Lowering the Bar on Performance and Payment Bonding

Posted on Monday, September 24, 2018

Acquiring or increasing your firm's bonding capacity can open a whole new market of jobs. It can allow you to take on a multitude of public works projects or larger, more profitable, higher-profile private jobs that require a more hearty bonding capacity than what you, or your agent, are used to.

The traditional method of laying out up to 20 percent of the bond value in cash collateral may be uncalled for if you approach your agent in the right way with the following cash-saving opportunities.

Funds Control Makes You a More Attractive Candidate

Is your firm is being awarded a much larger project than average? By agreeing to use funds control, you may sweeten the deal and put your surety company's underwriter in a better mood for granting the bonding capacity that your firm needs for the project. Funds control adds an extra level of comfort to the underwriter by guaranteeing that all subcontractors and materialmen are being paid as the project progresses, so there will be no chance of claims for non-payment down the line.

Funds control takes the "payment risk" out of the performance and payment bonding process, leaving only the "performance risk" for the surety company to bear. Here's how.

The "How-to" of Funds Control

In cash flow terms, with funds control, your firm directs the flow of funds from the owner or general contractor you work for to your subcontractors and/ or suppliers. In operational terms, you submit your payment application to your customer as usual, but you will also send a copy to your bonding agent and include a certified schedule of all the suppliers and subcontractors you currently owe money to, along with the amounts you currently owe them on this project.

The bond producer then gets the money for your current draw from your customer, and writes a batch of checks -- one to each of the vendors on your list and one to you. The bond producer then sends this batch of checks to your firm for distribution, processing and/ or depositing.

Sound Like an Accounting Nightmare? -- Not Really

With funds control, all of the checks come to you, even the ones made out to your vendors and suppliers. An inexperienced bookkeeper might get confused about how to account for it all, but all the payments for each draw go through your firm's accounting system. Your CPA can show you how.

Bonding Qualification Assistance

The Federal Small Business Administration lowers the bar on bond qualification, giving contractors easier access to greater bonding capacity. It pays to know how the SBA Surety Bond Guarantee Program works, in case you need it.

If you are willing to pay a small administrative fee and have enough lead time to obtain bonding, the federal government can help you qualify for performance and payment bonds on a project when otherwise the bonding capacity you need might seem out of reach.

Federal Bonding Assistance Step One: Screen Your Agent

The Federal Small Business Administration Surety Bond Guarantee Program can only help you if you use an agent who is familiar and qualified to underwrite bonds with this type of bonding assistance. So ask around. You may not need federal bonding assistance for every project, but if you use an agent who can access the federal assistance program, it might make a difference when the need arises. As you know, a bonded project can't start unless the performance and payment bonds are in place.

Federal Bonding Assistance Step Two: Try The Preferred Program. It Helps You Qualify... And Takes Less Time

If your firm needs help qualifying for that extra bonding capacity, the Federal Small Business Administration offers certain surety companies a hefty 70 percent guarantee backing on the bonds they underwrite for you, for a fee of only about 0.7 percent of the contract value (which you pay). Your firm must apply for the Preferred Surety Bond Program through your bonding agent with one of the following four currently approved, preferred surety companies:

CNA - Western
SURETEC
Travelers
U.S. Specialty - HCC

As you might assume, a surety company is much more apt to underwrite your bonds if 70 percent of the risk is guaranteed by the federal government.

Federal Bonding Assistance Step Three: If All Else Fails, Try The Prior-Approved Program

This program requires a lot of lead time, but takes almost all of the risk off of any surety company you work with, so the bonding is almost totally guaranteed. If your agent is familiar and qualified to make use of the Federal Small Business Administration Prior-Approved Surety Bond Guarantee Program, he or she can present your firm to any surety company they work with because the bond application is reviewed and approved also by the government before it is underwritten.

The advantage of having 90 percent of the value of the bonds guaranteed by the federal government is that the surety company bears almost none of the risk of default. And the administrative fee your firm pays for access to this program is the same 0.7 percent.

Consult with your accounting professional for more information in your situation.

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Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.