From the Desk of: Mary Jeanne Anderson, President, Hanover Surety

The challenge for contractors in this economic

environment is to not only survive but to actually

thrive. Financial management is the key. There is

a new discipline needed in acquiring work at a

reasonable price and terms balanced with the willingness to make

overhead cuts when the work does not materialize. Taking work below

cost just to generate cash flow is not a sustainable option, even if

that is what the competition is doing. It is not easy, and many contractors

will not survive because they took work too cheaply, fell victim

to unreasonable contract terms or did not make the necessary overhead

adjustments in time. Operating within the terms of the contract

is important regardless of past relationships and practices. A contractor

needs to be particularly attentive to collecting money when it is

due and not forbearing on collection, as getting behind in collecting

money—only to find the funds are not forthcoming—can lead to a

chain reaction of problems. Relationships between owners and contractors,

generals and subcontractors, will be tested, but the contract

terms will define the relationship in the end. Navigating the recession

successfully will require good advisers, including independent agents

with a surety specialty, a construction-focused CPA, a banker who

understands the business and a contractor-oriented attorney. Add a

flexible and knowledgeable surety company and team to the equation

and contractors will have the benefit of the best advice available.

From the Desk of :

Rod Williams, Executive Vice President, Chief Underwriting Officer,Liberty Mutual Surety

Experienced contractors are not strangers to

construction cycles. A successful contractor

implements sound business plans, monitors key

metrics and demonstrates flexibility in adapting

quickly to changing environments. The reality

most contractors face in today’s economic environment

is decreased revenue and profit margins,

limited bank credit access and an underutilized

workforce and equipment plan. Managing overhead remains a critical

success factor. Those contractors who anticipated a slowing market

and preemptively adjusted their operations to ride out the recession

will fare the best. Examples of such actions include reductions in

equipment fleets and related debt earlier in the cycle, as the ability

to sell equipment and pricing diminished as the recession unfolded.

Those slow to adapt faced heavy debt leverage ratios and struggled

to generate the revenue needed to fund debt on unused equipment.

Managing bank lines also has been important. Smart contractors

pursued longer-term lines when possible and minimized the use of

credit lines to ration borrowing capacity, should it be needed later.

Forward-looking contractors also are adopting BIM and integrated

project delivery methods, bringing together contractors, owners and

architects. As more owners seek to mitigate exposure by transferring

risk through contracts and bond forms, contractors need to facilitate

strong communications and build relationships with key partners.

Maintaining frequent and transparent communications with a surety

is especially critical as sureties can share a national perspective on

construction trends and mediate emerging disputes with owners on

affirmative claims. Overall, contractors should have a flexible plan and

be ready to adapt and execute it consistent with market trends.

I published a great little “How-to” artitcle on the basics of Performance Bonds, and the first steps to getting a facility approved.

For the article, click below:

http://ezinearticles.com/?Performance-Bonds—5-Tips-on-How-To-Get-Approved-and-Performance-Bond-Advantages-and-Basics&id=5408404

Let me know what you think!

Also, stay tuned for a more intermediate version, taking you through the Construction Bonding application process, step-by-step.

The following is the typical information that must be submitted to the Surety when making a claim under the Performance Bond:

•A complete copy of the contract with the Principal

•Copies of Change Orders

•Copies of all progress billings

•Summary of all payments made including the date of each payment

•Up-to-date summary of the contract accounting between the Obligee and Principal

•Evidence of termination of the contract and/or the declaration of default due to a prescribed breach

•Copies of any claims for a lien or written notices of claims received

•Any other documents establishing the validity of the claim

•Detailed explanation of the grounds upon the contractor was declared to be in default

Making a Claim Under a Performance Bond

There are three conditions of precedent for a Surety acting under a Performance Bond:

1)      The Obligee must have declared the Principal to be in default

2)      The contractor must be in default

3)      The Obligee must have fulfilled their obligations

When a Surety likely will NOT respond:

1)      When there has been no declaration of default as there is no justification for the Surety to act in this situation.

2)      When the Surety is not convinced that the contractor is in default. The situation often arises where a contractor refuses to do certain work they feel is not within the scope of the contract, and the Obligee believes that it is. This is a dispute which should be resolved via form mediators, arbitrators or if need be, the Courts.

3)      When the Obligee has not fulfilled the contractual obligations. Eg. when the Obligee has failed to make payments, contractually due.

4)      When the Obligee has acted in a manner prejudicial to the Surety. Eg. When the 3 conditions precedent to invoking the performance bond had been fulfilled,  however where an Obligee has made payments in advance of work having been completed and there is no provision in the contract for such payments.

The most common question we encounter is:

HOW MUCH DOES A PERFORMANCE BOND COST?

The Answer?

The industry standard is as follows:

It is important to note that rates do vary amoungst the surety markets. If your company does not qualify for the standard pricing, you may be quoted a higher cost per thousand.

It is also important to take into consideration the annual Facity Bonding Fee. This annual fees ranges from $1500 to $4000. Filing fees may also be applicable.

For budget pricing, most contractors use 1%-3% of the cost of the jobs.

The link below will take you thru to the ZURICH Panama Canal Surety Bond commercial.

Its a great advertisement and demonstrates important role that surety plays in our society.

http://www.zurich.com/main/about/helppointprinciples/advertising/tvcommercial/panamatvcommercialusa.htm

Enjoy!

Surety Bonds

1. Surety Bonding confirms the financial credibility of the Contractor.

2. Surety Bonding can increase the Contractor’s credit with a Bank.

3. Surety Bonding provides expertise to the Contractor (legal, accounting, estimating & engineering).

4. Surety Bonding provides claims assistance for the construction project parties, often as a mediator.

5. Surety Bonding seeks a solution for the Contractor to complete a project.

6. Surety Bonding provides more scope for the Contractor to accept more projects.

Disadvantages of Certified Cheques

1. Certified cheques do not confirm the financial credibility of the Contractor.

2. Certified cheques reduce the available credit to the Contractor.

3. Certified cheques do not support a Contractor in a contract default.

4. Certified cheques are irrevocable, unconditional guarantee payments regardless of contract issues in dispute.

5. Certified cheques are effectively contract holdbacks, held in escrow past contract completion.

Surety Bonds versus Bank Credit

Ai Surety Bonding is constantly working hard to find our contractor clients’ altnernative methods of getting a performance bonding facility.

The traditional contract bonding facility can be prohibitive to many contractors, especially in the early stages of their business. 

We understand the frustration on not being able to quote on bonded jobs, when those jobs are likely to the ones to help you get ahead.

Here is a program that may suite. Its called;

 THE CONTRACTOR ADVANTAGE, provided by L’Unique General Insurance

The community based contractor with expertise & experience may not qualify for a community construction project due to limited financial resources. We have a solution for the contractor & the community.

L’Unique offers ‘Project Cost Management’ and ‘Surety Bonding’:

 The Contractor manages the construction project

 L’Unique manages the project financial costs:

a. cash flow

b. payment of sub-trades

c. payment of materials

d. provide monthly lender project reports

 Sample Projects: Seniors Residences, Community Centers, Arenas, Parks

 L’Unique Partners To Qualify The Community Contractor

Please call us today to get started !