In our last post on Construction Bonds, we’ll take a look at three other common risk-mitigation tools: Site Improvement Bonds, Subdivision Bonds and Supply Bonds. The first two are key components for residential and commercial construction projects. But there is one distinct difference. The Site Improvement Bond is only for existing structures. Subdivision Bonds are required for new structures. Let’s start with Site Improvement Bonds.

Site Improvement Bonds

These basically guarantee that a contractor follows applicable building codes and regulations when making improvements to an existing property. Site Improvement Bonds can cover an array of fixes and improvements, including things like sidewalk repair, storm drains, curbs and sewers. The bond will usually state the anticipated cost and duration of the project. On many projects, these bonds must be in hand before a contractor can get a construction permit or record a final parcel map.

Subdivision Bonds

These are for contractors building new subdivisions. The Subdivision Bond helps ensure that a project will be built according to contract and applicable laws and regulations. They cover most elements related to the construction project, including houses, gutters and streets. Contractors typically need these to file plats with a municipality before the project’s completion.

Supply Bonds

The Supply Bond is pretty straightforward. In essence, they ensure that supplies will be provided as per the contract. They also provide a degree of financial protection in the unlikely event that a supplier defaults. These bonds are often purchased during the beginning stages of contracting, in advance of the start of work.

The Market for These Bonds

The market for both Site Improvement Bonds and Subdivision Bonds has fluctuated in recent years. Housing developments have stalled or collapsed because of economic peril and a depressed housing market. The amount of the bond will change depending on the project. Bond premiums will shift based on that as well as on the financial and work history of the contractor. Underwriting for these bonds remains tight. Supply Bonds aren’t typically as costly as other Construction Bonds. But, like any other bond product, the final cost will depend on several factors, especially the applicant’s financial health and history.

The contract bonds series was brought to you by Surety Bond Co. , leaders in surety bond education.

As our series on Construction Bonds draws closer to the end, we’re going to take a look at two big ones — payment and performance bonds.

These are very significant and similar bonds. And are also among the most common construction bonds in existence. In fact, contractors will often see these bonds issued together as one “Performance and Payment Bond.” Their individual and collective function isn’t much of a mystery.

What They Provide

A performance bond ensure that a contract will be followed to the letter and that work will be completed — or that appropriate financial compensation will follow if the wheels fall off. A payment bond guarantee that workers, suppliers and other key stakeholders get paid.

These bonds are crucial for most construction projects, especially those that involve public tax dollars. For example, mechanics liens can’t be placed against public property, so payment bonds are basically the only protection available. These key bonds are actually required by law for most public works projects, including all federal projects that cost more than $100,000.

Filing Bond Claims

If a subcontractor or other party hasn’t been paid, they can file a claim on the bond. If it’s deemed valid, the surety company issuing the bond ensures the claimant is properly compensated, either by the contractor or, at last resort, the surety itself. Then the surety company will seek to recoup the damages from the contractor.

Purchasing These Bonds

Performance and Payment Bonds are typically purchased during the period of contract negotiation for the project. Surety companies and surety bond issuers scrutinize an applicant’s financial history, company and work history, management team and other key factors before deciding whether to issue a bond.

Rates for these bonds shift depending on an applicant’s unique financial and credit status. The market has leveled off a bit in recent years, but contractors should expect a stringent, straightforward underwriting approach.

Contractors without solid credit or significant experience may wind up needing high-risk bonding. There are companies that specialize in these types of bonds, although the rates are definitely higher because of the added risk.

This guest post was written by Kevin Kaiser of SuretyBonds.com.

by Kevin Kaiser

Maintenance Bonds are another key cog in the world of Contract Bonds.

They’re also an essential, typically mandatory method of risk management for project owners, municipalities and others.

How They Work

These surety bonds come into play upon the completion of a construction project or some other job requiring legitimate bonding. Maintenance Bonds guarantee that the work performed is up to code, follows the contract and is otherwise without defect or problem. These bonds generally provide protection for project owners against design defects, workmanship faults and other problems that can occur during the construction term.

Project owners, governmental authorities and others with a financial stake can file a claim against the Maintenance Bond in the unlikely event that there’s a problem. At that point, the company that issued the surety bond is responsible for ensuring the issues are corrected or the parties are financially compensated.

A Short-Term Solution

Project owners need to remember that a maintenance bond is a short-term solution. They are only effective for a limited time to cover any problems that may stem from faulty work. Once they expire, any problems or defects are the responsibility of the owner. These are not a substitute for insurance or some other type of property or site maintenance plan.

How to get a Maintenance Bond

Getting a maintenance bond is very similar to getting a bid bond. In case you missed that post here’s a little refresher.

It very is beneficial to find a agent who specializes in construction bonds as they will be able to help streamline the process for you. You will also be expected to give the same information required of bid bonds, including the application, owner’s resume, business financial statements, and the owner’s personal financial statements. The contractor will also have to sign an indemnity agreement so the surety won’t have to worry about financial loss, so any claims from the bond will eventually be repaid by the contractor.

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The contract bonds series is courtesy of SuretyBonds.com, a nationwide surety bond agency.

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Kevin Kaiser is a principal with Surety Bonds.com, a nationwide surety bond agency.  Please visit surety bonds to learn more about contract bonds or request a quote.

Bid Bonds have become a necessity in the construction field. Not that long ago, unscrupulous contractors could issue low-ball bids to land a contract and then later try to increase the price or simply refuse to finish the job. The emergence of Bid Bonds eliminated those types of shady deals. Today, Bid Bonds are a mandatory aspect of almost all commercial and residential construction.

What they are
Bid Bonds are typically required when a contractor is bidding on a construction project. These surety bonds guarantee that the contractor has the financial standing to accept the job if it is awarded the bid. The Bid Bond also ensures that the bond issuer will make good on a Performance Bond upon the awarding of the contract.

Bid Bonds also provide financial protection for project owners. If a contractor is awarded a bid but ultimately fails to start the work, the project owner can file a bond claim and recover the difference between the lowest bid and the second-lowest bid.

Withdrawing a bid
In general, contractors are allowed to withdraw a project bid before the bids are officially opened. There are also cases where developers allow bids to be rescinded without financial penalty. But in most cases, once the process is complete and the project has been awarded, contractors who bit off more than they could chew will have to take a financial hit for withdrawal.

How to get a Bid Bond
These bonds are typically issued by surety companies or insurers. Finding an agent who specializes in construction bonds is always a good idea. Contractors will have to submit a host of financial and even personal information in order to secure a valid bond.

The underwriting process for  bid bonds is stricter today after a wave of contractor defaults in recent years. Previously, the market relied on looser practices. Now, contractors can expect to submit the following types of information:

• Application - Includes basic contact information.
• Owner’s Resume - Provides an overview of the contractor’s experience and potential ability to complete the project.
• Business Financial Statements - These will include tax records, revenue statements and a host of other pertinent financial documents so that sureties can have confidence in the financial standing of the applicant.
• Owner’s Personal Financial Statements - Sureties will also evaluate the personal holdings, credit history, income and other financial elements of the applicant.

In most cases, contractors must sign an indemnity agreement that insulates the surety against financial loss. Any bond claims paid out by the surety will ultimately be recouped from the contractor. Surety companies utilize a rigorous underwriting system to ensure they’re not on the hook for losses.

Small Businesses
The U.S. Small Business Administration provides a surety program for small businesses. Through September 2010, the SBA is guaranteeing bonds for public and private contracts up to $5 million. The guarantee rises to $10 million for some qualified federal contracts. This program aims to help smaller contractors who might otherwise struggle to get bonded through traditional channels.

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Kevin Kaiser is a principal with Surety Bonds.com, a nationwide surety bond agency.  Please visit surety bonds to learn more about contract bonds or request a quote.

We have a guest blogger.

Kevin Kaiser is a principal with Surety Bonds.com. He graciously offered to share his insights about bonding with our community. We hope you find his series on bonds to be helpful. Without further ado, here’s Kevin’s introduction to contract bonds.

Contract Bonds

Contract Bonds, often called Construction Bonds, are common financing and risk-mitigation tools utilized across the country. They’re a part of construction projects big and small, from city libraries and sewer plants to residential structures and hospitals.

In all, there are seven major types of contract bonds — there isn’t a single “contract bond” that can be issued. These seven forms cover a host of needs and provide financial protection for project owners. In short, contract bonds are basically three-party agreements that guarantee a project’s completion and provide an avenue for financial compensation in the event of default or some other problem.

How do they work?
These three parties are the principal, who performs the work; the obligee, the receiver of the work; and the surety, the third party guaranteeing that contracts are followed. For example, contractors must obtain payment bonds on public works projects guaranteeing that workers and subcontracts get paid according to their contract. If the contractor fails to pay or defaults, the payment bond ensures workers get paid — and that the project owner, the obligee, is protected against any financial harm.

Contract bonds are required on all federal projects valued at $100,000 or more. But state and municipal agencies also typically require contract bonds for public works projects. Even private developers and enterprise may require these standard surety bonds.

How are they issued?
Insurance companies and standalone surety bond firms are the most common issuers of surety bonds. These operations employ strict underwriting procedures, as surety companies do not want to be on the hook if a company defaults halfway through a project. Contractors will engage in a formal application process, which typically includes information such as:
-Credit profile
-Business financial statements
-Resumes for managerial team
-Personal financial statements
-Personal credit profiles

What do they cost?
The cost of contract bonds varies, often depending on the individual applicant, project and surety. They typically cost anywhere from 1 to 15 percent of the contract amount. Rates fluctuate depending on the nature and complexity of the contract and the financial standing of the applicant. Applicants with less than stellar credit or financial profile may be able to secure bonding from high-risk issuers, but those rates will be higher.

What’s next?
Over the course of the next few weeks, we’ll provide a snapshot of each of the seven major contract bonds. Next time, we’ll discuss Bid Bonds.
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Kevin Kaiser is a principal with Surety Bonds.com, a nationwide surety bond agency. Please visit www.suretybonds.com to learn more about contract bonds or request a quote.

If you, or someone in your office, is running QuickBooks and doesn’t know how to get it to produce the reports you need to run your business profitably, boy have I found someone you need to call!

Need QuickBooks Help?

Pam Newman – 816-304-4398

I visited with Pam Friday and have to tell you, she is ABSOLUTELY AMAZING!

If you’ve been following us for very long - reading our frequent complaints about the lack of solid support for contractors from the accounting community – you’ll know how thrilled we are to find someone who:

1. Totally understands contractors (she used to be one).

2. Totally understands the management reports business owners need.

3. Totally understands how to make QuickBooks sing and dance.

Pam has a fabulous personality.  A great pleasure to visit with. She’s not one of those dry, boring, accounting types.

She is remarkedly well educated (accounting degree and MBA). She is certified. And most importantly, she is down to earth.

She knows the type of information business owners should be looking at weekly and monthly.  As she was reciting her recommended list of managerial reports , I was grinning from ear to ear.

It was as if she had bugged conversations between Guy and I from weeks and months back. Wow!

To get ahold of Pam, you can call her at 816.304.4398; email her at pam@rppc.net; or browser her site at www.rppc.net.

Pam provides both consulting and training services. In person or via the telephone and internet (just like we do).

We hope Pam becomes a close member of our Contractor’s Business Coach team in the near future but don’t wait for that negotiation to complete. If you need help, call her now before we raise her rates. Seriously, she is WAY too cheap.

As always, keep beating the bushes and wishing you the best.

Ron & Guy

Just had to share this one with you. It so captures the essence of the people who do your books and calculate your taxes.

My lovely daughter, her husband, her sister and her sister’s date went out to dinner last night to celebrate a friend’s birthday. Dinner party of 12.

When they stopped by the house after dinner, my eldest, a staff accountant with a global manufacturer, started complaining that their dinner party had to split their bill by hand since the restaurant refused to do it for 12 people. She was really annoyed about having to figure their individual bills by hand.

Let’s put this in perspective.

At least four of the 12 in attendance were accountants. And here they were being put out about having to do a little simple math. (Hey, I’m an engineer. Simple math is something I did in my sleep in grade school)

Not willing to miss a grand opportunity to tease my daughter, I offered that after paying for 4 years of accounting school, the least I would expect would be an ability split up a check.

Her reply?

“That’s what Excel is for!”

Couldn’t have said it better myself.

Your bank probably hasn’t brought something to your attention that you need to be aware of. So, I’m going to. That’s what we’re here for, right?

A couple of weeks back, I deposited a check from a very large, very credible company. A company that has offices throughout the world. A day later, I happened to be looking at my account online and noticed my bank hadn’t cleared the deposit yet.  In other words the money wasn’t available.  It took three days for the money to become available.

Banks are allowed to take up to 3 days to clear deposits. When times are good, meaning when they can trust each other, deposits typically clear in less than a day. When times are not so good, meaning when they can’t trust each other – like right now, they take the full amount of time they are allowed by regulation.

Fortunately, I didn’t need my deposit to be accessible. Many contractors are not so lucky.

Many wait desperately for large checks on long past due accounts to arrive. They shout for joy the moment the check arrives and race off to the bank to deposit it. Often, due to payroll, payroll taxes, and overdue material bills, they need the money to be available almost the second it hits the bank.

That’s not going to happen right now or in the near future. Plan ahead. Keep a close eye on your bank accounts. Don’t try to withdraw the money before it is available.

Wishing you all the best.

Ron & Guy

Recently, I have seen first hand a tragedy that befalls many a subcontractor each and every day: a general contractor issues a deductive change order to his subcontractor after the work has been completed but before all the money has been paid out.

If you’re a subcontractor, I’m guessing you’ve suffered this abuse some time in the past.

The only way I know of to stop general contractors from doing this is to sue them.  Lawsuits get their attention. Liens? Not so much.

Lawsuits generate negative publicity. That’s something GCs don’t like.

Lawsuits cost money. That’s something else GCs don’t like.

Lawsuits signal that you will not go down without a fight. GCs like subs that roll over. It’s the only reason they get away with unfounded deductive change orders in the first place. They rarely get held accountable for this unethical action.

Now, if you’re a GC, I hope you’re not growing angry with my message. Good GCs, ethical GCs, truly professional GCs, do not issue unfounded deductive change orders. Unfounded deductive change orders are the mark of a desperate contractor.

If you are a subcontractor, you can’t afford to work for a GC who will treat you in such a costly manner. Sue ‘em. Get your money. Be leery about working for them in the future.

Yes, it’s a rant. It hacks me off every time I hear a story of a GC doing this to a sub.

The GC I worked for would never, ever resort to such unprofessional behavior. Unfortunately, his competition does and their clients remain oblivious.

Good luck with your business.

Ron Roberts,

The Contractor’s Business Coach

And the beat goes on.

Last week, I heard two more stories of woe from contractors who had taken on partners or turned over the management of their firms to individuals who turned out to not be worthy.

One of the contractors ended up in bankruptcy court and lost everything. The other is desperately digging his way out and is going to end up partnering with someone to keep himself out of bankruptcy.

This brings my 2008 total of such stories to an even dozen.  The split is about 50/50. Half turned over their business to someone who wove a grand tale, gave them near full authority in all matters, stopped paying attention to what was going on, and found themselves without work. A couple of those that did land work,  stole money (embezzled).

The other half brought on partners who turned out to be horrible salesmen and financial managers. They had track records of really poor financial performance that they inevitably blamed on someone else, couldn’t bring any money to the table to buy their share, and grew the business with complete disregard to the profitability of the work.

Moral of the Story:

Do your due diligence before joining up with someone new. Put in place monitoring systems to ensure he or she is taking care of your best interests.