Tag Archives: Steve Golia

Secrets of Bonding 125: Surety Bonds in the Bizarro World

images (1)There have been 24 movies about Superman, but I loved the original TV series starring George Reeves (the Real Superman). Even before that, there were the Superman comic books published by DC Comics.

The character, “Bizarro #1,” first appeared in 1958 – a mirror image of Superman but from a world where everything was opposite from that of humans. That was over 50 years ago, but strangely, there is a little piece of Bizarro World that still survives today. It is alive in our surety rate system. See if you agree…

Example #1

A contractor has won a $1 million contract. The specification calls for a 50% bond: $500,000. The surety’s maximum exposure is $500,000.

Bizarro Fact: The bond rate is based on the contract amount, the full $1 million!

Example #2

Sureties often issue a Performance and Payment Bond in a single combined instrument that states a single dollar amount (penal sum). However, if required, they will issue two separate instruments, one Performance and the other Payment, each with it’s own penal sum (double the amount in the combined bond form.)

Bizarro Fact: When required to issue this double bond amount, the bond premium remains the same as for the combined bond form!

Example #3

The contractor has already started the project. Now it has been verified that 50% of the work is completed and accepted by the project owner. It is confirmed that all related bills have been paid. It is apparent that 50% of the exposure has been eliminated.

Bizarro Fact: The bond costs the same as if it had been issued at the start of the work. There is no reduction or recognition for the portion of the exposure that has been eliminated.

Example #4

The contractor has negotiated a $1 million contract. Now the project owner has indicated that a P&P bond must be provided. The surety states that the cost of the bond will be 2% of the contract amount. Is it 2% of $1 million or $20,000?

Bizarro Fact: The correct calculation is 2% of $1,020,000 or $20,400. The bond premium is calculated on itself, even though it cannot be classified as part of the contract exposure.

There you have it. The Bizarro World we actually live in. Naturally, there are justifications for all the procedures sureties use, but at face value, they seem pretty strange to outsiders.

Steve Golia is an experienced provider of bid and performance bonds for contractors. For more than 30 years he has specialized in solving bond problems for contractors, and helping them when others failed.

 

Secrets of Bonding: “The Call”

imagesA couple of times every week we talk to a new contractor who wants to get their bond account set up for the first time. Here’s how it always goes:

  • Contractor: We want to go after bonded projects but we’ve never had bonds before. What’s involved?
  • Bond Expert: OK Hi! Who am I speaking to?
  • Contractor: Uh, I’m Humphrey.
  • Bond Expert: All right Humphrey, can we start by asking you a few questions? What is the size and nature of the work you intend to pursue?

Scenario #1 (Pursuing contracts up to $350,000)

  • Contractor: We have performed residential and light commercial work. We want to go after general construction contracts up to about $250,000.
  • Bond Expert: Great! Tell me the ownership and structure of your company.
  • Contractor: The company is an LLC owned by me and my partner Bogart.
  • Bond Expert: Are you both married?
  • Contractor: Yes, but not to each other.
  • Bond Expert: We have a very easy program that may be a perfect starting point for you. To be eligible, the owners and spouses must have good personal credit reports. Are the reports favorable?
  • Contractor: Yes.
  • Bond Expert: There are some other criteria. For example, the program cannot be used for long-term contracts or difficult / unique construction. Needs to be plain vanilla. The good thing is that no financial statements or other documentation is needed, only a simple one page app. If this program fits your needs, you’ll never find anything easier or faster!
  • Bond Expert: Give me your email address and we’ll send you the one page app. We can probably get you pre-qualified within 24 hours!

Scenario #2 (Pursuing contracts in excess of $350,000, or for applicants with low credit scores)

  • Bond Expert: We have an excellent group of bonding companies, and even offer exclusive capacity not available from other sources. We find that most contractors are able to qualify for bonding if their account is developed properly. That’s where our expertise (since 1972!) comes into play.
  • Contractor: What info will be needed?
  • Bond Expert: Getting approved for bonding is like applying for a bank loan. The same kind of financial and background info is needed. Your relationship with the surety is similar to banking and you promise to protect the surety from loss, just like signing a promissory note with a lender. That’s why surety bonds are not insurance policies.
  • Contractor: OK what’s the next step and how much does it cost?
  • Bond Expert: We don’t charge for setting up your account! We’ll send you an email with a list of items that are needed initially. Gather as much as you can and send over so we can get started. The process normally takes a week or two.

Conclusion

Have we oversimplified the process? Actually, no. It is easier than people assume to get their bond account arranged – when you know the ropes. That’s our niche. We don’t pretend to be good at everything, but we are experts at this!

Steve Golia is an experienced provider of bid and performance bonds for contractors. For more than 30 years he has specialized in solving bond problems for contractors, and helping them when others failed.