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surety bonds

We have a department at EPB&B entirely dedicated to bonds.

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EPB&B bond manager Jim Ewald

This full-service team is prepared to provide you these types of bonds/surety bonds:

  • construction (bid, performance & payment, prevailing wage)
  • subdivision
  • timber
  • probate
  • civil litigation
  • license & permit
  • transportation: fuel-highway use tax
  • cardlock

  


 Articles in this category


 

Suretyship is an ancient practice, with the first documentation contained in the Code of Hammurabi, circa 1790 BC, which outlined requirements for individuals to act as surety. The practice of an individual co-guaranteeing the obligations of another for a pre-determined fee spread throughout the Fertile Crescent and is reflected in the early legal codes of Carthage, Persia, Assyria, Rome, Babylon the ancient Hebrews and as far West as the British Isles.  The oldest surviving written surety contract is a contract of financial guarantee executed in Babylonia in 670 BC. Modern principles of suretyship have their roots in Roman jurisprudence enacted starting around 150 AD. 

 

In the 19th century contractor defaults on public works placed an escalating burden on taxpayers, and in response Congress passed the Heard Act in 1894 to authorize the use of corporate surety bonds to secure all federally funded projects, since liens cannot be placed against these by unpaid subs or suppliers. More recently, the Miller Act was passed in 1935 and this is the current authority mandating surety bonds on federal public works projects. Under this legislation performance bonds are required on public works contracts in excess of $100,000 and payment protect, preferably a payment bond, on contracts above $25,000. Most states and local jurisdictions have enacted similar legislation requiring surety bonds on public works which are referred to as Little Miller Acts. For example, the State of Florida recently increased the minimum level above which a performance bond is required from $100,000 to $500,000. 

 

The surety industry is in a period of high loss activity, and this has resulted in a reduction in the number of surety companies through failures and mergers, which in turn has reduced industry capacity.  Since bonding is a requirement to access public works, part of an effective business plan is to have a well-qualified bond agent who knows how to maximize your bonding capacity. With over 30 years experience including both company underwriting positions and as an agent interacting with many bonding companies, I have the skills necessary to help my clients navigate tough conditions in the bond market. I can be reached at 503-445-8404 or This email address is being protected from spambots. You need JavaScript enabled to view it..

 

Over the past couple of years, downturns in residential construction have forced many contractors from the private to the public sector, driving down margins. This in turn has increased contractor failures, producing tightening in the bond and lending industries. Surety underwriters have responded to escalating losses by returning to fundamentals of underwriting. A proactive approach to assisting the underwriter in understanding your company will assist you in maximizing your bond capacity.

 Here are 5 steps you can take to negotiate the most favorable terms available in today’s tight market:

 

  1.  Develop a schedule in order to provide your surety with financial reports appropriate to the level of bonding  you need before these are requested. As an example, a contractor wishing to bid jobs in the $1 million and above range should plan on providing the surety with a reviewed, percentage of completion basis at year end, along with current personal financial statements and a bank reference letter confirming the size and usage of the operating line. An internally prepared statement should be offered at mid-year and work in progress schedules on a quarterly basis. When submitting a request to bid a job, be sure to include not only copies of the invitation to bid and bid bond form, but for larger requests a detailed job cost breakdown and why the job is a good fit for your company with regard to type of work, equipment, staffing and funding, as well as how it fits with other work underway.
  2.  Develop  a detailed business plan that includes benchmarks for the growth you wish to accomplish, and share the original and periodic revisions with the underwriter. This is a way of assuring the surety that you are aware of your strengths as well as areas in need of improvement and that you will focus on the types of work and geographic territory with which you are familiar and have a successful track record. Should you wish to expand on that territory or diversify into new trades, be sure to give full consideration to any risks that might entail and have good reasons for how you plan on addressing these, and share your plans with your surety in advance to solicit their input.
  3.  Develop the internal management controls and management systems necessary to address cash collection issues and potential claims issues, and be prepared to discuss these with the surety early in your relationship. These are essential to long term accumulation of cash, equity and working capital which serve to protect the surety as well as  your company. When submitting work in progress reports, whether bi-annually or quarterly, it is helpful to the underwriter to provide aged schedules of accounts receivable with retentions shown segregated, and any amounts in dispute or of doubtful nature should be disclosed as early as possible.
  4.  Arrange to meet with your bonding agent and underwriter at least once a year after you have provided year end underwriting information to answer any questions those materials may generate and to go over your business plans and projections for the upcoming year. Your professional bonding agent will be able to anticipate questions the underwriter will ask and assist you in preparing answers with supporting documentation in advance of the annual meeting. This makes the meeting very productive and has a favorable impression on the underwriter that will translate into enhanced bond credit, particularly in stretch situations.
  5.  Finally,  your surety bond agent is not only your direct connection with the surety, but should be considered a professional consultant in the same context as your accountant, attorney or lender. You should examine a potential agent’s qualifications, expertise and track record in assisting other contractors in growing their businesses, perhaps asking what other contractors in your trade area they have represented. Relying on an insurance agent who only occasionally dabbles in bonding, perhaps because they are a relative or friend, can be costly to you in terms of lost opportunities.

About the Author, Jim Ewald:  Jim has over 30 years experience equally spread between being a company underwriter and an agent representing a wide variety of surety markets, he is well-equipped to assist his bonding clients in securing the highest capacity levels and best terms available. Should you or an industry acquaintance have any bonding issues, Jim can be reached at (503)445-8404 or This email address is being protected from spambots. You need JavaScript enabled to view it..

 

There are many different types of bonds, but of these Contract Bonds are the ones of most interest to contractors bidding public works projects. Contract bonds are also increasingly be required of subcontractors by larger generals, often at the direction of the general contractor's surety company.  Basically these guarantee the performance and payment of obligations under a construction contract.

 

The three associated types of bonds are bid, performance and payment bonds.

A bid bond acts as a prescreening device and guarantees to the owner, or Obligee, that if awarded the contract, the contractor, or Principal, will enter into the agreement and provide any performance and payment bonds required. In the event the contractor fails to do so, the bid bond covers the difference in amount bid between their low bid and next higher one up to the bid bond amount, which generally ranges from 5 or 10% for municipal, county of state work to 20% for federal projects.

 

Once a contract is awarded, the contractor is generally given 10 days to present the performance and payment bonds. These can be written separately or combined on a single bond form, but cover two distinct obligations. The performance bond guarantees that the successful low bidder will perform the work according to the specifications and time schedule provided in the plans. Failure to finish the work by the stated completion date often triggers a liquidated damages clause under which the contractor must then deduct a per day pre-agreed upon dollar assessment from the contract price for delays in completion.The payment bond guarantees that the contractor will pay legitimate billings from subcontractors and suppliers, thus delivering a lien-free project to any private owner, and taking the place of liens on public works on which these cannot be placed.

 

As a result of the downturn in housing, many residential contractors have been forced into the public sector, driving prices down, often below cost.  This has combined with restricted bank credit to produce increased contractor failures and a tightening in the surety industry.  Contractors who trust their insurance agent to handle their bonding are often experiencing difficulty obtaining the bonding

capacity they need to operate profitably.

 

Jim Ewald has over 31 years experience specializing in bonding.  He can offer a wide variety of bonding solutions through several different bonding companies and has helped contractors of all sizes increase their sales and profits over the years.  Contact Jim at (503) 445-8404 for more information or help with any bonding needs. 

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