 |
|
Frequently Asked Questions
For additional questions you may have please click
here.
- How is single job limit established?
The rule of thumb for sureties is that they do not like to approve single job
limits much more than two times the previously largest completed job. There are
a lot of qualifications to this, however. If the company is relatively new, it
may be more important to look at the prior work experience of the owner/principals
before they formed the new company. Also, the financial strength of the company
can be strong enough to justify a stretch beyond the two times or even three times
rule. Another area is the nature of the contract in question - its duration, its
apparent difficulty, its cash flow requirement. These are just a few of the many
considerations that can apply.
Top of Page
- How can I improve my bonding capacity?
Probably the most important consideration is to be doing business with an experienced
bond agent who represents the broadest range of surety companies. The next most
important might be to make sure you have a CPA who understands your business and
has a favorable reputation with the bonding companies. We at Allegiance Surety can
provide you with a list of qualified CPA's and make introductions. Beyond that,
there are at least ten specific things we at Allegiance Surety have identified as
being helpful in improving capacity. Call us or write and we can share these with
you.
Top of Page
- Why do Sureties sometimes require their general contractor clients to bond
their subcontractors?
The correct answer isn't that it is a conspiracy by the sureties to increase their
revenues. There are actually several considerations in making this a requirement.
More often a surety will recommend that a general contractor bond their subs just
as a way for the general contractor to reduce the risk that comes from a sub who
can't perform or doesn't pay his sub-subs or suppliers. Where it might move from
a recommendation to a requirement is when the job itself is a very large and/or
complicated one technically for the general contractor and when a subcontractor
problem could have very serious consequences in terms of job delay or difficulty
in replacing the sub without suffering a major financial hit. Many general contractors
issue checks jointly to some of their subs and suppliers and take other precautions
in managing this area of risk, but a bond gives another level of comfort. Make
sure the bond from the sub is properly prepared and backed by a reputable surety.
We at Allegiance Surety can help in this evaluation.
Top of Page
- How do I find a qualified CPA?
As mentioned above, we can help, but you can also ask other contractors in a similar
trade who they use and the extent of the services provided by their CPA. CPA's
provide many services besides doing tax returns and financial statements. These
days they provide a wide spectrum of management advisory services. When you interview
CPA's and discuss price, make sure you have a clear understanding of where they
can help you the most. The best CPA's will show you how to keep their fees down
by doing things internally to reduce the work they need to do.
Top of Page
- How do I handle a claim situation?
If the claim is against you, it is important to notify the surety as soon as possible;
hopefully, before they receive notice from the claimant - be it a payment bond
claimant or the obligee/owner. Copies of all correspondence should be sent to
the surety (through the surety agent) along with a reply to the claimant's letter
of demand. Most times the situation causing the claim can be remedied without
active involvement of the surety. Nevertheless, the surety must respond within
a certain time period to the claimant and conduct a good faith investigation if
the matter is not quickly remedied. You, as the principal, may receive a letter
from the surety claim representative asking you for your defense and reminding
you of the indemnity agreement you signed. Each indemnitor may get a separate
letter. This is a routine that must be followed. The letter may sound cold but
it is not intended to be unfriendly.
If the claim gets converted to a suit, it is common for the surety to be joined
in the same suit against the bonded principal. The surety would like to be able
to tender its defense to the attorney for the principal but this is not a foregone
conclusion. At this juncture, it is important for the attorneys to discuss the
case and agree on a strategy. There are certain defenses available to a bond surety
separate from those of the Principal.
Top of Page
- What factors determine the rate I am charged?
Aside from the Class of construction such as roads, building construction, maintenance
etc., each surety files its own rates. Although many of the sureties have similar
rates, it is not nearly as uniform as it was 10-15 years ago. Your rate may start
at say, 2 ½ % but then drop to 2% or 1 ½ % when the bond exceeds $100,000 or $500,000
or some other cut off.
Some sureties will also provide a preferred rate which is a discount from their
standard rate. Generally, these discounts vary from 10% to 50% and take into account
several factors such as financial statements, volume of bonds needed, favorable
experience. At Allegiance Surety we try to find the lowest rate the contractor or
developer qualifies for consistent with maintaining the best relationship and
bonding capacity.
Top of Page
- What additional liability am I exposed to when I
provide a "Miller Act" bond?
The Miller Act applies to all Federal construction projects and provides protection
to a class of potential claimants such as subs, suppliers, equipment rental firms
and other vendors who provide materials or labor and materials incorporated in
the project. The payment bond provided by the general contractor is in favor of
the U.S.A. but does provide direct third party coverage to this class of claimants.
The difficulty for a general contractor providing this type of bond, versus a
more restricted payment bond on a private project, is that he is covering potential
claimants that he has no direct contractual arrangement with. In other words,
the general contractor's payment bond will respond if his sub-contractor fails
to pay his supplier. This puts the general contractor in the position of paying
twice for the same materials if he has already paid his sub, but the sub has not
passed this money along to the supplier. There is a rather complex set of rules
governing what and who is covered and notice requirements. You probably need a
good contracts attorney to sort things out in some situations, but this is the
basic problem of providing Miller Act payment bonds.
In most States, on public works, "little Miller Act" rules apply.
In other words, on State or County projects, payment bond coverage will also extend
beyond your immediate subs and suppliers. In some States the little Miller Acts
are even broader in the extent of covered persons than the Federal law - Maryland
happens to be one of these.
Top of Page
- If I have a mistake in my bid, what are my options?
There is a fairly current treatise on this subject written by Richard W. Miller,
Esquire and published by our National Association, NASBP. If you are interested
in obtaining this publication, let us know.
Very briefly, the usual remedy for a mistake, from the contractors point of
view, is to simply be let out of the bid without penalty. Normally, given this
relief, you would not be able to participate in a re-bid if, in fact, the owner
took that approach rather than award to the next responsible bidder.
In some cases, you may be able to "reform" your bid - correct your
mistake - after the bids have been opened publicly, and still be awarded the contract.
The above publication will identify those rare situations. The important thing
to know in seeking relief is that, generally, you need to give prompt notice to
the owner of an apparent or a possible mistake, and the mistake should be of a
mathematical or clerical nature rather than a judgmental error, and it needs to
be of a magnitude that would cause irreparable and serious harm to the bidder.
Of course, there is much room for judgment in interpretation and it does vary
by jurisdiction.
Top of Page
- What are the added risks of performing private work?
By far, the biggest risk is the inability of the owner to pay you, the contractor.
A thorough investigation of project financing needs to be undertaken by the contractor,
perhaps with the help of his surety agent, before a deal is struck.
The second problem can be the contract itself. Although the AIA contracts
are generally considered to be fair to both contractor and owner, there are many
non-standard contracts that can have traps for the unwary contractor. A thorough
review by a good contracts attorney is advisable.
Top of Page
- Why do sureties require personal guaranties?
The general rule is for sureties to require the owners of closely held firms to
guarantee the bonds issued to the corporation as Principal.
The reasoning is that the surety is your partner and wants assurance that the
owners of the firm, who stand to profit most from the value added by the bond
projects, are comfortable and confident that they can successfully complete the
bonded contract. Their personal endorsement tells the surety that the information
presented to the surety to qualify the firm for bonding is accurate and complete
and they are willing to put their personal wealth behind their statements to the
surety.
In some instances, personal guarantees are required to tie in personal assets
that could be necessary to help the company complete and finance the work; but,
more often, it is simply that the surety wants to be able to count on the owners
(who are usually the active managers) to be there when and if problems arise and
to cooperate and work with the surety toward a successful resolution.
There are contractors that can, by virtue of their track record and financial
strength, qualify for bonding without personal guarantees or with a more limited
guarantee. Our experience suggests that less than 5% of all bonded contractors
can avoid personal guarantees. Many contractors are not averse to providing guarantees,
even if they could qualify, simply on principle.
Top of Page
|
|
|
|
|
