What are the guidelines for getting a performance and payment bond on a contract?

Question by alltechldg: What are the guidelines for getting a performance and payment bond on a contract?
These bonds are for retrofitting lighting and installing a control system (BAS) in a building. I need to know the rules so I know when to get these bonds more efficiently and quicker.

Best answer:

Answer by Surety Guy
The bottom line for obtaining Performance & Payment Bonds is that you need to qualify. Not all contractor quality. There are two different levels of qualification and this depends on the contract size. If the contract is $ 100,000 or under, the qualifying factor is the personal credit score of the owner(s) of the company. At this level, there is only a one-page application to complete.

Anything over the $ 100,000 amount entails a comprehensive underwriting process. Including the following:

•Contractor questionnaire
•An overview of the company – short form business plan – to help them understand the company better
•Three years of company financial statements (CPA prepared – the quality of the financial statement is directly related to the size of contracts you would target – the better the quality the more comfortable the insurance is with the numbers presented). Including concurrent aging of A/R & A/P
•Interim business financial statement (if your year-end statement is over six months old)
•Personal financial statements for all of the owners
•Current work in process schedule
•Current insurance certificate
•Resumes on key employees
•Bank reference letter
•Insurance certificate

The insurance company will do reference checks on subs, GC’s and owners on completed contracts identified in the Contractor Questionnaire.

The insurance company looks at surety as a zero loss proposition. They underwrite with the expectation that when they approve a contractor, that contactor is a quality contractor and the chances of them not performing is minimal. Regardless of how good a contractor is, the contractor would need to indemnify the insurance company both as the company and individually (all owners and spouses). This means that if there is a claim and the insurance company pays out, the contractor will reimburse the insurance company and make them whole. If the contractor is not solvent at that point, the individual owners will need to make the insurance company whole and cover any claims paid.

When underwriting a potential contractor, the insurance company focuses on three things:

•Capacity – does the contractor have the capacity to complete the given contract and other ongoing projects
•Capital – is the contractor financially solvent and have the capital to complete the contract and other ongoing contracts
•Character – does the contract have a good reputation in the industry

The cost (premium) of the bond is directly related to the quality of the contractor. A good quality, fiancially strong contractor may expect to pay 1% or less of the contract amount for the premium. The high end is 3%. With the average being 2%-2.5%.

This whole process is a prequalification process that assists the owners of the project in screening potential contractors while gaining assurance that the contractor and the insurance company will fulfill the terms of the contract.

If the contractor fails to perform per the contract, the insurance company steps in and either hires another contractor to complete the work or pay a monetary settlement. Again any claims paid out by the insurance company will need to be paid back by the contractors.

So what happens if a contractor does not qualify? There are secondary market insurance companies that will issue performance & payment bonds if the contractor puts up collateral against the bond. They also may require funds administration and the premium may be higher.

Any insurance company you deal with should be an admitted carrier and US Treasury listed.

So, to answer your question, in order to streamline the process and get bonds (bid and performance/payment) quicker, you should be pre-qualified. Once you qualify, you need to keep your agent up to date with interim financial statements and work in progress schedules. If everything is current, the decision process for approving bonds going forward is very quick.

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