Tag Archives: Maintenance Bond

Three Basic Bonds Used In the Construction Industry

There are three basic type of bonds used within the construction industry.  They are the bid bond, the performance bond and the payment bond.   These three basic types of bonds are used to guarantee that contractor will perform the work contracted, at the price contracted within the period of time contracted.  If this doesn’t occur the bond company will pay the owner to prevent financial loss and the bond company will collect payment from the contractor.  Below is exactly how bid, performance and payment bonds work.

  • Bid Bonds: This type of bond is obtained to guarantee that the bid that is submitted is in good faith. It states that the contractor enters into the contract at the price that is bid and will perform the required performance and payment bonds.
  • Performance Bonds: This type of bond is obtained to protect the owner of a project from any financial loss if the contractor fails to perform the contractor as stated in the terms and conditions.
  • Payment Bonds: This type of bond assurers that a contractor will pay the price specified to subcontractors, laborers and material suppliers as guaranteed within the contract.

In order to prequalify contractor needs to prove to a sureties company that they are an acceptable risk.  It is up to sureties to accept the risk of contractor’s failure based on a thorough analysis that pre-qualifies the contractor.  This ensures that the contractors business is a risk worth taking.  It is an in-depth analysis that ensures the contractor’s business operations are legit.

The surety company must be completely content that the contractor meets certain criteria before issuing a bond.  The criterion looks something like the following:

  • High-quality references with integrity and solid business reputations.
  • A strong ability to meet all of their current and future obligations in respect to both financial and employee abilities.
  • Industry experience that matches the requirements that are stated within the contract.
  • Equipment that is necessary to perform the work that needs to be done or the ability to obtain it when it is needed.
  • The strength financially to support the desired load of work that is contracted within the contract period.
  • A credit history that is established and a relationship with a bank that extends a line of credit if needed.

As a surety company it is important that they are satisfied that the contractors that they have extended surety bonds to will satisfy their requirements. The contractor should run a well managed, profitable company that fulfills their word fairly and performs all of their obligations within a timely manner.

Construction Bonding Specialists, LLC are dedicated Surety Bond Professionals that are aligned with several Treasury Listed and AMBest Rated Surety markets which allows them to assist with virtually all Bid, Performance and Payment, Financial Guarantee and Supply bond needs.  Find out more information at http://www.bondingspecialist.com.

Major Points Of The Claim Process In Auto Dealer Surety Bonds Continued

In this installment of surety bonds we will continue to look at major points of the claim process in auto dealer surety bonds.

Eligibility

Only certain consumers are eligible to process a claim against the auto dealerships surety bond.

–          Consumer Purchaser:  Most of the claims that a consumer will make are related to the auto dealer’s failure to report the sale and not producing a title for the vehicle.  This creates a multitude of issues for the buyer.  Other claims involve the dealership not paying off the vehicle that was traded in, when the mileage on the odometer has been changed or the condition of the car was not reported and clearly becomes evident after the purchase.

–          The Seller of a Motor Vehicle:  A seller may file a claim if an auto dealership fails to pay for cars sold to the dealership or through the dealership.  This seller may be another car dealer, an individual, a consignor, a regional or national auto auction.

Be Prepared

Auto dealers should follow these basic steps when a claim is presented against them.
–          Auto dealers need to understand and follow the rules that are set by your state’s department of motor vehicles.  It is important to meet all of the terms within the contracts to avoid complications later on.

–          Auto dealers should always be honest.  They should ask the claimant for proof of their loss.

–          All communication should be documented.  All correspondence, statements and agreements should have proper documentation.

–          Auto dealerships should always be proactive in finding a solution to problems that have arisen before an official surety bond claim.

Look for assistance from the surety bond agency

When a claim is brought to the attention of the surety bond company all of the parties involved in the argument to explain their side of the story.  The guarantee that is offered by the surety bond company is that if they don’t find the claim to be legitimate they will not pay.  The opposite is true as well, if the evidence is found to be against the dealership the dealer will be obligated to pay the claim up to the bond’s penal sum.

Bonding company’s provide legal defense on your behalf; often leading to a winning verdict on your behalf.  It should be understood that if they end up paying the claim due to the dealerships negligence the legal fees plus the amount of the claim will need to be reimbursed.

Protect yourself and your dealership

Claims do arise against auto dealer surety bonds.  It is important to protect yourself.  Be sure that your dealership follows all industry regulations.  If you are honest in your dealings with customers you have nothing to be worried about.

Keep all licenses up to date, renew bonds on time and file all necessary paperwork diligently.  If a claim happens to arise you will easily be able to plead the case against the dealership without hurting business.

Construction Bonding Specialists, LLC are dedicated Surety Bond Professionals that are aligned with several Treasury Listed and AMBest Rated Surety markets which allows them to assist with virtually all Bid, Performance and Payment, Financial Guarantee and Supply bond needs.  Find out more information at http://www.bondingspecialist.com.

Major Points Of The Claim Process In Auto Dealer Surety Bonds

To avoid confusion we will discuss some of the major points of the claim process in auto dealer surety bonds.

Surety bonds are not the same as an insurance policy.

A surety bond protects the consumer not the business.  The surety bond is an agreement that outlines an obligation of one of the parties, in this case the car dealer, to another, their customer, which is watched carefully by a third party, the surety company.  If there is a claim against the car dealer the surety bond company may need to pay the client based on the claim and then seek reimbursement from the dealership.  A car dealership that is bonded is financially obligated to pay back the surety if a claim is paid on your behalf.  No matter how long the dealership has been in business or how long it has been out of business, if a claim is levied against the dealership and the surety is paid the surety company will seek to get reimbursement on the paid claim from the dealership.

Eight of the most common bond claims that arise from used car dealerships.

–          Failure to account for the sale and/or supply a valid title as stated under the contract

–          Writing a check that does not clear or to not make a payment on a vehicle

–          Tampering with the automobiles odometer

–          Providing inaccurate or false information in regards to the cars past and current condition during the sale

–          Fraudulent activity in regards to the financing of the car

–          Selling vehicles that have been stolen

–          Failing to pay for the warranty that was purchased by the consumer

–          The inability to honor the written car warranty

In our next installment we will finish discussing the major points of the claim process in auto dealer surety bonds.

Construction Bonding Specialists, LLC are dedicated Surety Bond Professionals that are aligned with several Treasury Listed and AMBest Rated Surety markets which allows them to assist with virtually all Bid, Performance and Payment, Financial Guarantee and Supply bond needs.  Find out more information at http://www.bondingspecialist.com.

Comparing Surety Bonds and Insurance Part Two

In our last installment we began comparing surety bonds and insurance.  Many people are under the misconception that because of the similarities between surety bonds and the fact that often insurance companies offer them that they too are a form of insurance.  This however is not true.  As we previously discussed surety bonds are an agreement between three parties as well as that with a surety bond a loss is not expected instead a guarantee in case an obligation is not met.  Insurance on the other hand is an agreement between two parties where a loss is expected.  At some point you expect an insurance policy will pay out whereas with a surety bond you don’t expect to ever have to receive a payout.

A company offering surety bonds expect to recover any losses occurred.  If the principal defaults on the contract and the surety bond have to pay the obligee the surety expects to get repaid from the principal.  The surety has loaned assets to the principal and therefore will seek reimbursement.  Insurance claims are never expected to be repaid.  In fact with an insurance policy a claim is expected.  The whole purpose of insurance is to cover any losses the insured has experienced.

When the premium is paid on a surety bond it is acting as a service charge for the bond by the principal.  In fact surety companies get to be incredibly selective when choosing companies that they agree to bond.  This is because bonds serve as a non-collateral loan unlike a car or mortgage payment.  A surety company asks for a fee anywhere from half a percent to three percent of the contract amount.  The fee will be dependent upon the financial strength of the principal.  The premium is usually paid on an annual basis.

This is different than insurance premiums in that the premium that is paid is to cover the expenses and losses that are expected to occur. An insurance policy is something that nearly everyone can be issued.  The premium that is paid will depend upon the risk of the person or people being insured.  The greater risk to the insurance company the higher the premium.

As previously stated, surety companies are incredibly careful when choosing companies that they bond.  Years of running a successful business, financial stability and a record of completing projects on time and within the projected budget allotted within the original contract.  Agents handing out surety bonds are trained to ensure they don’t make loans that will default.

Insurance agents however are a lot more flexible when it comes to writing insurance policies.  Insurance companies offer up a higher volume of business in order to make a profit as well as cover any losses experienced.  This allows agents to be flexible with whom they offer insurance policies to.  Although as an example, if a car owner is seeking insurance and they have been in multiple accidents they will pay a higher premium then a client who has not been involved in an accident or had a previous ticket.

There are key distinctions between surety bonds and insurance policies.  Although they function differently they both meet a need that protect someone from experiencing a loss.

Construction Bonding Specialists, LLC are dedicated Surety Bond Professionals that are aligned with several Treasury Listed and AMBest Rated Surety markets which allows them to assist with virtually all Bid, Performance and Payment, Financial Guarantee and Supply bond needs.  Find out more information at http://www.bondingspecialist.com.

Comparing Surety Bonds and Insurance Part One

Most people assume that because surety bonds are offered through an insurance company that a surety bond is a type of insurance policy.  This however is untrue.  Even though surety bonds and insurance policies have a few insignificant likenesses they are not the same thing at all.  In this installment we will discuss the differences between surety bonds and insurance.

The first difference between surety bonds and insurance is the number of individuals involved in the agreement.  With a surety bond there is a three-party agreement that connects the bond issuer, who is known as the surety, with the second party, who is the principal, into a financial guarantee to the third party, who is known as the obligee.  The agreement states that principal fulfills the obligations set forth in the contract.  The principal relies on the monetary power of the surety in order to acquire a contract with the obligee.

The difference with insurance is that the agreement between two parties; the two parties being the insurance company and the insured.  This arrangement is in place to guarantee that if the insured has a loss or is damaged the insurance company agrees to pay an amount set forth in the original policy.

Another distinction between surety bonds and insurance is that losses are not to be expected under a surety bond.  The contracting company to which the bond is issued needs to be financially stout and secure to be eligible for bonding.  The surety company carries out a thorough background check into the contractor’s character, their credit worthiness, the talent and capability to finish a project as contracted.

It is also important that they meet the specific check points in place within the contract.  A surety bond is sought out because the contractor is asked to provide one because the project owner mandates it.   The surety bond amount decreases as certain check points, which are stated in the contract, are met.  Less surety is needed as the job gets closer to the agreed upon end.  As each stage is completed the contractor is required to carry less surety to meet their obligation to the project owner.

An insurance policy is purchased because a loss is eventually expected.  The insurance policy rates are always changing and need to be adjusted based on the law of averages, expenses and losses.  A perfect example is when purchasing car insurance.  The rates are high at first because the expense is greater to cover the amount owed on the car loan.  If the car is in an accident a large amount of money is needed to cover the expense of repair or to cover the payoff on the loan.  As time passes the amount owed becomes less and less, the expense to repair the car decreases and because of all of these factors the insurance policy costs decrease.

In our next installment we will look at more comparisons between surety bonds and insurance companies.  These two very different industries and products have qualities that are similar but they are indeed two very different things when side by side comparisons are completed.

Construction Bonding Specialists, LLC are dedicated Surety Bond Professionals that are aligned with several Treasury Listed and AMBest Rated Surety markets which allows them to assist with virtually all Bid, Performance and Payment, Financial Guarantee and Supply bond needs.  Find out more information at http://www.bondingspecialist.com.

Construction Bonds Help To Decrease Default

Nearly all public construction work that is completed is done so through private sector construction firms.  Jobs are bid on by private sector contractors.  An open competitive sealed bid system is used to determine who is awarded the work.  Many times the work is given to the contractor with the lowest, most comprehensive bid.  With the use of surety bonds the system works well.

A Bid Bond is used to keep flippant bidders from the bidding process.  They do this by promising that the chosen bidder will enter into the outlined contract as well as obtaining the required performance and payment bonds.  If the bidder with the lowest bid cannot honor the contract, the owner is protected.  The bid bond ensures the owner will be covered for up to the amount of the bid bond which is most often the difference between the lowest bid and the next highest bid.

A Performance Bond is an agreement that protects the contractor’s promise, contract.  It is there to ensure that the contract is carried out in agreement with the terms and conditions that were agreed upon, at a certain price and within a certain amount of time.

A Payment Bond shields specific employees, suppliers of materials and subcontractors from nonpayment.  The protection payment bonds provide is to claimants that have not been paid for their goods and services that they have supplied to the contracted project.

It is required, by law, that in most public construction projects that bid, performance and payment bonds are utilized.  These laws have been in place for so long that little thought is given to why they were enacted in the first place.  Contractors that are unable to acquire the bonds required complain that the law is unjust and unfair.  Note that the law is only required on most public construction projects not all construction projects which still allows such contractors to obtain jobs.  However, it is important that we understand why such laws were necessary requiring contractors to post bonds when performing public construction projects.

Before the laws were enacted the failure rate on public construction projects among private construction companies was high.  What would happen is that private contractors became bankrupt before they were able to finish the contracted services.  This left the government with half completed projects which tax payers were left to cover.  The additional costs coming from the contractor’s default added to a substantial hit on taxpayers.

With government property unable to be subjected to a lien many laborers, material suppliers and subcontractors were left without compensation if the services they performed were not paid for.  The government tried to use individuals as sureties on public construction projects.  This however also failed as many times the sureties themselves were unable to honor their financial obligations.  This chain of events led to the Heard Act.  The Heard Act authorizes the use of corporate surety bonds to secure privately performed federal construction contracts.  In 1935 the Miller Act replaced the Heard Act which is the current law that requires performance and payment bonds on federal construction projects.

Construction Bonding Specialists, LLC are dedicated Surety Bond Professionals that are aligned with several Treasury Listed and AMBest Rated Surety markets which allows them to assist with virtually all Bid, Performance and Payment, Financial Guarantee and Supply bond needs.  Find out more information at http://www.bondingspecialist.com.

 

Requirements on Establishing a Contractor’s Bond Line

Bonding is a concept many of us are unfamiliar with. In this article, we will focus on how bonding affects financing. It is important to understand that bonding is not a type of insurance. The purpose of bonding is to guarantee projects are completed on time or as near to schedule as possible regardless of payment or performance. What the bond does is reassure the owner or general contractor that the company they hire can and will complete the obligation as stated in the contract. If the bond is in fact utilized, for whatever reason, the bonding company is guaranteed re-payment in the amount utilized.

In order for bonds to be obtained there are several requirements that need to be met. One such prerequisite is equity of ten percent or higher. There are several ways this can be accomplished. A company can prove that they have retained ten percent or more in earnings this year within the Stockholders Equity section on their balance sheet. If this has not occurred or cannot be shown due to previous losses or large shareholder distributions a company can inject their balance sheet with equity capital. This will show on your balance sheet in the Contributed Capital section. Check with your accountant and attorney to ensure that this is documented properly and that conversions are done properly.

Another condition that bond companies can ask to see is five to ten percent revenue in a line of credit. This is in place to ensure that if issues arise such as cost overruns, slow payment by the general contractor or owner or disputes on work performed. The surety company can be confident that you there are available funds above the operational cash flow. The line of credit will allow work to continue as stated within the contract which reduces the chance that any use of the bond is necessary.

A line of credit against bonded receivables will never be provided by a bank or other type of financial institution. Bond receivables are funds received from contracts that require bonds. A bank places a lien on a company’s funds, receivables, as collateral in the event of default. Simply a lien can’t be placed on funds that are coming in from current contracts that require bonds. Companies work around this by not having one hundred percent bonded contracts. These non-bonded funds offer security. Companies also use equipment, property or other types of collateral.

Construction bonding as well as bonding in general is needed to reduce the risks associated with projects. Bonding affects financing and helps to ensure projects keep on pace no matter what situations arise with performance or payment.

Construction Bonding Specialists, LLC are dedicated Surety Bond Professionals working with new and experienced contractors to find the most satisfactory bond solutions. CBS is aligned with several Treasury Listed and AMBest Rated Surety markets which allows them to assist with virtually all Bid, Performance and Payment, Financial Guarantee and Supply bond needs. Find out more information at http://www.bondingspecialist.com.