Surety Bonding: Understanding the Client-Broker-Carrier Relationship

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

People from outside the surety bond industry will sometimes ask if we work for 1) the carrier (bond company) or 2) the contractor client. This is an easy one. While we are approved to issue bonds by the 20+ carriers we are appointed with, make no mistake that we work 100% for our clients. 

The thought for this article came about when a potential new client mentioned to me that he felt his broker was not working very hard on his behalf to increase his aggregate bond program. During a phone call where the client was providing the broker with a narrative of information to pass along to the bond company, the broker mentioned that he didn’t want to, “push too hard” because he had a number of accounts with the bond company and did not want to negatively affect that relationship.

Whether a broker has 1 or 10 accounts placed with a particular carrier, you should ethically treat each account individually, working as hard as possible to create the best program for your client. Our industry promotes very high standards regarding the servicing of our accounts, and the State of California requires agents to complete three hours of ethics training every two years. I am certain this is covered during the training.

Looking at this from the carrier viewpoint, if the bond company supported an account mainly because a broker placed numerous accounts with that company (yet the underwriting of the account did not meet the bond company requirements) that would open the door for them to accept undue risk of future losses. At some point, one of these accommodation-type accounts will fail and cause a loss that the bond carrier could have avoided. 

If you would like to discuss the client-broker-carrier relationship, please contact me at (619) 937-0165 or mgaynor@ranchomesa.com.

Performance Bonds for Private Equity Contractors

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

We have entertained several recent submissions from our construction division prospects looking for bonding support of their companies that are majority owned by a private equity firm. The traditional surety market will push back on private equity submissions pointing out the goodwill and large amount of debt listed on the balance sheet. Throw in the limited indemnity package offered in support of the bond program and we have created a perfect storm for the account to be declined without any actual underwriting taking place. But there is hope!

Let’s first take a step back. For our standard construction bond program, we preach the retention of capital and net profit as the best way to increase your bonding facility. The bond company will also look to company and personal indemnity to ensure they are protected in the event of a bond claim. This is in deep contrast to the private equity arena where the payment of monthly interest on debt and write-off of goodwill often translates into a net loss on the income statement translating into reduced net worth. Also, no personal indemnity is afforded to support the bond program. In fact, only limited indemnity from the principal is available.

Fortunately, a number of large commercial surety carriers are willing to look beyond the net worth underwriting roadblocks and concentrate more on cash flow, available bank credit, and other working capital items to consider a bonding program. 

By providing quarterly financial updates, work in progress schedules exhibiting strong gross profit margins, and generating advance discussions of potential acquisitions, the broker and client can get out ahead of potential underwriting distractions.

If you would like more information or want to discuss what is needed in support of a bond program for your private equity owned company, please contact me at (619) 937-0165 or mgaynor@ranchomesa.com.

Need a License, Permit, or Court Bond? Rancho Mesa Can Help

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

During our recent budget discussions for the 2024 fiscal year, the Rancho Mesa Surety Department looked at a breakdown of the bonds we wrote in 2023.  As expected, 90% of our bond revenue was represented by the typical performance and payment bonds, subdivision bonds, bid bonds, bond riders, and consents of surety for our construction clients.

One area that surprised us was the volume of bonds classified as “non-contract” that we provide for both our construction and human resource clients.  While these type of bonds are small in size (bond amounts are usually $25,000 or below) they make up a large volume of bonds since many of our accounts require at least one or two of these.  Below I have identified four categories of non-contract bonds and several examples:

1. Court and Fiduciary: Plaintiff bonds include attachment, replevin, mechanic’s lien, and garnishment. While defendant bonds include appeal, supersedes, release of lien, and temporary restraining order bonds. We also placed various probate bonds to cover executors, administrators, guardians, and conservators.

2. License and Permit: Businesses and professionals may need mortgage brokers bonds, CA contractor license bonds, sales and use tax bonds, alcohol bonds, and compliance bonds.

3. Federal Official and U.S. Government: There are several types of bonds including public official bonds, U.S. customs bonds, and notary public bonds for those doing business with or for government entities.

4. Miscellaneous: Additional miscellaneous bonds could include financial guarantee bonds, utility deposit bonds, insurance program bonds, and lost securities bonds.

With over 1,000 types of bonds classified as “non-contract,” it can be overwhelming to determine which category of bond might fit a certain circumstance. That is where a Rancho Mesa bond agent brings value to provide direction and assist in placing the correct form of coverage.   

If you would like more information on various miscellaneous bonds that you might encounter, please contact me at 619-937-0165 or mgaynor@ranchomesa.com.

Risk Tamed and Rewards Claimed: Requiring Subcontractor Bonds

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

We often receive questions from our contractor clients regarding if/when they should require a subcontractor to provide the protection of a performance & payment bond for a project. Although the premium charged for the bond will add cost to the project – on many occasions the benefit of the bond will far outweigh the cost. Here are several benefits that might assist in your decision:

1. The subcontractor would have gone through a prequalification process of the surety. The surety will evaluate the subcontractor’s financial strength, experience, and ability to perform the work. This can be extremely valuable if you have never worked with this subcontractor on past projects.

2. Provides protection that the subcontractor will pay their suppliers and lower tier subcontractors. The payment bond transfers the risk of these payments to the subcontractor’s surety.

3. If the subcontractor has a critical role in the overall completion of the project or a special expertise - the bond can protect against additional costs or delays due to a default.

Your bond company may require you to obtain subcontractor bonds when a trade exceeds a certain parameter (for example: $500,000) as a condition of the program they provide. 

We recently supported a contractor client on a project that was two times larger than any project they had completed in the past. The decision to bond back the three largest subcontractors made the bond company comfortable enough with this transfer of risk to support the project. 

We have other clients that have suffered subcontractor losses in the past and now require subcontractor bonds on all their projects.

If you would like more information on the bonding of subcontractors, please contact me at 619-937-0165 or mgaynor@ranchomesa.com.

Contractor Strategic Planning with Kevin Brown of RBTK, LLP

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

In my recent StudioOne™ podcast episode with Kevin Brown, Of Counsel with the CPA Firm RBTK, LLP, we discuss the anatomy and considerations that go into strategic planning for your business.

The podcast addresses questions, such as:

• What do you want your business to accomplish? 

• What steps will help my company achieve its goal(s)?

The episode includes a discussion of the importance of developing a succession plan.

If you would like more information on Episode 309, please contact Kevin Brown at kbrown@rbtk-cpa.com.

Take Advantage of Contractor Express Bond Programs

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

Several years ago, I put together an article on various credit driven surety bond offerings that require a one-page application to qualify for bonding. Quick and simple! At that time, the maximum limits offered by various carriers was $350,000 for a single bond.

Last week, I received separate emails from two of our partner surety carriers offering single bond programs of $600,000 and $750,000, respectfully. Again, these quick and easy bond offers are solely based on personal credit scoring. In other words, if the owner of a construction company pays their personal bills, then they most likely will have the ability to qualify for a decent-sized bond.

There is no need for company financial statements to qualify for bonding in these programs. Instead, the contractor completes a “fast” application requesting personal financial information about the owner(s). The bond company will run the personal credit of the owner(s). If the personal credit is decent, the bond will be approved. A response is provided within 24 hours of submission. 

The program responds to requests for bid bonds, performance and payment bonds, and letters of bondability. Several carriers provide a “pre-qualification” feature so you can determine if you will qualify for the bond before you bid or negotiate a project that will require a bond. This pre-qualification feature is helpful for owners that are concerned they may have low credit scores.

The standard premium rate for these programs is 3% of the contract amount. Based on the strength of your personal credit, and the type of work you are looking to bond, we have seen this lowered to 2%. 

Therefore, if you are considering a project that requires a bond and you are not a big fan of collecting a lot of paperwork for one project – don’t fret. We may have a solution to help you win that job.

If you would like more information on how to qualify for these programs, please contact me at (619)937-0165 or mgaynor@ranchomesa.com.

Utilize Payment Bonds as a Backstop for Getting Paid

Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.

Contractors may do their work and meet their contractual obligations, but on some jobs it’s harder to get paid than on others. As in any business, your collection activities are key to getting your money. Don’t be afraid to be a squeaky wheel. There are a couple of things I’d like to share as either a reminder, or perhaps an education, that all contractors should know and consider.

Know where your money is coming from. If you are working on a public works job, it is of course coming from the public agency/owner of the job. If you are working on a private job, there are more questions to be asked.

If you are working as a general/prime contractor or a sub-contractor on a private works project, always confirm the financing – always. Make sure you document your job file with information as to where the money is coming from, and specifically cover your scope/line items of work. There may be a construction loan. If so, you will typically obtain that information for your preliminary notice purposes. If not, don’t hesitate to ask for some verification as to where the funds are held. Your surety will commonly pursue the source of the financing, if you are asked to bond the job. 

What do you do if you are struggling to collect what you are owed? First and foremost, be aware of what your basic payment protections might be.

Your most likely assurance of payment for undisputed work would be the payment bond. Payment bonds are a primary protection to sub-contractors and suppliers if they are working for a prime contractor who has had to provide their bonds to the owner. There is an investigative process in the event of a claim against the bond, but the surety is there to make sure all valid claims are paid.

Sub-contractors, if you are working for a general contractor, you will want to make sure you get a copy of any payment bond that might be held by the owner for the general contractor’s work.  

Suppliers, you may have payment bond protection as well, depending on who you are working for on the job and the type of job (i.e., federal, public or private).

Public works project bonds are required on most public works jobs of $35,000 or more (but can vary by agency) and Federal jobs of $150,000 or more.

Private works project bonds are rarely required of the general contractor, but it is important to ask if they are to document your job file. Otherwise, your best options are the stop notice to the lender and/or mechanic’s lien.

Best practice here is to always ask for a copy of the payment bond from your general contractor. Confirm one has been provided to the owner if you are a sub-contractor or supplier. If you are a lower tier sub-contractor, find out if the sub-contractor you are contracted with had to provide a bond and obtain that for your job file! If you are a supplier, ask about those payment bonds that might protect you as well.

What if a payment bond isn’t in place to cover you? There are various remedies short of litigation that may be available to you. These include mechanic’s lien filings, and/or stop notice to the lender/owner of a project. 

Mechanics lien can be used if the job is on private property (needs to be recorded with the county recorder). At the very least, this puts you in a generally secured position on the title of the property when it is sold. It’s not a quick remedy, or even guaranteed payment, depending on other liens already filed ahead of you.

Stop notice may be useful if the project is for private works (filed against the construction lender). This notifies the lender that you are owed money. You will have to file a bond to accompany your stop notice, but when properly filed, it requires that the lender withhold monies until your matter is resolved. Again, there is a process involved here and it’s often not a quick remedy, but it should be considered.

If you are working on a private job and there is no payment bond filed on the project, the stop notice and/or mechanics lien are key.

It's important that you know your lien rights and filing times whether you are working on a public or a private project (the various protections have certain timetables, e.g. after notice of completion, etc. that have to be considered for you to have rights to these various remedies). If you are a member of a trade association, you no doubt have a member who is an attorney. They can provide the current timelines for the various lien rights. We can also offer referrals to construction attorneys who can provide you with the timetables for the purposes of these various filings or related support.

Pursuing these remedies are best practices. It doesn’t hurt to file the preliminary notice on any job when you begin your work. Everyone is entitled to managing their relationships the way they see best for their business, but hopefully some of this information will be helpful.

If you have questions about payment bonds, contact me at (619) 486-6570 or awright@ranchomesa.com.

Five Things to Know Before Your Annual Surety Meeting

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

November is the month that I meet with our contractor clients to discuss how the current year will end up and begin planning for the next year. We will also touch base regarding the items our surety carrier partners will want to hear about when we schedule our annual meetings (after the December 31, 2022 financial information is available).

Similar to having an open book test, if our contractor knows in advance what will be requested, they can prepare accordingly and anticipate any “red flag” type items that might be of concern for the bond company. Below is a general list:

1. Items on the balance sheet with an emphasis on cash, accounts receivable, borrowing against the bank line of credit, and equity.

   An aging schedule of the accounts receivables will be very helpful to determine what amount is in excess of 90 day collections.

2. The revenue and net profit or net loss from the income statement to reflect if 2022 was a profitable or losing year. Also, a discussion of any Paycheck Protection Program (PPP) money that was loaned to the contractor and if the entire amount was forgiven in 2022.

3. They will review the work in progress and completed contract schedules to discuss which projects were successful and others that lost money. Be prepared to provide additional detail on any problems connected with losing projects and steps taken to correct this on future work.

4. Potential new opportunities you anticipate in 2023. Will any of these projects exceed your current program, contain work outside your normal scope or geographic territory? Be prepared to address how you will manage additional risk that may be a concern to the bond company.

5. Tax Planning. What additional withdraws do you anticipate to cover taxes, etc.?

If you would like more information on how your bond carrier might analyze your 2022 financial information, please contact me at (619)937-0165 or mgaynor@ranchomesa.com.

Blockchain Technology May Further Digitalize the Surety Industry

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

In my previous article and podcast, “Surety Industry Forced to Innovate,” I discussed a few technological advancements within the surety industry and how the ultimate goal would be issuing bonds to obligees digitally. While that is still some ways off, the technology is here and there are companies and organizations already exploring how blockchain technology may be the answer when it comes to fully digitalizing the surety industry.    

Simply put, a blockchain is a shared digital ledger that records transactions between parties and is permanent and verifiable. Applying this method to the surety industry, an electronic record (i.e., bond) would be created and shared with all parties to the bond, and any changes to that bond would be automatically added to the record so that every party who has access to it can see the history of the changes. This type of technology and the fact that it’s an immutable record, would alleviate the need for wet signatures, raised seals, and notary acknowledgements, which would increase the speed at which bonds can be issued, while also cutting some costs that are associated with issuing hard copy bonds. As mentioned, these systems are still being developed, but there are companies and surety organizations that are actively working to make this technology commonplace within the industry.   

The Institutes launched the Institutes RiskStream Collaborative, which has spearheaded the effort to introduce blockchain technology to the surety industry. 

“The power of attorney use case was the logical starting point and we’re excited to advance it forward. We are also excited that it will lead to many more downstream use cases, including Bond Signature and Verification,” said Patrick Schmid, vice president of the RiskStream Collaborative. 

Institutes RiskStream Collaborative started by piloting a program digitalizing the power of attorneys and this is now moving into its second phase. This initiative has garnered support from major surety associations like The International Credit Insurance & Surety Association, the Surety & Fidelity Association of America, the National Association of Surety Bond Producers. 

Rancho Mesa is committed to utilizing technology and strives to always be at the forefront when it comes to advancements and changes in order to help our clients stay ahead of the curve. And, while issuing bonds digitally using blockchain technology won’t be happening tomorrow, there are bond companies in Europe along with the Institutes Riskstream Collaborative that are testing the process. And, its participants view this as the future of issuing bonds, which makes it an important topic for us to address and monitor. 

For questions about technology in surety or your surety needs, contact me at aroberts@ranchomesa.com or call my direct line at (619) 937-0166.

Surety Industry Forced to Innovate

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

Rarely are the words surety and technology advancement synonymous, and that’s because it’s hard to introduce advancements to an industry where so many obligees still require raised seals and wet signatures on the bonds they are receiving. However, due to some challenges that bond companies, insurance agencies and obligees have faced during the pandemic, the industry is being forced to innovate. E-signatures on bond documents are becoming more commonplace, and electronic powers of attorney and digital seals are being adopted with the eventual goal of creating a surety bond creation process that is wholly digital.  

General Indemnity Agreements executed by a contractor/principal when they are establishing a surety program with a bond company, have traditionally needed to be executed in front of a notary and the original document, with the wet signatures, provided back to the bond company. Now, more and more bond companies are moving away from this archaic practice and allowing these documents to be signed digitally. This is an important change as it shows the industry’s willingness to implement changes that are in the best interest of the principal. Another change that is being brought about is the use of electronic powers of attorney (POAs), and digital seals.

A couple of years ago, very few bond companies utilized electronic POAs, opting instead to mail agents hard copies that needed to be dated using a typewriter. While this method is still being used, more and more sureties are opting to provide their agents with e-POAs that they can print as needed. In addition to this change, digital seals are also starting to be more commonplace. These can be affixed to the POAs and the bonds themselves when they are transmitted digitally. The importance of these two changes is worth noting as they are steps towards creating a process which allows for the creation of a surety bond by solely electronic means. 

Getting to a point where contract bonds are done only electronically is still a way off, but the technologies that are needed are available, making it necessary that the surety industry continues to embrace technology to improve our processes, and to ensure we are providing bonds in the form, whether electronic or paper, that clients and obligees want. 

For questions about technology in surety or your surety needs, contact me at aroberts@ranchomesa.com or call my direct line at (619) 937-0166.

What to Consider When Hiring a Bond Agent

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

With the passage of the Infrastructure Investment and Jobs Act, there is $125 billion of federal funds available for procurement. This provides a significant amount of federal construction work which will be put out to bid, with a vast majority of it requiring bonding. For contractors that may have never bonded before or bond infrequently, this is a clear opportunity to build revenues. With that in mind, it is critical that these contractors have a good surety bond agent on their side to help them navigate this process. Here are some questions and things to look for when evaluating if an agent is the right fit.

Experience  

It is important to note how many years an agent has been in the industry, but it’s more important to make sure they are a surety specialist. Surety bonding is a very specialized insurance product, and an agent that focuses solely on surety will have a better understanding of what the different bond companies value when they are reviewing a new contractor because each bond company has a different appetite. Additionally, agents that focus solely on surety will have developed stronger relationships with bond companies. This relationship is important because bond companies want to work with agents that are knowledgeable and have good reputations within the industry. 

Agent Appointments

Which bond companies does the agent have an appointment? This is an important question to ask, as bond companies are very conservative and the better bond companies are much more selective with the agents that they appoint. When asking this, it is also important to note how many bond companies the agent is appointed with. Having access to numerous sureties, while maintaining key relationships with the main companies, allows an agent to find the best bond company for each contractor.

Additional Value Adds

Surety bonding is a complicated industry, and if a contractor's goal is to increase their bonding capacity, it is vital that the agent provide additional services, like a detailed review of the company’s financials, and yearly analysis of a contractors single and aggregate bond limits. These services are important because they help the agent and the contactor get on the same page with regards to the current bond program, while also allowing them to game plan for the future, and set goals for how to increase bonding capacity. In addition to these in-house services, an agent should be able to recommend a good construction CPA and reputable banking contacts that know what a contractor needs to maximize their bond credit.

Bond agents play a vital role and partnership for contractors, which makes it very important that a contractor performs proper due diligence when hiring an agent. At Rancho Mesa, we have surety only specialists whose expertise is used to ensure our clients are placed with the right bond company to suit their needs. 

To answer any questions from this article or discuss if we can assist with any bond related needs, contact me at aroberts@ranchomesa.com or call my direct line at (619) 937-0166.

Understanding Single and Aggregate Surety Bond Limits

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

When we work with the bonding carriers on surety credit programs for our contractor customers, we traditionally put into place single and aggregate bond limits. This provides our contractor clients certain parameters when they are considering a maximum project size for bonding purposes.

The single limit is a guide the contractor can use on a per project basis as they consider various projects to bid or negotiate.

The aggregate limit is the total of all current projects using a “cost to complete” calculation. The cost to complete would be the estimated costs on a project (less) the costs to date. As an example, a contractor may have a $5,000,000 single / $20,000,000 aggregate bonding program.

A few important points to consider:

• The limits are not set in stone. This is important to understand. The bond company will often raise the single and aggregate limit if the right type of project presents itself.

• We include the bonding limits when we prepare a bondability letter for our client. If you are looking at a project that might exceed your single bonding limit, be sure that the required limit listed is sufficient to support the projected amount. For example, if your limit is typically $5,000,000 and the project requires a bondability letter for a $6,000,000 job, it is important that you secure pre-approval from your agent/bond company to increase the amount of the single limit on the letter.

• The bonding limits are often determined by the contractor’s fiscal year-end financial statement. This is one of many factors to set the limit but an extremely important consideration.

One final consideration is that bonding limits listed on a letter are often just a guideline reflecting the normal size of the projects our contractor clients usually bid. Based on their financial ratios and project history, some clients, for example, will qualify for a $10,000,000 limit but only list $2,000,000 because they rarely consider projects over that amount.

If you would like more information on how your particular bond limits are determined, please contact me at 619-937-0165 or mgaynor@ranchomesa.com.

How Improving Equity Impacts Your Bond Program

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

In our current series of articles, we are taking a deeper look into the properties of a balance sheet that will affect a contractor’s bonding capacity. We have previously discussed bonding capacity and summarized working capital in regards to the impact it can have on a contractor’s capacity. However, another very important component on the balance sheet that surety underwriters will consider is net worth, also referred to as equity.

Equity is calculated by subtracting a company’s total liabilities from their total assets on the balance sheet, and is a measurement that is used to determine their long term liquidity. From a bonding standpoint, surety underwriters love to see equity increase year after year. They analyze each item in the equity section of the balance sheet such as common stock, additional paid in capital, and shareholders’ loans. One item that carries a particularly large amount of weight is retained earnings.

Retained earnings represents the net income or profit that a company reinvests in its business after distributions are paid to the shareholders. This is important because as a general guideline we say a contractor can qualify for an aggregate bonding capacity that is ten times their company’s equity. Thus, their retained earnings heavily influence the overall equity of the company. Contractors looking to maintain a strong bond program, or increase their bond program, will want to retain as much profit in the company as they can. This allows their retained earnings and their equity to continue to grow through the years, making it even more important to have a knowledgeable and proactive bonding agent on your side. This should be someone who understands your business and overall goals, can analyze your balance sheet, and will discuss strategies with you to reach optimal capacity.

For many contractors, building a strong bonding capacity can create opportunities for significant revenue growth. Perhaps one of the more critical elements to note as you review your balance sheet is being educated on the importance of having strong retained earnings inside your financials. You can start this process and leapfrog your competitors when you request a quick capacity analysis from our surety team. They’ll provide you with a detailed evaluation.

To answer more questions about your bonding program, contact me at aroberts@ranchomesa.com or call my direct line at (619) 937-0166 and we can get started.

A Contractor’s Guide to Bonding Capacity

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

For contractors that do a lot of bonded work, their bonding capacity is a critical element of their business. Capacity often determines which projects a company can and cannot pursue, so it is managed very closely. However, for contractors that are new to bonding or have not bonded previously but remain interested in performing bonded work, this is likely a foreign concept to them. So, what is bonding capacity, and what items determine the amount of capacity that a surety carrier is willing to offer?

Generally speaking, a contractor’s bonding capacity is comprised of single and aggregate limits, where the surety underwriter will approve performance and payment bonds for a job, up to the single limit. The aggregate limit is the cap that the surety carrier sets for how much total bond liability a contractor can have extended at one time. Having these caps is what makes it important for contractors to have an understanding of what information sureties use when determining how much capacity to offer. Underwriters will look at personal and business credit, industry experience, as well as personal financial wealth. Typically, though the most important item a surety underwriter will focus on is the company’s financials, specifically, their balance sheet and income statement. 

When reviewing the balance sheet and income statement, two important items that an underwriter will be reviewing are the contractor’s working capital and their equity. We took a deeper dive into working capital in a previous article, but simply put, working capital represents a contractor’s current assets minus current liabilities, and this measures how much a company has available to pay its current debts. Equity, or net worth on the balance sheet, is made up of retained earnings, common stock and additional paid in capital, and these numbers provide a measure of the long term liquidity of a company. Surety carriers take a hard look at this number because they want to ensure that there are sufficient reserves to complete the work that they have issued performance and payment bonds on.    

Building an effective bonding program can take time and requires collaboration with competent, trusted advisors. Determining what type of bonding capacity you can establish and/or deserve is a key part of the process. To find out what your bonding capacity looks like, request a quick capacity analysis and I will provide you with the information you need for your company. To answer more questions, you can email be at aroberts@ranchomesa.com or call my direct line at (619) 937-0166. Stay tuned for my next article which will take a deeper dive into strategies for improving equity and how this can increase capacity.

Funds Control May Secure Project Bond

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

As surety brokers, we initiate bond programs for our construction clients. Single and aggregate limits are determined in large part by their financials and experience. Often, there are jobs that exceed the single limit we have in place, or are larger than any job that our client had previously completed. When it is a job that makes sense for the contractor, it is our job to work with the bond company and find a solution so the contractor can bid the job or take on the contract. One available solution is a process referred to as funds control.

Funds control is a service that bond companies use to ensure funds involved in the project will be used for appropriate work-related expenses. This arrangement involves a third party company engaged to handle the disbursement of the funds to the different sub-contractors and suppliers on that specific project. In order for this to be set up, the contractor is required to execute two documents, a Disbursement Agreement and an Irrevocable Direction of Funds. 

The Disbursement Agreement addresses the specific terms agreed upon by the contractor and the third party company and also details the responsibilities of both the contractor and the funds control company. The second document, the Irrevocable Direction of Funds, is a one-page document that requires the project owner, or the general contractor, to send all payments directly to funds control. Once the funds are received, they are placed into a project specific bank account that is set up in the contractor’s name. The payments are then disbursed to the sub-contractors and suppliers based on the pay applications that the contractor submit to funds control. And, while this adds some additional steps and work to the process, there are benefits to funds control and good reasons why the bond company will require it on certain projects. 

For the bond company, with a third party taking control of the distribution of funds, there is a much lower risk of financial mismanagement, and subcontractors, suppliers and vendors can expect to be paid for the work that they do, which leads to a lower risk of payment bond claims being filed against the contractor’s bond. 

While adding funds control to a project adds some additional work and steps to the job, it can be a valuable alternative route and one that contractors should gain familiarity. In many cases, funds control can be the solution that helps get a surety underwriter comfortable with supporting a bond for a particular job that otherwise would not be approved.

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

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.

Managing Working Capital is Key as Markets Tighten

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

Contractors often ask us what bond companies are looking for when they are reviewing balance sheets and income statements. The answer isn’t a simple one, because there are many items that underwriters look at when determining if they will write a bond for a contractor. Typically, the first thing an underwriter will do is calculate a contractor’s working capital.

Simply put, working capital is calculated by subtracting a contractor’s current liabilities from their current assets on the balance sheet. Current liabilities are any obligations due within one year, while current assets are the most liquid like cash, accounts receivable, and items that can be converted to cash within a fiscal year. This calculation measures what is available for a company to pay its current debts, finance its current operations, and provides an indication of a company’s overall health. 

With bond companies placing an emphasis on working capital and tightening their underwriting guidelines through these uncertain times, it is critical that contractors pay close attention to their balance sheet. Managing their working capital can ensure a contractor receives the bond credit that they need. One specific area a company can focus on to accomplish this is being more diligent with collecting receivables.

Accounts receivable are listed as a current asset. However, bond companies will review the aging of a company’s accounts receivable and likely deduct any that are 90 days or more past due from the amount listed on the balance sheet. These are viewed as not likely to be received and will lower a company’s total current assets, which lowers working capital. This can directly affect the amount of credit that a bond company is willing to offer and possibly lead to bond requests being denied.

With so much remaining uncertainty in the economy, it is more important than ever for contractors to re-visit their balance sheets and take an aggressive stance with collecting receivables. These techniques can quickly build or re-build a strong risk profile to secure the level of surety credit a contractor may need for their bond program. 

As you develop your financial strategy and look to strengthen bonding options, consider Rancho Mesa’s Surety team of advisors. Contact Andy Robert at (619) 937-0166 or email him directly at aroberts@ranchomesa.com. 

Why Am I Now Required to Bond Such Small Construction Projects?

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

I received an email from a large Subcontractor client last week requesting performance and payment bonds in the amounts of $87,000 and $133,000, respectively. This client has completed projects in excess of $5,000,000 in the past and was surprised that the general contractor they were working with was requiring such a small amount to be bonded back.

I explained the potential reasons for why the general contractor may require such a small bond.  

• One reason might be with the financial uncertainty created by the COVID-19 pandemic, the prime contractor/general contractors’ bond company is looking to transfer some of the risk from the bond they provide to their prime contractor. They may set a certain limit (for example, all subcontracts over $100,000) to require the subcontractor to bond back to the prime contractor.

• A second reason might be that the prime contractor has not used a certain subcontractor in the past and wants the protection of a bond to help offset the risk. The general contractor might have selected this subcontractor based on “price” and wants the third party prequalification that the performance and payment bond provides.

• A third example could be that the trade this subcontractor supports is critical to the success of the project and the general contractor is using every tool they can to manage the risk.

Overall in 2020, we have seen an increase in the number of prime contractors requiring a bond for a small subcontract.

The good news for the subcontractor that rarely requires bonding is that the qualification process for a small subcontractor bond is relatively easy. A number of highly rated bond companies provide programs for bonding projects up to $400,000 (sometimes higher) based on the credit scoring of the subcontract company owner.

If you would like more information on how a professional bonding agent can assist in putting a single bond or a bond program in place for your company, feel free to reach out to me at (619) 937-0165 to ensure your company is getting the proper attention.

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.