Performance and Payment Bond – Tool Box Part 1

Qualifying for performance and payment bonds can be difficult. this blog will discuss one “tool” an astute underwriter and agent can use to qualify for a bond that would otherwise be rejected.  This tool is called contract administration, or funds control.  Basically, a third party company sets up an escrow account and all the proceeds form a construction contract are paid to this third party.  With the permission of the contractor, the third party then pays all the sub contractors and suppliers, and makes payments into the payroll account.

Performance and payment bonds are  required on publicly funded construction projects, usually over a certain dollar amount. These bonds are a type of surety bond .  The performance bond guarantees the performance of the contract, the payment bond guarantees that all the subcontractors, suppliers and even prevailing wages will be paid on a project.  The payment bond is as much, if not ore of a risk to the surety.  As such, using funds administration is a great tool for reducing this risk.  All the funds on a bonded project will be used to pay the bills for that project and nothing else.

Insurance agents are really good at placing insurance, however, qualifying for a surety bond surety bond is similar to qualifying for a loan versus buying insurance.  If you are a contractor and need surety bonds, go to a surety bond only agency like Surety1.   Recently, Surety1 was able to place three bonds that would have otherwise been declined by using the tool described above.

Case 1 – A general contractor was approved for a bid up to $350k.  The contractor was the low bidder ,however the owner decided to award some additional work under the contract pushing the contract amount to close to $500k.  The contractor, that had been approved via one of the short application programs available would not qualify for this larger contract.  Most Insurance agents in America would simply have passed on the bad news to the contractor that the job exceeds the approval and the contractor would have to pass on the job.  Surety1, on the other hand, was able to find another surety to write the bond by offering funds administration as an underwriting tool to gain the approval.  The contractor got the job as a result.

Case 2 – A developer needed a performance and payment bond to secure permits to do a small subdivision.  Often called subdivision bonds, this type of surety bond caused a fair amount of losses in the surety industry when the real estate market collapsed.   A developer was going to self fund the development and no surety was interested in the bond because without a lender involved, there was no guarantee the work would be paid for.  The insurance agent was astute enough to reach out to Surety1 and by using funds administration as a tool, Surety1 was able to place the bonds .

Case 3 – An existing account of Surety1 had completed some jobs that were bonded, however the account had gotten into a dispute with one of the subcontractors on the jobs and the subcontractor filed a claim on the payment bond.   While the issue was eventually resolved,  Surety1 was able to continue to provide bonds despite the pending claim by convincing the surety company to use finds administration on future work.  Another value added approach provided a contractor with performance and payments it needed to pursue work.

Funds administration is just one tool available to place the hard to place surety bonds.  Unfortunately for many contractors, very few insurance agents know when the tools are appropriate, if they even know they exist.