Archive for the ‘Bid Bonds’ category

The Significant Advantage of Bid Bonds

February 25, 2011

The days of a contractor being able to simply bid a job without solid surety bonding in New York are on their way out.  The economy has burned all of us to some degree.  Everyone has had to tighten their belts – from the banks lending money for projects all the way down to the NY Construction firms and NY Trade contractors.  No one has been immune.  In fact, many have had to close up shop entirely.  According to BizMiner, of the1,155,245 contractor firms in operation in 2006 – 20.37%  had gone out of business by 2008.  Now, in 2011, that number has steadily risen.

The work that is available is becoming harder to get. A contracting firm can no longer rely on their reputation to win contracts.  More firms are bidding the same job including ones that do not have the proper experience with the work involved.  Many are stepping out of their comfort zones and taking on projects they probably shouldn’t just to stay alive.  This has not gone unnoticed by project owners and their lenders.  Both want a return on their investments and have taken steps to tighten requirements for the contractors bidding the jobs.

One increasingly popular method is taking a page out the playbooks of local, state and federal agencies – Surety bonds.  Obtaining a NY Surety line, or NY Bonding line is quickly becoming a necessity to stay competitive.   A viable NY Bonding line tells the job owner two very important things: Firstly, if you have the financial security and experience to obtain the bonding line you are more likely to be able to complete the project without much issue.  Secondly, and arguably more importantly, if something should happen and your firm is unable to complete the work or pay your suppliers and/or subcontractors, the Surety Company will step in to make sure the project is completed.  At the end of the day both the project owner and lenders have a lot to lose if the job isn’t finished.

Contacting a NY Surety Bonding Agent to establish new line or increase your current bonding line is an important first step before bidding that next job.  Many projects now require bid security , or reatianage – typically 10% of the contract amount bid.  This can either be provided as a check in that amount , , or as a bid bond.  While it may seem easier and quicker to put up your own funds as collateral for the bid security, it is not the most prudent option.  You are tying up your own funds that may be needed elsewhere and while 10% may not seem like much, if you’re bidding on, or working on six, seven or eight figure project – that security can suddenly become a harder nut to swallow.  If have several bids out at once, you can have a substantial amount of your available funds and/or credit tied up that have been applied to reinvestment into your firm or set aside for emergencies.

Having a Surety Bond line set up prior to bidding a job allows you the financial flexibility of using bid bonds.  Once a line is established, a bid bond can be approved in about 24-48 hours, and in some cases that same day.  Bid Bonds are issued at little to no initial cost to you thereby keeping your own funds available to you.

Another important factor in setting up your surety line with your NY Bonding Agent prior to bidding is that it could greatly reduce the time you need before you are able to begin the work.  Once approved by the Surety Company, a bid bond becomes a guarantee that payment & performance bonds will be issued should the contract be awarded.  The Payment & Performance bonds must be in the owner’s hands before any work can be started.

Conversely, just as job owners & lenders have tightened their requirements, so too have Surety Companies.  The time, amount and viability of information needed to establish (or increase) a bonding line has increased substantially. As such putting up your own funds as collateral for a bid affords no guarantee that a bonding line can be established and payment & performance bonds obtained prior to the scheduled start date.   If this should happen, the job could be defaulted to the next highest bidder or re-bid entirely and your security retained by the owner for their trouble.  You lose your cash, your reputation is soiled and it all but ensures that you will not be allowed to bid another project for that owner again.

Establishing a NY Surety Line, or a NY Bonding Line can give your NY Construction Company a significant competitive advantage against your competition. Further it allows Best Practice NY Construction firms to better and more efficiently deploy their critical cash resources. We welcome your phone calls, and inquiries as it relates to obtaining or increasing a NY Surety or NY Bonding line . We encourage you to  contact a Risk Advisory at Metropolitan Risk Advisory for all of your NY Surety or NY Bonding needs.

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The Basics of Surety Credit

February 13, 2011

Why has the NY surety marketplace changed  and have become so tight ? With significantly higher loss ratios for the surety industry in the last several years and prospects for still worse results ahead growing in large part out of the Banking Crisis, there is a move by both reinsurers and primary surety writers to return to more consistent and fundamental underwriting standards. Surety premiums are a very minor share of the revenue base for most insurers. The business, however, holds significant exposure for large losses as defaults like Enron  and others have  underscored.

The insurance companies who are the “parents” of most surety operations were already suffering from effects of a prolonged soft market and the affects of the banking crisis. Therefore, if you are an insurance executive managing risk, you may view the surety business as a low revenue business with a potential for big losses. Your choices appear quite clear: exit the line entirely; restrict your writings of this line; and/or implement sound underwriting standards. That is what is happening and it very likely will affect your current bonding arrangements.

The days of easy underwriting are gone:

Even without the financial melt down, their was an apathy as it related to the underwriting of the surety industry. In years past it’s  almost as if anyone could obtain a bond regardless of experience, character, or financial acumen. Such an environment may have generated additional surety premiums for cash starved  insurers, but it was also a disservice to the many surety principals who earned their surety credit,

This project was made possible by a solid surety relationship

resulting in a dilution of the bond issuance itself. It was also a dilution to owners, general contractors, and other obligees that relied on the surety’s much touted “prequalification” process. Therefore, bonding  and surety programs that far surpassed the contractor’s financial base or experience, the unwarranted elimination of personal indemnity, or continually lower bond rates has  come to an end.

Self-Assessment :

How do we navigate this new surety environment when their has been such a tectonic shift? In our estimation we believe the first thing should be to perform a self-assessment litmus test. Has your bonding credit grown at a much faster rate than your financial base? Has the surety released the personal indemnity of the owners and or owner’s spouses?  Has your bond rates decreased several times in the last few years?

If the answer to one or more of these areas is “Yes,” then you may expect some change(s). To the extent that you earned each of these benefits, you should work with your NY Bonding Agent and be prepared to support your position. Surety insurers want to continue their business relationships based on solid fundamentals, and the burden will fall on you and your agent to demonstrate that you meet those new standards.

The Relationship

The perennial challenge is how to make your account more attractive to a surety underwriter.  To better help or clarify that challenge, it’s essential that you as the obligee understand what it is the bond underwriter does.

The surety becomes your partner and is guaranteeing your contractual performance on a particular project, or many projects. The surety is effectively becoming a silent business partner. When it approves your bond, it says to the world that it believes you have the capacity in every respect to complete the bonded contract as stipulated. Like any partnership the foundation must be  built on a mutual respect and transparency . If  you view the bonding relationship  as a partnership, then the responsibility to each  of the parties becomes quite clear.

Transparency :

What a surety looks for in their ideal client partner is full transparency as it relates to your past and present operations, including any affiliated business activities that may impact the operations and/or financial status of the obligee, (you). You have a pretty good idea of what events will impact the financial result of a given project, and you know in the context of your overall backlog how this may impact your company’s financial results.

The surety does not want or need a day-to-day accounting on each job, but if a major subcontractor defaults or there is a payment problem, it is probably a material event that should be shared with your agent and the bond underwriter. Bonding companies can deal with bad news, but what can really impair the relationship are surprises.

The surety’s approval of a particular contractor’s project and/or overall work program is made based on certain financial and operational parameters. If those conditions change for any reason, the rules of transparency and the surety partnership  require full and timely disclosure.

Recall that what really caused the downfall of many contractors, and financial institutions  was the  failure to provide full and timely disclosure of its activities and financial position. That resulted in a failure of confidence in a business that relied heavily on trust. Your surety relationship is also based on trust, and if either party breaches that by failure to fully and timely disclose relevant information, it destroys that relationship. Bottom line: don’t hide or manipulate the data. Neither party should ever surprise the other. Strong , timely, transparent  communication is essential.

Actionables:

With a tightening of the surety markets, what are the critical actionables  you could  do to improve both the  your bonding line and your business? Begin by retaining a professional  NY Surety Bonding Agent who will take the time to understand your business and help you to communicate your story with an appropriate surety market. You should retain a CPA who is active in the construction accounting arena.

You also should preferably secure an annual certified audit with adequate supporting schedules and footnotes that fully disclose and communicate your operations and financial picture. Review level financial statements may still be acceptable for smaller accounts, but my expectation is that sureties will increasingly demand fully audited financial reports. Compilations or in-house statements are of little or no value except perhaps for interim statements and then only if they reasonably “mirror” the format of the CPA prepared statements.

Personal Indemnity

The issue of personal indemnity may become a discussion point. Depending on the financial structure of your company relative to work program, how much money the owners regularly take out in the form of salary and bonuses, the amount of net worth outside the company, and/or the length and quality of your past surety relationship all will bear on whether personal indemnity is appropriate.

Some NY sureties will consider a homestead rider that would exclude the indemnitor’s primary residence. Some may be willing to exclude specific assets, such as monies inherited by the spouse. Some may consider a personal indemnity cap limiting the financial exposure of a personal indemnitor. In the case of Sub-S entities, the surety may consider a Net worth/Working Capital Maintenance agreement to maintain a specific level of NW/WC in the corporation or personal indemnity triggers.

Spousal indemnities are nearly an absolute requirement if the owners are married and have mingled assets. It’s important that this is communicated with your spouse. Many sureties won’t issue a bonding line without this.

Bank Line

It’s critically important to have a bank line of credit that supports your business plan. . While revolving bank lines create no working capital per se, they do provide a facility to obtain cash to meet anticipated or unforeseen shortfalls in cash flow. On a relative basis, contractors have always been considered more hazardous than most other borrowers. Bank of America announced awhile back that they were exiting all contractor bank lines of credit nationwide.

The number of banks willing to provide unsecured revolving line of credit is also growing more limited. Nonetheless, the surety views an unsecured revolving bank line as fundamentally  critical in risk management. Without a bank line, the surety may be one step closer to becoming your bank of last resort in the event of a cash flow problem. Having a bank line is important for your fiscal management and to enhance your relationship with the surety.

Cash Is King

Acknowledging the economy has become more difficult, the ability to acquire new profitable work has become   more difficult, and the financial condition of NY owners and NY subcontractors  more precarious, you would do well to manage your business to enhance your firm’s working capital position. A contractor with a strong net cash position may be able to fund problems without turning to third parties, e.g., the surety , banks, or others.

The adage “Cash is king” becomes more true during difficult times. Therefore, you may expect that with a tightening surety market, your working capital level and balance sheet composition will receive more scrutiny.

Conclusion

In summary the more salient points of this article I would say that the three most important fundamentals to a solid business partnership  with your surety are:

* Understand, appreciate, and support the surety partnership . Understand it truly is a partnership.

* Encourage transparent, timely, and accurate  communication with the surety.

* Effectively identify, allocate , and mitigate your business risks.

If you understand, and appreciate these points , you are well on your way to establishing a solid bond line, or even better increasing an existing one. To obtain a bond line, or make an inquiry on how you may get started on the process contact a Risk Advisor at Metropolitan Risk Advisory.