We have a guest blogger today. His name is Vic Lance, owner of Lance Surety Bonds.
By Vic Lance:
Starting a new construction project requires endless amounts of legal documentation and working through the proverbial “red tape.” Most often one of the starting points for beginning a construction project is to acquire at least one (typically two) contractor bonds, also known as surety bonds. Even though they are required on virtually all projects, much is still unknown about what they do, how they came to fruition and how much they cost. The following is an inside look at the most common questions regarding surety bonding:
Why are surety bond required?
The history of surety began around 1935 with the passage of the Miller Act. This law required both performance bonds and payment bonds on federal construction projects costing more than $100,000. Following this, several states adopted their own regulations which were deemed “Little Miller Acts.” Because of this, surety laws can vary widely from one region to another.
What is a surety bond?
In simple terms, surety bonds are a form of a contract. They promise that work will be completed per agreed upon terms and payments will be given to subcontractors and material suppliers.
In all cases, surety bonds are an agreement involving three parties:
Obligee – the project owner
Principal – the bond purchaser or bond owner
Surety – the agency selling the bond and overseeing work is performed per the bond’s protections
How much does a surety bond cost?
There is not one set fee associated with surety bonds. Rather, premiums and prices range depending on the applicant’s credit history, the type of bond being purchased and the geographic region the bond is required in. Applicants with almost flawless financial backgrounds will be granted the most competitive rates. Those with less than average credit history can also apply through several organizations high-risk bond programs. On average the lowest rates offered are between 1 and 3 percent, while bad-credit individuals may pay anywhere between 5 to 20 percent of the contract amount.
How do contract bonds and construction bonds differ?
The simple answer to this is, there is no difference between the two bonds. In fact, these are simple nicknames or terms used interchangeably to refer to various types of contractor surety bonds. The most common types of contract surety bonds are bid bonds, performance bonds and payment bonds, which are often sold together.
Payment Bonds: these ensure that all parties who should be compensated will be even in the event of a contract default
Performance Bonds: these protect project owners from contractor negligence if work is not performed to the agreed upon statements in the contract
How do surety bond differ from insurance?
The biggest difference between bonds and insurance is due to risk assessment. For insurance most of the risk associated with protecting a client lies with the insurance agency. On the other hand, bonds are issued under the expectation a claim will never have to be filed. If however a principal is found to be in violation of his/her bond protections, the surety agency will pay reparations to the claimant and then seek reimbursement from the bond purchaser. Due to this, risk always lies on the side of the principal – the bond owner.
Vic Lance (firstname.lastname@example.org) is the owner of Lance Surety Bonds a nationwide surety agency. He helps advise contractors and small businesses on the bonding process.
You’ve just gotta love those insurance companies. A few years ago a hail storm blew through my neighborhood. Most of the houses received new roofs. My insurance company told me mine was fine. Well, not really fine. It wasn’t damaged enough to qualify for much repair. However, bless their sweet hearts, they did decide I would need to replace it by the beginning of this year or they were going to drop my coverage.
That set off a round of meeting roofers, checking them out, selecting one, and working with him to arrive at the right choice of shingles. The company did an amazing job. Sent out two large crews and knocked out my house in a touch over one day.
The crew was very well organized, took the roof off in a manner that avoided any damage to our gutters and landscaping. And that brings me to my point. The owner who sold the job, was great at explaining all the roof’s features, etc. What he didn’t mention, or at least stress, were the items my wife and I were most concerned about such as the yard, landscaping, and speed of installation. Frankly, we wouldn’t let any contractor work on the house if we weren’t convinced they knew how to install the roof properly to avoid water damage over the long haul.
Guy and I see this sales behavior frequently. Salesmen not being in touch with their client’s true concerns and priorities. If you want to close more sales at higher margins, figure out what fears rattle your customers the most and explain how you are going to prevent those issues from arising. It is a sure fire formula for sales success.
The following was penned by Danielle Rodabaugh of www.SuretyBonds.com.
New contractors have a plethora of regulations to learn about in a short time, and oftentimes they’re left to sort through them on their own. The use of surety bonds in the construction industry is one such regulation. There are many things every contractor should understand about surety bonds in the construction industry, but here are the five most crucial.
1) Government agencies require different surety bond types to protect consumer interests.
The basic idea behind contractor bonding is to protect project owners from financial loss due to a contractor’s inability to complete a project and/or follow industry regulations. Contract bond requirements help regulate the industry, reduce fraud and keep financially unstable contractors out of the market.
Although there are a number of specific surety bond types out there, government agencies typically make use of three major ones when it comes to the construction industry.
Bid bonds guarantee a contractor won’t increase the initial price of the bid submitted to the project owner. If a contractor should try to raise the price of the bid later on, then the project owner can make a claim on the bond.
Payment bonds guarantee a contractor will pay for all materials and subcontractors used on a project. If a material or labor provider should remain unpaid after a project is completed, the business can make a claim on the bond to gain reparation.
Performance bonds guarantee a certain quality of work will be completed. If a contractor should fail to meet a contract’s stipulations such as deadlines, then the project owner can make a claim on the bond to recover losses.
2) Contractor bonds should not be confused with insurance policies.
Although surety bonds are categorized as a type of insurance, contractors should understand that contract bonds and insurance policies are two entirely different products. The two are essentially different in that insurance policies generally protect policyholders (i.e. contractors) whereas surety bonds generally protect the bond’s obligee, which is typically the project owner. As noted earlier, though, payment bonds protect contractors who have been subcontracted by a prime contractor.
3) Contractor bonds act as legally binding contracts.
Each contractor bond that’s issued legally binds together three parties.
A contractor purchases a surety bond as a guarantee that work on a project will be performed according to the project’s contract.
A surety executes the bond by providing a financial guarantee of the contractor’s ability to complete work on the project.
4) Contractors undergo a thorough background check before they can get surety bonds.
Before contractors can purchase a surety bond, they must go through an application process. The exact process will vary depending on the surety provider, but it oftentimes includes a review of the applicant’s credit score and other financial records. Contractors with poor credit usually pay a significantly higher price for their bonds because sureties take a greater risk in backing the work of a financially unstable principal.
5) Contractors should look for the surety that will best serve their needs.
As with any major purchase, the decision to buy a surety bond should be carefully researched. Contractors should always verify the reputation of any surety provider they plan to work with. The agency should be able to explain all material clearly while also being well-versed in local, state and national market conditions, as laws and regulations change frequently. Experienced surety specialists have a thorough knowledge of the industry and also provide great service to their clients.
This article was provided by SuretyBonds.com, a nationwide surety bond producer that aims to help contractors understand the legal aspects of surety bonds and the bonding process.
You can reach Danielle at email@example.com.
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.
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.
The contract bonds series is courtesy of SuretyBonds.com, a nationwide surety bond agency.
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.
The last few weeks I’ve been cramming for the LEED Commercial Interiors AP exam. It’s a bear of material to memorize. It’s also turning out to be information well worth knowing.
Rest assured, over the next few years green building construction as defined by the LEED certification process is going to be a Tsunami of change crashing upon the construction industry.
A huge chunk of public work is going to require LEED construction techniques. I’ve been hearing rumors about pressure being applied to Fortune 500 companies who receive government contracts. Don’t be surprised if several of the techniques work their way into building codes.
No trade is going to be left untouched. My former trade is one that is suffering some of the most dramatic impact.
Prior to jumping sides, I was a consulting mechanical engineer who designed, commmissioned, and retro-commissioned many a mechanical system. I often went into the field to take performance data on existing sytems, designed retro-fits, verified system start-up, tested control systems, and tuned control loops. Many of the services our select manufacturing clients valued – and no commercial clients ever were willing to pay for – are now being required by LEED.
To say that I am shocked and delighted would be a grand understatement. The positive impact on mechanical engineers, mechanical contractors, test and balance contractors, and operations and maintenance staffs is almost mind-boggling. Finally, buildings and their occupants will receive mechanical systems that operate as they should to maintain comfort and health with minimal energy consumption.
Your trade will be touched. Bank on it.
Your costs will rise as productivity drops, materials cost more. material handing consumes more time and the volume of paperwork sky rockets.
My recommendation is:
1. Learn the LEED requirements that apply to you.
2. Take on a couple of small LEED projects to get a feel for the change in job costs.
3. Build your strategy to take advantage of competitors who fail to respond to the rapidly changing landscape.
While visiting with a contractor the other day, he mentioned sharing one of our recommendations for improving field performance to a friend and fellow contractor.
His friend shook his head and replied “I would never do that. Share the budgeted time with the crews? I’d never do that. If they realize they’re moving faster than the allowed time, they’ll slow down. I want them working as hard as they can.”
I had forgotten how common that belief was among owners and project managers.
These people simply do not understand human behavior. A worker is FAR more likely to miss a deadline or budget because he was left in the dark than he is to dial it back when he’s ahead of the budget.
Heck, which hurts worse? Hitting the budget when we MIGHT have beat it by 10% or running 10% over budget?
If you only take one piece of advice from Guy and I make it this:
Tell your employees EXACTLY
what their performance targets are.
That one action alone will reduce costs, improve on-time performance, increase customer satisfaction and – believe it or not – improve employee satisfaction.
Never, ever keep your employees in the dark about the outcomes you need them to deliver.
Do Clock Watchers Ever Take Ownership of Their Jobs?
While visiting with a friend over lunch the other day, we got to talking about a lady we both know and the strange – to us – conflict between her work ethic and her clock watching.
The clock watching in this case wasn’t that she sat around counting down the minutes until she was off. It was the other type of clock watching.
Salaried Clock-Watchers Rarely Stay Past 8 Hours.
She had the mindset of an hourly worker. She wasn’t paid by the hour. She was on salary. But she kept close track of her hours. If she worked late one day, she took off early the next.
What threw us off was that she made sure her employer got their money’s worth for 40 hours a week. She worked hard and was more productive than several of her peers that put in longer hours for the same pay.
All in all, her employer was getting great bang for the buck – with her. Yet, it brought to mind the three different mindsets workers have.
The “hourly” employee figures he is being paid for 40 hours a week. That is true for employees who are LITERALLY hourly. Not so true for salaried employees. Most front line salaried employees think like hourly employees. Some front line supervisors do also.
The “salaried” employee figures he is being paid to do his job, whatever the volume of tasks and the time they take, he has been assigned with.
Employees who think like “owners” go above and beyond. The only reason they keep an eye on the clock is to meet important deadlines. They strive to make the company successful.
We all thirst for our company to be staffed full of “owner” minded employees.
That’s difficult to pull off – not impossible – but difficult. Naturally, we know how. That’s why our clients hire us.
You need to keep your eye out for salaried employees who think like hourly employees.
Very, very few of them are like the lady I described. Most are modestly productive at best. Most are true clock watchers. You’ll rarely turn a true clock watcher into a highly productive, owner-minded employee.
Food for thought as you try to grow your business.
While glancing through my bookcase the other day looking for my go-to resource for proposal writing, my eyes came across a book whose message you might find interesting…and useful. The book is Blink: the Power of Thinking Without Thinking by Malcolm Gladwell.
In Blink, Gladwell explains that your subconscious mind is far smarter than your conscious mind.
Remember know how you’ve always been told that the first answer that comes to mind on a multiple choice test is usually the right one. That’s your subconscious at work. Here’s another familiar example.
You wake up in the middle of the night, or you’re in the middle of a shower, when a sudden “Ah Ha!” hits you. Something you’ve been trying to figure out for awhile, couldn’t, and the answer just flashed into your mind.
That’s your subconscious at work.
In Blink, Gladwell explains how the process works. We won’t go into that.
What’s valuable about his message is that you can actually put your subconscious to work. Purposefully. Skillfully.
I had read about the process several years ago from an online financial commentator, Jim Sinclair. This commentator’s father happened to have been the business partner of the most famous Wall Street trader of all time, a man named Jesse Livermore.
Sinclair explained that both his father and Livermore would study and study, cramming their mind full of information. Then they would completely shut off their thoughts about it. They would push all of the information into their subconscious and let it work on it while they were completely unaware of it. At some point in time, the correct answer would pop back into their thoughts. Somehow, those two men knew to trust the answer although they had no idea how they reached the decision.
Blink explains how the mind does that, and far more importantly, why you should trust your subconscious instinct instead of your conscious logical reasoning.
So the next time you need to make an important decision, cram your head full of as much information about the decision as you can – then forget about it until it reappears to you.
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:
Totally understands contractors (she used to be one).
Totally understands the management reports business owners need.
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!
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.