Bonds

Do you need Performance or Bid Bonds in Missouri?

The term “bond” or “bonds” have so many different meanings to so many different people. Sometimes bonds are required when a construction company wants to bid on a job. Sometimes bonds are required when a business wants to open up their doors and some governing authority. like a city or county or state, will require them to put up some sort of bond to guarantee they will pay their sales taxes or when some other licensing or permit situation requires the bond to be issued. What ever the reason, bonds are a special part of the insurance world and at Mid America Specialty Markets we provide access to some of the best bond markets available! If you need a bond, performance, bid or contract, be sure to contact our offices! We can help!

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What exactly are bonds?

A bond in layman’s terms is a way to secure a debt.

It is a way of you the consumer, being able to put up a little cost up front that says “I am letting you borrow this money so as to your agreement to pay the face value of said bond if ever needed”. In the real world, bonds can be issued by a government, municipality, corporation, federal agency and other entities.

In the insurance world a lot of times you will see bonds requested in the following ways:

Contract Surety Bonds or Performance Bonds

Contractor bonds are one of the most “popular” bonds you will see asked for in the insurance space. Contract bonds are used in the construction industry by general contractors and project owners. They are a guarantee to a project’s owner that the general contractor and/or their subcontractors on the project will adhere to the contract put in place. Another description or word for contract bonds is performance bonds. Performance bonds are issued to a primary owner, general contractor or other hiring contractor to provide a guarantee that the hired contractor will perform to the standards as outlined in the construction contract. If you are a contractor who has won a bid for a specific job your bonding company will issue a performance or contract bond to the obligee (the one requesting the bond) that provides them with a financial backing that guarantees you will complete the job as described in the contract. If for some reason you do not complete the job then the bonding company will be asked by the hiring contractor or owner of the project to put up the bonded amount in dollars so they can go out and hire another company to complete your portion of the contract your signed. Once the bonding company pays off in your behalf, they will turn to you, the bonded contractor, and ask your to repay the amount the had to pay on your behalf. This is a key concept in the entire bonding process.

You see, bond underwriting is all about financial underwriting to make sure you have the capacity to fulfill the contract terms which you have agreed. A performance or contract bond underwriter will review your historical and most recent financial documents, including your financial capacity, to meet the obligations which you have agreed. If a bonding company does not like what they see in your financial documents, they will limit your bonding capacity or not allow bonding at all. In other words, they will not want to pony up a large financial backing for your operation unless they feel confident they will be able to recover the amount of a bond if you, for any reason, default on your contract obligation.

Performance bonds with a lower limit say $100,000 to $300,000 will usually fall into a “rapid bond” status. This means that bonds this size are usually underwritten on a credit basis of the contractor seeking the bond. More simply put, for these types of bonds the bonding company will usually run a credit report on the owner of the construction company seeking the bond. If they meet the rapid bond underwriting guides, the bonding company will generally issue the performance bond. Do not believe that construction performance bonds are a simple insurance product!

For larger bonds, you will find that the requirements become much more intense. Contractors working with bonding limits in excess of $300,000 will find the financial information required to qualify for these products to be much much more detailed. Bonding carriers, on larger bonds, will require current work on hand schedules, personal financial statements from the company owner, indemnity agreements from all company owners and their spouses, CPA compilation and review quality financial statements along with past work history. Bond carriers want to make sure you have the ability to do the job to completion and to repay the bonding amount if necessary.

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Bid Bonds

Bid bonds are issued to a contractor when they are bidding on a job. The purpose of a bid bond is to guarantee the obligee (the entity requesting the bond) that if your company is issued the job, the bonding company will issue the performance bond. Think about this, if you bid on a job that has a value of $300,000, and win the bid, then the general contractor or project owner will want to have some guarantee that if they give you the job then you will be able to secure a performance bond for the job in question for the amount of the bid. Because of this guarantee when it comes to bid bonds, the bonding company will need to fully underwrite your ability to qualify for the performance bond before they will issue the bid bond.

So a word to the wise, if you find yourself bidding on a job for your construction company, DO NOT WAIT TILL THE LAST MINUTE TO CONTACT YOUR AGENT FOR A BID BOND!! If you do, you may find yourself unable to qualify for the bond. A little heads up is all that’s need when it comes to securing bonds for your construction company.

Underwriting Process of Performance and Bid Bonds

 Performance and Bid Bonds are financially underwritten. This is because, unlike normal insurance products like general liability, business auto and even workers compensation, the reason a bond exists is to guarantee to the another party, the Obligee, that you will perform to the specifications as outlined in the contact you have agreed to with the Obligee.

Let’s sort out the players:

  • Obligee – The party requesting the performance bond
  • Principal – You and your company
  • Surety – The bonding company who will issue the bond for you to the Obligee

Since a Performance Bond is a guarantee issued by the Surety to the Obligee that you, the Principal, will perform all obligations you have agreed to in a contract, the Surety or bonding company,must make sure that you (and your company)have both the ability to complete the work and are financially secure enough to back up the amount or value of the contract.

To qualify for a Performance Bond you will typically be required to provide these items:

  • Three to five years of company profit and loss and balance sheet financial records. Depending on the size of the project you may also be required to provide CPA Review Quality financial records along with personal financial records.
  • You will be required to provide completed, signed indemnity agreements by your company and personally by each owner and their respective spouses. An Indemnity agreement is a pledge or promise that your company and you personally guarantee to the Surety your assets as collateral for the bond. Remember, if you default on the contract with the Obligee and the Surety has to pay on your behalf, the Surety will look to you for full reimbursement of the bond and all legal costs.
  • Provide a listing of the past five largest jobs or projects that you have completed including a full description of the work and value of each contract.
  • A current work on hand schedule describing the type of work, start dates and expected completion dates along with the beginning contract value and where you are at in payment receipts for the project.
  • You will be asked to provide a copy of the bid specifications or the job contract.

Larger bonds will require more detail than smaller bonds. As a matter of fact, smaller bonds will be issued on credit of the company owners.

Bond Underwriting Ground Rules:

  • Does the Principal (you and your company) have the experience to qualify for a bond? Part of bonding is your ability to do the job. The bonding underwriter will want to see that you have successfully completed such work in the past and that you have the ability to fulfill the contract requirements.
  • Is the size of the bond amount being requested close to the size of past jobs? This is a tricky one and sometimes hard for the Principal to understand why it’s of importance. Bond underwriters will often ask if the current job on the table is greater than 1 ½ times the largest job the principal has completed. They want to know if the current job is too big for you. Think about it this way, all past jobs you have completed are no bigger than $200,000. The job you want to bid on is $1,000,000. That’s 5 times larger than the largest job you’ve successfully completed in the past. In this case the bond underwriter will probably not issue the bid bond as the job is too large for your historic experience. Because of this you will find those who have been successful at building bid work will have started out small and continually increased the size of jobs they have bid. For example, you start out working on $200,000 jobs then move up to $300,000, then $400,000, then $500,000, then $750,000. See the pattern? This is the work history a bond underwriter will like to see.
  • Do you have the equipment and man power to do the work? Contract work and bonds are a contractual obligation. You may find that even if you have the financial strength, but you lack the equipment and employees to perform the job, you may not qualify for the performance bond. Say you are an excavating contractor but you only have one bull dozer and one back hoe but the job your are bidding requires you to have multiple dozers, pan scrappers and track excavators. This means you will need to either go out and buy or lease this equipment and doing so will have a negative impact on your financials. Your alternative will be to sub contract out a large part of the job and if you have no experience working with sub contractors you may again find yourself in precarious financial situation. This is the kind of information a bonding underwriter will be looking at to decide whether or not to issue the bond on your behalf.
  • Is the bid job within your normal scope of work? This makes sense. If your company specializes in carpentry work and the job is excavation work how could you expect a bonding underwriter to approve your bond? Stay within your normal scope of work when bidding on jobs.

Hopefully this section will help you gain a better understanding on what a bonding underwriter will require and what they will look at while underwriting your application for a bid and performance bond.

Surety Bond

A surety bond is a contract between three parties. The person who is the recipient of an obligation, the primary party who will perform the contractual obligation, and the person who assures the obligation will be done.

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 Contract Surety Bond

Refer to the above information on Performance Bonds. Also known as Contractor Bonds, Performance Bonds are one of the most “popular” bonds you will see asked for in the insurance space. Contract bonds are used in the construction industry by general contractors. They are a guarantee to a project’s owner that the general contractor will adhere to the contract put in place.

Lost Title Bond

These bonds are a type of surety bond. They provide a proof and guarantee of ownership to the Department of Motor Vehicles. When no other form of documentation is available a Lost Title Bond shows the DMV that you are the “owner” of said vehicle.

License and Permit Bonds

These types of bonds function as a guarantee to a government entity that a company will comply with a statute, state law, ordinance, etc.

Some examples are but not limited to:

  • Contractors License Bonds
  • Tax Bond
  • Environmental Bonds
  • Broker’s Bonds
  • Motor Vehicle Dealer Bonds
  • ERISA Bonds

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Our job as an independent insurance provider is to help you navigate a cumbersome system in finding the best fit for your bond requirements. We can help you find your bond needs, provide you with your bond, and help you get it to the party requesting.

Call our office today or complete the form below to get started!

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Video Transcript

Bonds, and the process of Bonding, are often misunderstood. And that’s easy to understand because the term “Bond” means so many different things depending on your perspective. There are literally thousands of different types of Bonds.

Hi! I’m Randy Sieberg, Director of Commercial Insurance and a member of our Commercial Team here at Mid America Specialty Markets.

So, let’s learn a few things about Contract Bonds and some other classes of Bonds.

Contract Bonds are surety bonds. They are a legally binding agreement or contract where three parties are involved. The first, known as the principal, is the party who needs the bond. The second, known as the Obligee, is the party requiring the bond. And the third, known as the surety, is the party guaranteeing the principal can fulfill their contractual obligations to the Obligee. Contract Bonds are not insurance. They are a promise of performance and because of this, the principal must be financially able to repay the surety if they default on the promise, or contract.

Bid, Performance and Payment Bonds are often required in the construction industry. As a contractor you may be asked to bid on a project and find that part of that bidding process is a requirement that you provide a Bid Bond. A Surety Company will need to underwrite or qualify you for the performance bond before they can issue a Bid Bond. You see, the bid bond is a guarantee to the Obligee that, if they award the job to you, the surety will issue the performance bond on your behalf.

As an example, let’s say your company wants to bid a job and the value of that job or the amount of your bid for the job is $300,000. Your bonding company or surety will, before providing you with a bid bond, need to qualify you for the amount of $300,000. The surety will look at your financial ability to repay that amount to them if for some reason you default on your contract with the Obligee. So in essence, the surety puts up the financial backing to the Obligee that you have both the experience and financial ability to complete the contract requirements.

If a Surety company has to pay out on your behalf, they will then turn around and look to you for repayment of the default amount.

Other Classes of Bonds have very specific duties and perform certain identified actions. Other Classes of Bonds Include:

  • Commercial Bonds – made up of:
    • Business Service Bonds
    • Notary Bonds
    • And Erisa Bonds
  • License and Permit Bonds
  • Court and Judicial Bonds
  • Probate and Fiduciary Bonds
  • Public Official Bonds
  • Fidelity and Crime Bonds
  • And General Bonds

As you can see Bonds or more specifically the term Bond, covers many different categories and can certainly have more than one meaning!

So, when it comes to securing a bond be sure to contact one of our local agents or one of Commercial Team Members. We can help with all of your bonding needs!

Thank you!

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