Early Warning Signs of COVID’s Impact on Surety

Author, Andy Roberts, Account Executive, Surety Department, Rancho Mesa Insurance Services, Inc.

The COVID-19 pandemic will have many long and short term effects on the surety industry. While the long term effects might not be known for years, some short term changes are already occurring. Early on, we have witnessed bond companies start to tighten their underwriting guidelines, and now we are seeing an increase in General Contractors (GC) requiring performance and payment bonds from their subcontractors. 

For contractors that do a lot of public works, or work with GCs that require bonds already, this is not an issue, as they have already established bond programs and understand the process. However, for contractors that have never been required to bond before the pandemic, they are thrust into a part of the construction insurance world that is foreign to them. So, what exactly are performance and payment bonds and why are so many contractors now being asked to provide them?

To put it simply, the performance bond is an assurance to a project owner, or in this case a GC, by a surety company, that the contractor is capable and qualified to perform the contract and protects the GC from financial loss if the contractor fails to perform in accordance with the terms and conditions agreed upon. The payment bond assures that the contractor will pay certain subcontractors, workers, and materials suppliers associated with the project. While these assurances are meaningful, GCs very often do not require bonds because of the extra cost associated with obtaining them. Bonds typically cost 1-3% of the contract price with the GC in many cases paying the corresponding premium. COVID-19 has created turmoil in the financial marketplace many ways including a tightening of available money, a lengthening of account receivables, high unemployment, and an overall slowing of the economy. With so much uncertainty surrounding the effects that COVID-19 may have on an individual  contractor’s financials, GCs are becoming more risk adverse and willing to absorb the cost of the bond to avoid subcontractor defaults in the middle of the project. In those situations the GC can then rely on the surety company that wrote the bond who will step in to make sure the work is completed.  

For contractors that have never secured a bond before, the process can seem daunting, complex, and invasive, which makes having a good surety agent and bond company vital to help make the process seamless. At Rancho Mesa, we work with a number of high quality surety markets that provide a variety of different types of bond programs, and we have the expertise to get you set up with one that works best for your company’s surety bond needs.

For more information or for any questions regarding your surety needs, please contact me at (619) 937-0166 or aroberts@ranchomesa.com.

Frustrated You’re Not Getting Paid on a Bonded Project?

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

Getting paid on time by project owners is essential! As construction companies attempt to collect their account receivables, a frustration builds as the overdue payments stretch from 60, to 90, to over 120 days. You might have already paid certain suppliers or subcontractors, and now your cash flow is getting stretched because your receivable has been delayed. If this is a bonded project – you do have an additional avenue of recourse to collect.

You should first obtain a copy of the bond from the owner, municipality, or general contractor on the project. On a public works project this should not be difficult to obtain.

The next step is to work with your bond agent on the best way to contact the bonding company with your claim. Some bond companies will request you send an email to their claims department. Otherwise, your agent will have the bond company claim department address to ensure your claim goes to the proper area to receive attention. At Rancho Mesa, we have prepared letters that you can use as a sample to provide the bond company the proper information so your claim is not delayed.

The bond company should respond to you (usually within 20 days) and have you fill out their claim form and provide the backup documentation required to support your claim. They will then check with their insured to find out if the claim is legitimate and why payment has not been made.

If you would like a better understanding of how your professional bonding agent can assist you in filing a bond claim on a construction project, please feel free to contact me to ensure you are getting the proper direction to collect your money.

Skilled Labor Shortages Prompt Subcontractors to Provide Performance Guaranty

Author, Andy Roberts, Account Executive, Surety Division, Rancho Mesa Insurance Services, Inc.

The construction industry is currently booming. According to a survey conducted by the AGC of America, and a recent article written by Rancho Mesa’s Kevin Howard, the industry shows no signs of slowing down, as 80% of contractors predict growth in 2020. While that’s great news for the industry, we are starting to see some trends that can cause some issues for contractors.   

With an abundance of work, contractors are finding it more difficult to find the skilled labors required to complete a project on schedule. This is causing more and more general contractors, who historically didn’t require their subcontractors to provide a bond, to now require their subcontractors to bond back to them on contracts over a certain amount. 

Bonding back is when a general contractor requires a subcontractor to obtain a performance and payment bond, even though the general contractor is already carrying a bond for the entire project. The bonds from the subcontractor operate in the same way as the bonds that the general contractor provided to the project owner, but now the general contractor has a performance guaranty from the subcontractor. This gives the general contractor an avenue to pursue recourse, should the subcontractor default or fail to perform up to the standards required by the contract, which is something that can happen if the subcontractor is having issues finding enough skilled labor.

Furthermore, this can present a problem for subcontractors who aren’t accustomed to bonding. They would need to get a bonding program put into place in order to work with a general contractor that they may have a long relationship with, who they previously never required a bond back. This makes it very important for subcontractors to have the discussion with the general contractor about potential bond requirements. An upfront conversation with the general contractor can help you avoid getting into a situation where you win a bid, but don’t have the ability to meet the bond requirement.

Fortunately, for contractors that are new to bonds or maybe don’t bond frequently, there are a variety of programs that the different sureties offer, whether it be credit-based, or a more traditional program. We can help navigate those programs and find the solution that works best for their company’s bonding needs. 

If you have additional questions or would like to explore all the different options that each surety offers, please contact Andy Roberts at (619) 937-0166.