide the contractor with a backup if it defaults.
If your contractor defaults, a payment bond will make sure everybody involved in the project gets paid and you don’t get saddled with that debt.
They guarantee that the client performs the work according to contract.
This is where a performance bond comes in. It’s another required bond that you’ll be happy to have on your side should the unfortunate event occur that the contract is not carried out correctly.
Contract Bonds Provide Value to Contractors:
The client feels safer and more assured.
Being backed by a contract bond provides a level of assurance to the client that the contract will be honored. Having this financial guarantee will help facilitate a better working relationship.
They guarantee completion of the project.
Sometimes you get near the end of a project and realize your company simply doesn’t have the resources to complete it. It happens to the best of companies, but you still want to see the project completed and know that all your hard work didn’t go to waste.
They provide assurance for subcontractors and vendors.
As you’re gearing up for a project, the best subcontractors and suppliers may want to see proof that you are holding a bond. It also serves as an assurance to them that they’ll receive their due compensation.
For contractors and business owners in a wide range of industries, surety bonds are an unavoidable part of operating their organization. However, that doesn’t mean they are forced to take on high-cost bonds which can cost hundreds or thousands of dollars more than what is necessary. The key to securing low-rate surety bonds is being informed about the process and knowing what is taken into account when determining your cost. Here are a few things to be aware of before you approach a surety company looking for a bond:
1. Check your credit
The first thing any surety company will do when you walk through the door is run a credit check on you and/or your company. Just like having a good credit rating can get you lower interest rates on car loans, they can also get your company lower costs for bonds. Before applying for a surety bond, check your credit and make sure everything is correct and up-to-date. One or two bad marks can deliver a serious blow to your overall rating. Fortunately, reporting errors or mistakes can generally be cleared up with just a few phone calls.
2. Balance your books
A large part of bonding consideration, especially when it comes to contract bonds, lies in whether or not your company has the capital necessary to complete a job. Have your in-house accountant comb through your company’s financials to make sure you actually have sufficient funds to see the contract through. If necessary, free up capital by selling off investments to keep a majority of funds liquid and easily accessible. Following responsible accounting practices at all times will ensure that you are able to present an accurate picture of your company’s assets to a bonding company.
3. Toot your horn
Having a well-established network of references and contacts can go a long way to getting you a lower bond rate. The amount of experience a company has in the industry where they are seeking work weighs into their overall credibility and reliability to carry out the contract. To apply for a bond, ensure you have proof of previous work which has been completed satisfactorily.
4. Make your choice
Different bonds come with different rules and regulations associated with them. The sheer number of different bond types can be overwhelming, so consult a professional to ensure you are applying for the bond best suited to your company. In many industries there are well-established standards for the kind of bond necessary, but new business owners may need a unique bond specially-tailored for their operation.
5. Read your rules
Bonding guidelines can vary widely by state, but some basic online research should give you a good overview of what you are required to obtain. Unfortunately, you don’t get brownie points for securing a surety bond worth more than your state’s required minimum amount. Save yourself additional costs by knowing the exact amount of bonding you need to operate in your state and locality. You can find this information online or call your state’s licensing board for details.
SB 490/860: Subdivision Bond
This bill will allow for the performance bond required for a subdivision or site plan application to be enlisted before or after the subdivision or site plan is recorded on the land records of the municipality. This is so long as no work begins until after the bond is posted.
HB 1275: License Bond – Sewage Treatment Contractors
Sewage treatment contractors must post a surety bond in the amount of $25,000 if the bond covers both plumbing work and subsurface sewage treatment work. Current law required a license bond to be posted in the amount of at least $10,000 for such contractors.
The Small Business Administration (SBA) has developed a Surety Bond Guarantee Program in order to provide smaller contracting firms with assistance in obtaining surety bonds. This program was designed to help small contractors with less experience have an opportunity to become bonded so that they may compete for jobs requiring surety bonds. The program will allow these smaller companies to prove their ability to meet job specifications, and perform well while making a profit. Strong performance with the help of this program can enable less-experienced contractors to build credibility, which could help them acquire surety bonds for future jobs based alone on their company’s proven ability to perform, as well as their financial strength.
Does this program apply to all surety bond types?
No. The SBA’s Surety Bond Guarantee Program can only be used for obtaining surety bonds classified under the contract bond umbrella. However, other types of surety bonds, such as license and permit bonds, may be authorized as well, as long as they are written in conjunction with a contract bond.
So how does this program work?
The SBA does not write surety bonds for eligible companies, but instead guarantees to reimburse participating sureties for a specified portion of any losses incurred as a result of a small contractor’s breach of contract (i.e. 70-90% of losses). Participating sureties must also pay the SBA a fee for using their backing to guarantee all bonds written via the Surety Bond Guarantee Program. In the unfortunate event that a claim against someone bonded under this program, the SBA must be notified in a timely manner. The participating surety is responsible for handling all aspects of a claim before seeking reimbursement from the SBA.
For more information on how to apply for the SBA’s Surety Bond Guarantee Program, click the following link: http://www.sba.gov/aboutsba/sbaprograms/osg/OSG_HOWTOAPPLY_SBOND_GUARANTEE.html.
Despite a large spike in 2007 of state legislation for public private projects (PPPs), last year saw a significant decrease in the number of states that passed such permits. This is likely a result of the diminishing private funding for PPPs due to the current economic conditions within the United States. Additionally, recent reports from the U.S. House Transportation Committee on PPPs could have reflected negatively on them as well. However, international funding may still be an option seeing how PPPs were originally an overseas model. While many are concerned with the concept of PPPs in the United States, state officials should be able to protect public interest in PPPs with concession contracts, in which they have been able to provide oversight and address work force issues.
Today, a majority of surety bonds are purchased by principals through surety bond producers, also referred to as surety bond agents. This does not only pertain to contract bonds, but all other surety bonds to include the numerous commercial bonds available, as well as court bonds. Surety bond producers serve as middlemen between those in need of bonds, and the deep-pocketed surety bond and insurance companies. Top bond agents are knowledgeable about the surety bond industry, and the industries in which they provide bond service, such as the construction industry. Many work as part of bond agencies that focus on suretyship, but can also be a part of certain insurance agencies that have surety departments. The best, most professional surety bond producers have well-established relationships with multiple surety bond companies. This allows the agents to help find their customers (principals) the surety company that is the best fit for their particular needs.
When it comes to the construction business, surety bond producers not only help contractors obtain their required surety bonds, but they also can provide additional business advice, technical expertise, and managerial consulting. A good surety bond producer can become part of a contractor’s support network, providing invaluable bonding advice for the short and long term.
In recent years, numerous state bills have been passed that look to hold sureties liable, and put contractors in default, when a contractor violates immigrations laws. Such bills have also made general contractors responsible (or liable) for immigration legislation compliance by all sub-contractors. However, due to the fact that the constitutionality of some of these laws is currently being challenged, the full affect of such immigration laws has not yet been experienced.
The Surety & Fidelity Association of America (SFAA) has been working closely with other interested groups to monitor immigration laws to identify what, if any, impact they will have on the surety bond industry. Specifically, the SFAA has worked to help contractors found in violation of such laws by trying to change the way penalties are handed down. Their thought is that project termination should not necessarily be the first option for a penalty, because terminating an on-going project may end up costing the taxpayers more money. Such terminations have many underlying costs associated with delays, etc, and will ultimately prove to be nonbeneficial to the public entity.
Like many industries in our economy, theU.S.construction market has taken a hit as a result of the recent credit crisis. Many constructions projects throughout the country have either stopped or been slowed down, and subsequently, the construction bond portion of the surety bond market has seen changes as well. Specifically, perhaps the greatest change to the construction bond market is the level with which underwriters of surety bonds apply scrutinize the cash flow, or financial health, of contractors seeking surety bonds for their businesses.
It’s important to understand why this additional scrutiny is being placed on the contractors’ cash flow by underwriters, because this is happening despite expectations by brokers that rates will be stable for the near future. However, theU.S.construction market’s recent decline forced related insurance rates (premiums) to fall during the second quarter of this year, which was the first quarterly drop in insurance premiums in the past few years. Additionally, the current market situation has caused a major increase in competition for construction jobs/projects nationwide. Construction companies are forced to lower their prices to get much needed jobs, and therefore their profits (profit margins) are naturally going to take a hit. This makes accurate, efficient management of companies’ financial statements essential to their financial well-being, and possibly to the survival of the business. In particular, proper management of the balance sheet, and the statement of cash flows (SCF) is crucial to a construction companies’ success, because often times they can work for up to a couple of months on a project before they begin receiving cash from customers. Constructions expenses and payroll can add up quickly in this environment, and therefore cash flow is vital. Underwriters of surety bonds understand this, which is why they are taking a close look at contractors’ cash flow.
On 9 January 2009, the Wichita Business Journal reported that the Wichita-based Martin K. Eby Construction Company Inc. and Liberty Mutual Insurance Company entered into a surety bond program with one another. This deal comes after a roughly four-year period where Eby Construction Co. was unable to purchase the contract surety bonds required in order to work on certain government projects. This inability to obtain surety bonds came as a result of a number of significant losses on jobs in both the states of Texas and Florida. Eby was forced to sell their operations in TX and FL.
In October of this past year (2008), Eby made the positive announcement that they were on the verge of regaining their ability to obtain surety bonds. A significant settlement in a lawsuit with one of their Dallas-based customers may have been the catalyst for this favorable turn of events.
Now that Eby Construction Co. has begun a surety bond program with Liberty Mutual, the company should soon be able to conduct work in the public sector. Additionally, Eby announced that they will be able to place bids to do work on certain profitable jobs in the private sector that they had previously been unable to bid on due to their inability to obtain surety backing (via surety bonds). Two of the private sector jobs mentioned by the Wichita Business Journal were Via Christi Health System and Cessna Aircraft Co.
We recently posted an article on the two major categories of surety bonds: Contract Bonds and Commercial Bonds. However, another less common yet significant category of surety bonds are Court Bonds. While this category of bond does not make up as much of the surety bond market as the previously mentioned categories, it is important to understand what they are, and the primary types of surety bonds that fall under court bonds.
In a nutshell, court bonds are a form of surety bonds that are required in many court proceeding in order to allow litigants to engage in the requisite legal proceedings. They can ensure that a person has the necessary protection from possible loss that could come about as a result of courts outcome. Court bonds can also guarantee that a person assigned as a fiduciary carries out his/her duties in accordance with the terms of an agreement or the orders of the court.
Here are the most common types of Court Bonds:
- Appeal Bonds - Required by a court before any appeal is made.
- Guardianship Bonds - These types of bonds ensure that legal guardians of minors or incapacitated individuals will not misuse any funds that are supposed to utilized to support that individual. (also known as Custodian Bonds)
- Probate Bonds - Bonds that are required by the court to guarantee the proper distribution of assets by the executor of an estate whenever an person passes away or becomes incapacitate. (also referred to as Estate Bonds, Executor Bonds, and/or Fiduciary Bonds)
To understand surety bonds, and how they work, it is best to start off by breaking them down into larger groups or categories. There are two major categories of surety bonds: Contract and Commercial Bonds. In this article, I will briefly explain what each of the previously listed bond types guarantees, and will also provide you with a few examples of each.
The first category of bonds I will discuss are contract bonds. Contract Bonds are purchased by a contractor (or principal) from a surety at the request of a project owner (obligee), and essentially provide obligee with assurance that the principal will perform in accordance with the terms of the contract (i.e. complete the work, pay subcontractors, material suppliers, etc.).
Examples of Contract Bonds:
- Bid Bonds – Bonds that guarantee that a contractor will enter into a contract at the amount bid and post the appropriate performance bonds.
- Construction Bonds – These are bonds designed to guarantee the performance of obligations under a construction contract.
- Payment Bonds – These bonds guarantee payment of the contractor’s obligation under the contract for subcontractors, laborers and materials suppliers associated with the project.
- Performance Bonds – Guarantee performance of the terms of a contract by a contractor.
- Site Improvement Bonds – These bonds guarantee that any public property that was disturbed or altered during the conduct of a private project will be completely restored upom completion of the project.
- Subdivision Bonds – May be required by local government to ensure that landowners follow-through and complete mandatory public improvements made to their property by builders.
The next category of bonds we will cover are commercial bonds. There are litterally hundreds of different types of Commercial Bonds, which guarantee the obligee that the principal (purchaser of the bond) will perform per the terms outlined on their specific license, etc. The obligee for this type of bond is typically some sort of government entity.
Some examples of the many types of Commercial Bonds are:
- ARC Bonds – Required by the Airlines Report Commission.
- Auto Dealer Bonds – Bonds required by each state to ensure auto dealers abide by state regulations.
- Broker Bonds – The different types of Broker Bonds available are Freight Broker, Insurance Broker and Mortgage Broker Bonds.
- Cigarette Tax Bonds – Cigarette distributors may be required to obtain this type of bond to ensure payment of taxes.
- Collection Agency Bonds – Bonds required by a governing body to ensure collection agencies operate within rules and regulations.
- Freight Broker Bonds (BMC-84) – These federally-mandated bonds must be obtained by freight brokers to ensure delivery of brokered goods.
- License & Permit Bonds (not listed) – Due to the very high number of bonds nation-wide that fall under this category, this link will provide general information on license & permit bonds.
- Liquor Tax Bonds – Bonds required to guarantee the payment of taxes collected on liquor and other alcoholic beverage sales.
- Mortgage Broker Bonds – Bonds that are required by many states to ensure that mortgage brokers operate in accordance with all pertinent rules and regulations of that particular state.
- Sales Tax Bonds – Required by the government to ensure timely payment of sales tax by a company.
- Telemarketing Bonds – These types of bonds are required by the state to ensure that telemarketers, or phone solicitors, follow all rules and regulations set forth by that particular state in the conduct of their solicitation.
Contract and Commercial Bonds can also each further broken-down into many more sub-categories (i.e. A License & Permit Bond is a sub-category of Commercial Bonds), and some of these sub-categories can have numerous different types themselves. Each and every sub-category of surety bond is underwritten differently by the surety bond companies, and there may also be different application requirements for each types as well.
Today, most surety bond consultant firms focus significant effort towards internet sales and marketing. While the development of the internet has made the sale of certain bonds such as commercial bonds much easier, it has not been a major source of new business for all bond types. For instance, construction performance bonds, which generate some of the highest premiums of all surety bonds, have seen relatively small increases in new business generation via the internet, industry wide. To understand the significant difference in internet-based sales volume between commercial surety bonds and construction performance bonds we can look to three reasons:
1. Geographical location
2. Complex underwriting
3. Difficulty adjusting to new ways of doing business
Geographical location: When dealing with a construction performance bond, some sureties may have difficulty providing significant financial backing to a contractor (principal) and is not geographically close to their bond agent.
Complex underwriting: The paperwork involved in writing a construction performance bond (contract bond) can be much more time-consuming and complex than some of the commercial bonds out there.
Difficulty adjusting to new ways of doing business: We’ve all heard the saying “you can’t teach an old dog new tricks.” Historically, most people that have been purchasing construction performance bonds are used to getting such surety bonds from their insurance company. Since that is “the way they’ve always done it”, many people/businesses find it hard to change.
The internet is clearly not just a fad. It is here to stay and be around for the foreseeable future. As more and more people use the internet, internet sales will continue to rapidly grow, and this will most certainly include the sale of construction performance bonds. In today’s high-tech world, sureties will need to stay at the cutting edge. Today, an increasing number of sureties are allowing bond agents to write surety bonds in each and every state in which they are licensed to do so. In an attempt to expedite the often cumbersome, time-consuming underwriting process, many companies are expanding their capacity. Finally, many contractors are beginning to realize that while purchasing a surety bond from the same company that provides them insurance may seem like an efficient way to operate, that is often times not the case. Many of these insurance agents do not have the breadth of knowledge that a surety bond agent can provide them, nor can they match the premiums. As more and more contractors come to this realization most will look to the internet to help them find the surety bond agency that is right for them.