We have compiled a list of common questions about obtaining a surety bond.
A guarantee to the obligee that the principal will fulfill an obligation or series of obligations. In the event the principal fails to do so, the obligee will recover from the surety bond. The surety, through the indemnity agreement, will expect reimbursement from the principal.
The Performance Bond guarantees to the owner/obligee that you will perform the work as per the terms of your contract. If you do not perform, the obligee may put you default and ask the surety to remedy. The options of the surety at that point are determined by the terms in the bond and your contract. The Payment Bond guarantees that you will pay your suppliers and subcontractors as per the terms of the applicable statute or terms of the Payment Bond. Depending on the bond form, this coverage may extend to tiers below your direct suppliers or subcontractors. If these vendors make proper claim on the Payment Bond, the surety may be required to pay these vendors directly. What differentiates a surety bond from insurance is that you are required to sign an indemnity agreement that states that if the surety incurs expenses or loss as a result of providing a bond for you, they expect that you will repay the surety. The terms of the indemnity agreement and State law dictate when or how the surety might pursue repayment.
Premiums vary from Client to Client depending on the type of bond, quality of financials & surety company. Bid bonds are usually free. There is usually just one charge for a combined Performance & Payment Bond. Depending on circumstances, these rates can average to be less than 1% of the contract price up to about 3% of the contract price. We would be happy to review your situation and let you know what rates roughly what rates you might be able to use, and further, tell you what you could do in the future to obtain lower rates in the future.
It is similar to applying for a bank loan. It gets more complicated if you need a large bond. If you need a bond under $500,000, we might be able to get it approved with minimal information if you have clean personal credit. For larger bond programs, we will need to obtain information from you that will allow the bonding company to understand your character, ability, and financial condition. How much information do we need? Best to give us a call and we’ll try to make it as simple as can. The process can be very fast, but it’s best if you discuss the pros and cons of various options so you do what’s best for you.
Yes, every Surety has different rules, requirements and standards. Indeed, the personality of various underwriters involved needs to be taken into account. Fortunately, we represent over 30 surety companies. That is good for you. It gives you choices. Our job, is to place you with the surety that best fits your needs.
The Bonding Company is the Surety. They are the ones who actually make the guarantees and promises found in the Bid, Performance, and Payment Bonds. The Bonding Agency works with you to find the best fit for the right Bonding Company. The Bonding Agency works with you to service your day to day bonding needs, helps maintain a good relationship for you with the Bonding Company, and helps solve bond problems as they arise.
The surety looks at the client’s credit, capital, and capacity (the three C’s). This is a credit relationship and the surety wants to know that you can do good work and pay your bills. Here’s how it works:
- The prospective company’s Credit (Dun & Bradstreet or Experian generally) and also the owner(s) personal credit as this may be an indication of pay record.
- Capital is shown on financial statements. They look at Balance Sheets, Income Statements, and aging of Accounts Receivables to determine equity and liquidity. The bigger the bond request, the stronger the balance sheet should be.
- Capacity to do certain projects will depend on your experience. There may be reference checks, questions about your estimating process, project manager resumes, current work on hand, and a discussion of how you’d approach a project may come into play here.
With this information, the surety evaluates surety creditworthiness and the size of the surety program parameters.
Florida Statutes 255.05, 713, and 337(DOT work) define who must file a Notice to Owner, when they should be filed, to whom they should be filed, how they should be delivered, and what needs to be included in the Notice to Owner. It would be absolutely foolish to attempt to provide any products or services to the construction industry in Florida without having a basic understanding of the Florida Lien Law. A Notice to Owner is the legal way to let the powers that be know that you are out there and providing services to the project. Failure to provide a timely Notice to Owner could block your ability to be paid. If you want a little more direction in this area, feel free to give us a call.
You can usually get a very good idea of your potential bond costs by giving us a call. Generally, we’ll try to manage your expectations by informing you of what a “safe” number might be. Once we have your submission we may be able to improve on that rate for you. If rates are important to you, we would be happy to work with you to achieve the best program in terms of rates and limits for your company. We usually need a submission to achieve that for you, but we’ll work hard for you.
At Florida Surety Bonds, there are no set up, underwriting, maintenance or bid bond fee’s unless charged by the surety. Sometimes, the surety will require that a contractor upgrade his financial statements to qualify for larger bonds. That investment in better quality CPA statements is sometimes considered a cost of getting set up for larger bonding programs. We can advise you on your options and possible benefits before you decide to make an investment with your CPA.
This is a legal document usually signed by your company and major shareholders personally, indemnifying the surety against loss they may incur because of bonds they wrote for your company. Generally, if a surety is asked to incur costs on your behalf, they will expect to be reimbursed by you. The terms and conditions of the indemnity agreement are important for you to understand. Be sure to read the indemnity agreement. If you have questions, we can probably give you insight on when certain clauses are usually invoked and how that might affect you.
That often depends on the size bond that is needed. If you need a bond under $500,000 the information required is much less. Sometimes, we only need a small application completed. For larger bonds, we usually need Personal Financial Statements, Last 3 year Corporate Financial Statements, Current Work on Hand, Evidence of Borrowing Capacity, Copy of your trade license & current certificate of insurance. Have a question about any of this information? Give us a call and we’ll work it out.
Your marriage legally joined your assets with your spouse. Because it is too easy to transfer assets to a spouse, the spouse’s indemnity ensures the personal assets used for underwriting are available to the surety in the event of a claim. We understand the hesitation of a spouse and would be happy to discuss this further with he/she to help them understand the process (what’s protected, what’s not) and get them comfortable.
The surety will want to understand your ownership in other companies to the extent that those other companies could affect the company that needs the bond. They sometimes need to have some understanding of the strengths and liabilities of these other companies just to be sure they might not impact the construction in a bad way. Often, a surety will ask for the indemnity of other affiliated companies to strengthen the case. It is good to talk over your concerns about this with your bonding agent so he/she can present the facts fairly to the surety.
Yes. A qualifying CPA Statement will get you the maximum bonding limits and lowest rates possible, but we understand that not everyone has had a need to invest in a CPA Statement. In lieu of CPA Statements, we will ask for Corporate Tax Returns and Corporate Accrual Internal Financial Statements, including concurrent AR Aging Schedule to confirm receivables, concurrent bank statements to confirm cash, and a work in progress schedule. For smaller bonds, we may not need a financial statement at all.
Yes. A lot of our sureties understand that after the Great Recession, not everyone has the best credit these days. We will need to dig into the cause of the credit issues (medical bills, foreclosure, bankruptcy, divorce, etc.) so we can figure out the best Surety match. Ultimately, our goal is to help you obtain bonds while you work towards repairing your credit.
A performance and payment bond protects the Owner of the project against your non-performance of the contract, and protects certain subs/suppliers against non-payment. A bond is a form of credit to you, not insurance. When a surety extends credit to you with a bond, they are vouching that you will perform your contract and pay certain bills, with the understanding that you are corporately and personally guaranteeing that you will reimburse the surety company for any claims. The advantage of a bond for the contractor is that it will allow them to do work that is limited to only those contractors who can bond the project. Other advantages of having a bonding relationship include the expertise and knowledge that the bonding company and agent can provide you with the management and growth of your business.
Actually, we have quite a bit of experience with the lien laws and might be able to help you in that regard. We also have great resources in terms of construction-oriented attorneys who are very skilled at helping contractors.