All About Performance Bonds

Want to know more about Performance Bonds including what they guarantee, what do they cost and how do you get one? The video below explains everything contractors need to know about the basics of Performance Bonds.

 

Published first here: https://axcess-surety.com/all-about-performance-bonds/

Bid Bonds vs Performance Bonds

Performance Bonds and Bid Bonds are both important types of construction bonds. However, these are two very different tools with different guarantees. Learn more about what separates these contract bonds. 

 

What is a Bid Bond?

 

A Bid Bond is a type of contract surety bond that guarantees that a contractor will honor their bid amount and enter into a contract if awarded. A Bid Bond protects the project owner or General Contractor by making sure that the bidding party does not back out of their bid or increase the bid price. If the bidding contractor will not enter into a contract at the bid price, an Owner can file a claim on the Bid Bond.

 

What is a Performance Bond?

 

A Performance Bond is a type of contract surety bond that guarantees that a Contractor will complete a project according to the contract and specifications including the contract price. A Performance Bond protects a Project Owner or Upstream Contractor by ensuring that they get a project completed at the agreed upon price. 

 

Similarities in Bid Bonds and Performance Bonds

 

Parties to the Bonds

 

Both Bid Bonds and Performance Bonds have the same parties involved. This is usually a Contractor who is bidding the project or performing the work. This party is called a Principal on both of the bonds. The Project Owner or Contractor that is benefitting from both bonds is called the Obligee. Both bonds are written by a Surety who is the bond company that is backing the Contractor’s guarantee on both Bid Bonds and Performance Bonds. 

 

Bid Bonds vs Performance Bonds - This chart shows that both bid bonds and performance bonds have the same three parties which are a Principal, Obligee and Surety. This chart has colorful tools all around it.

 

Underwriting

 

Underwriting is the same for both Bid Bonds and Performance Bonds. The contractor must be underwritten by a surety bond company in order to receive both bonds. This underwriting process is referred to as the “3Cs” which stands for Credit, Capacity and Character. 

 

Credit

 

Credit refers to a Contractor’s financial capacity to complete the project being bid or built, along with the contractor’s other workload. Surety Bond underwriters review a contractor’s business and personal financial statements, bank statements, work in progress, and credit reports to determine if the contractor can qualify. This often involves assessing a contractor’s liquidity and project trends. 

 

Capacity

 

Capacity refers to Contractor’s non-financial ability to complete the project being bid or built. Bond underwriters assess a contractor’s equipment, labor force, supervision, management, accounting and estimating systems to determine if they are likely to have the resources to complete their projects or if additional investments may be needed. 

 

Experience is an important part of Capacity. Usually surety bond companies do not want to support bid bonds or performance bonds for contractors that are larger than 2 -4 times as large as a previously completed project. 

 

Character

 

Character refers to a Contractor’s history in keeping their commitments. Character is the hardest to underwrite, but bond underwriters want to make sure that a contractor will finish the bonded projects, even if things go bad. Underwriters will often ask for project references, supplier references, and analyze a contractor’s track record. 

 

Underwriting Bid Bonds and Performance Bonds is similar because a Surety Bond underwriter must assume that a contractor is going to be low bidder, awarded the project and that they will eventually have to issue Performance Bond and Payment Bonds on the project. 

 

Indemnity on Both Bid Bonds and Performance Bonds

 

Bid Bonds and Performance Bonds are both a type of contract surety bond. All surety bonds require indemnity. Indemnity means that if the bond company pays a valid claim on either a bid bond or a performance bond, they will seek reimbursement from the contractor and any indemnitors. More can be read about indemnity here.

 

Validation Requirements

 

Seals

 

Both Bid Bonds and Performance Bonds need the surety bond company’s seal in order to be valid. This seal can be a raised seal “wet seal” or it can be electronic. The important thing is that it matches the seal on the Power of Attorney included with the bond. 

 

Power of Attorney

 

Both Bid Bonds and Performance Bonds need to be accompanied by a valid Power of Attorney to be enforceable. A power of attorney should match the name of the Surety Bond Company listed on the bond. The Power of Attorney will list the Agents and Brokers that are authorized to sign the bond on behalf of the surety bond company. The Surety signature on either bond should match one of the names listed on the Power of Attorney. 

 

Signature Required

 

Both Bid Bonds and Performance Bonds need to be signed by both the Principal Contractor and a representative from the Surety Bond Company. As mentioned above, the signature from the Surety should match a name listed on the Power of Attorney. Signatures can be either electronic or original and depends on the Obligee. Many Obligees will accept electronic signatures for Bid Bonds but prefer original signatures for Performance Bonds. These requirements keep changing with technology though. 

 

Rating Requirements

 

Although it varies from contract to contract, there is typically the same rating requirement for both Bid Bonds and Performance Bonds. If a bid specification requires a bid bond company to be rated “A-” or better by service such as A.M. Best, a Performance Bond will typically have the same requirement. 

 

 

Bid Bonds vs Performance Bonds - This colorful chart compares 4 aspects of bid bonds vs Performance Bonds. In the background is a construction site.

 

Differences in Bid Bonds and Performance Bonds

 

Although they are both contract surety bonds, Bid Bonds and Performance Bonds have some important differences as well. 

 

Cost

 

The cost of these two bonds is significantly different. Most surety bond companies and bond brokers do not charge for bid bonds. If there is a charge, it is usually minimal such as $100 for administration. On the other hand, Performance Bonds do carry a charge. Performance Bonds normally cost between 0.5% – 3% of the contract amount. Performance Bond Cost depends on several factors including the underwriting strength of the contractor, the type of work and the surety bond company’s filed rates in the state where the project is being built. You can read more about how Performance Bond Costs are determined here

 

Bond Amount or Bond Penalty

 

Bid Bond Amounts and Penalty

 

The amount of the bond varies significantly for Bid Bonds and Performance Bonds. Bid Bonds are written as a percentage of the contractor’s bid. 5%, 10%, 15% and 20% are all common bid percentages, but a bid bond on a private project could be in any amount. The bid bond amount is the maximum a surety bond company and contractor would have to pay if there is a claim on the bid bond. 

 

For example, if a contractor bids $1 million on a project and has a 5% bid bond, the most an Obligee could claim on the bond is $50,000 ($1,000,000 x 5%). The penalty could be even less though. For example, say the second bidder on the project bids $975,000. If the contractor does not move forward, the bid bond penalty is only the difference between the two bidders which would be $25,000. 

 

More detail can be read about bid bonds and bid bond claims here

 

Performance Bond Amounts and Penalty

 

On the other hand, the bond amount and penalty on a Performance Bond is much greater. Performance Bonds are written for 100% of the contract amount. That means that on the same $1 million contract, the surety bond company and contractor could be liable for the full $1 million. Regardless of how much the contractor completes, the Surety must complete the job, or pay for completion up to the $1 million bond amount. 

 

More can be read about Performance Bonds and Performance Bond Claims here

 

Guarantees

 

As discussed earlier, Bid Bonds and Performance Bonds have different guarantees. However, they are also related. If a contractor uses a bid bond to bid on a project and then is awarded the project, the owner may ask the contractor to provide a Performance Bond and Payment Bond on the project. Although the guarantees are different, they work in conjunction with each other. 

 

Understanding different types of Surety Bonds can be complicated. The experts at Axcess Surety can help you understand whether you need a Bid Bond or Performance Bond and how to obtain them. Contact our surety bond experts anytime. 

Published first here: https://axcess-surety.com/bid-bonds-vs-performance-bonds/

The Miller Act

The Miller Act

 

What is The Miller Act and how does it affect contractors, taxpayers and Surety Bond Companies? Learn more about this important piece of legislation.

 

What is The Miller Act?

 

The Miller Act (40 U.S.C. §§ 3131-3134) is a piece of legislation enacted in 1935 that requires Contractors fulfilling construction contracts of $150,000 and above, to post a performance bond and a separate payment bond on the project. Additionally, the law requires a payment bond alone when a project exceeds $30,000.

 

Specifically the law states, “The Miller Act as implemented by the FAR, provides that, before a contract that exceeds $150,000 for the construction, alteration, or repair of any building or public work of the United States is awarded to any person, that person shall furnish the federal government with the following:

 

A performance bond in an amount that the contracting officer regards as adequate for the protection of the federal government. The FAR establishes an amount of 100% of the contract price as the rule. An exception to this rule requires a specific determination by the contracting officer that a lesser amount provides adequate protection.

 

A separate payment bond is required for the protection of suppliers of labor and materials. The amount of the payment bond must be equal to the total amount payable by the terms of the contract. The FAR establishes an amount of 100% of the contract price as the rule. 

 

A deviation from this rule requires the contracting officer to make a written determination supported by specific findings that a payment bond in that amount is impractical, in which case the amount of the payment bond shall be set by the contracting officer. The amount of the payment bond may not be less than the amount of the performance bond.”

 

In other words, a contractor doing construction work on most Federal projects of $150,000 or more must post a performance bond for 100% of the contract amount and a separate payment bond for 100% of the contract amount. 

 

The performance bond guarantees that the  Prime Contractor (General Contractor) will complete the project according to the contract and specifications. The payment bond guarantees that the contractor will pay their Subcontractors and Material Suppliers.

 

Both the performance bond and the payment bond must be included on the United States Treasury Department’s 570 Circular of surety bond companies approved to do business with the U.S. Government.

 

History of The Miller Act 

 

Basic forms of lien laws go back hundreds of years. However, modern mechanic’s liens in the United States are often attributed to Thomas Jefferson. 

 

Mechanic’s Liens protect contractors, Subcontractors, and material suppliers against non Payment. Should a party not be paid for work or material, that party can file a Mechanic’s Lien on the project. The Mechanic’s Lien is a Public record and creates a security interest in the property. In practicality, the property owner is usually unable to sell or borrow against the property until the lien is satisfied.

 

Understandably, this system of filing liens does not work on Federal Property. Imagine an unpaid Subcontractor having a lien against The White House or National Park. Clearly this would not be in the General Public’s best interest.

 

Similarly, imagine a Federal Building under construction. Congress approved $1 million of taxpayer money to build the project. However, after paying the contractor $1 million, the project is only 10% complete and the contractor files bankruptcy. It would not be good for the Public to have unfinished projects or to have to spend more money to complete these projects.

 

These are the problems Congress was finding on Federal construction projects. To combat these issues, they signed The Heard Act into law in 1894. The Heard Act allowed for Corporate Surety Bonds on Federal projects. It also required a single Performance and Payment Bond on Federal projects. 

 

Although this provided some protection to contractors and suppliers, The Heard Act was written narrowly and therefore faced many legal challenges that were often interpreted against subcontractors and suppliers. Therefore, in 1935, Congress replaced The Heard Act with The Miller Act.

 

Who is Covered by a Miller Act Payment Bond?

 

It is important to understand who has protection under a Miller Act payment bond as not all parties are covered.The Miller Act payment bond specifically covers four parties. These are:

 

First Tier Subcontractors – 

These are Subcontractors that have a direct contract with the Prime Contractor.

 

First Tier Material Suppliers – 

These are Material Suppliers that have a contract with the Prime Contractor.

 

Second Tier Subcontractor – 

These Subcontractors have a contract with a First Tier Subcontractor.

 

Second Tier Material Supplier – 

These are Material Suppliers that have a direct contract with First Tier Subcontractors.

 

You will notice that many parties are excluded. For example, a Material Supplier who supplied Material to a First Tier Material Supplier would have no protection.

 

“‘Subcontractor’ means any person who has contracted to furnish labor or materials to, or who has performed labor for, a contractor or another subcontractor in connection with a construction contract.” N.C.G.S. § 44A-26

 

This chart shows the tiers of Subcontractors and suppliers protected and not protected by a Miller Act Payment Bond. The background is black and white road construction. Each Tier is blue or red.

 

What is Covered by a Miller Act Payment Bond?

 

Coverage under The Miller Act is broad. Various rulings have included things such as:

 

  • Labor
  • Material
  • Fuel, oil and tires for vehicles used on the project
  • Tools
  • Rental Equipment
  • Groceries for labor
  • Delay Costs in some instances
  • Attorney fees and expenses in some cases

 

In order to qualify the supplier only needs to show in good faith that the material was intended to be used in the project.

 

What is Covered by the Miller Act Performance Bond?

 

The performance bond covers the cost to Complete the project if the Prime Contractor cannot. A Miller Act Performance Bond also cover taxes on wages that are needed to complete the project.

 

Miller Act Claim Notice Requirements

 

Unfortunately, bond claims happen. When they occur on a Miller Act project, there are notice requirements that need to be followed. These can be confusing and depend on the Subcontractor or Material Supplier’s relationship to the Prime Contractor.

 

Miller Act Payment Bond Claim Filing Requirements - This shows two boxes with the timing Requirements for parties filing a Miller Act Payment Bond Claim. The background is an hourglass.

 

First Tier Subcontractors and Material Suppliers 

 

First Tier Subcontractors and Suppliers that have a direct contract with the Prime Contractor must wait at least 90 days after they last supplied labor or material to the project before filing a claim against the payment bond 40 U.S.C. § 3133(b)(2).This is thought to be a reasonable amount of time for project funds to flow from the owner to the Subcontractor or Supplier.

 

From a practical standpoint, a First Tier Subcontractor or Supplier does not have to give notice to the Prime Contractor or Surety. However, it likely should in order to try and resolve the issue quickly. A civil action must be brought no later than one year after the last labor or material was provided on the project.

Second Tier Subcontractors and Material Suppliers 

 

Second Tier Subcontractors and suppliers must file a claim within 90 days of the last labor or material provided on the project. The purpose of this timing is to make the Prime Contractor aware of nonpayment on lower tiers. This gives the Prime Contractor the opportunity to potentially withhold contract proceeds from the First Tier Subcontractor or Supplier to correct the issue.

 

Requirements for Second Tier Subcontractors and Suppliers Notice

 

  • Must be in writing

 

  • Must accurately state the amount being claimed

 

  • Must name the party that was provided labor or material

 

  • Must be delivered by a means that provides verification of delivery

 

Failure to provide proper notice under a Miller Act Payment Bond is a valid defense that can keep a Subcontractor or Supplier from being able to collect.

 

Filing Suit Under The Miller Act

 

If a civil action is needed, a case may be brought in a United States District Court and the Surety Bond company names as the Defendant. The civil action is brought in the name of the United States although the U.S. is not responsible for any expenses or payments associated with the suit.

 

Miller Act Protection Waiver

 

A Prime Contractor can not require a Subcontractor or Supplier to waive their right to a Miller Act Payment Bond in order to enter into a contract. Such a clause would be unenforceable.

 

However, a civil action can be waived, but only after the Subcontractor or Supplier has already provided labor or material on the project. In such cases, the waiver must be in writing and signed by the party whose right has been waived.

 

Courts have sided with General Contractors who insert contract language that stays the claim pending a dispute with the Owner. This contract language should be carefully reviewed and considered.

 

Exceptions to the Miller Act Bond Requirements

 

Foreign Country Waiver – 

A Contracting officer may waive The Miller Act’s bond requirements if they find that it would not be practical to do so.

 

Cost Plus Contracts –

 

Secretaries of the Army, Navy, Air Force, and Transportation may waive the requirements 

 

“with respect to cost-plus-a-fixed fee and other cost-type contracts for the construction, alteration, or repair of any public building or public work of the Federal Government and with respect to contracts for manufacturing, producing, furnishing, constructing, altering, repairing, processing, or assembling vessels, aircraft, munitions, materiel, or supplies for the Army, Navy, Air Force, or Coast Guard, respectively, regardless of the terms of the contracts as to payment or title.” 

 

Construction of Vessels –

 

The Secretary of Transportation and The Secretary of Commerce may waive the requirements on certain contracts for the construction and alteration of vessels.

 

Additional Bonds May be Required – 

 

A contracting officer may also require additional bonds or protection if they are needed.

 

Right to Obtain a Copy of a Miller Act Bond

 

Any party providing labor or material on a Miller Act contract has the right to request a copy of the bond from the contracting officer. A signed request is required.

 

In practicality, it is always better to request a copy of the payment bond upfront when signing a contract with the Prime Contractor.

Little Miller Acts

 

The Miller Act applied to Federal work but many states and municipalities have adopted legislation. These laws are often referred to as “Little Miller Acts”. Although these Little Miller Acts are similar, they can differ in a number of ways. It is important to check local laws before signing a construction contract.

 

The Miller Act has and continues to be an important piece of legislation for protecting taxpayers, contractors and material suppliers in the U.S. Each party should know their rates and responsibilities under the Act to ensure that these protections are available when needed.

Published first here: https://axcess-surety.com/the-miller-act/

Subcontract Bonds

What are Subcontract Bonds?

 

Subcontract Bonds are Performance Bonds or Payment Bonds issued for a Subcontract Agreement between a contractor and a lower tier Subcontractor.

Subcontract Bonds are an effective form of risk management on a project. 

 

Who Are the Parties to a Subcontract Bond?

 

The Principal on a Subcontract Bond is the Subcontractor. They are responsible for fulfilling the contract obligation. The Obligee on a Subcontract Bond is the General Contractor or it could also be an Upstream (higher tier) Subcontractor. The Surety is a third party bond company that is guaranteeing the Principal’s obligation.

 

When Are Subcontract Bonds Required?

 

Subcontract Bonds are not a requirement by The Miller Act. Instead, they are used by contractors as a way to prevent Subcontractor Default and to keep the projects free of mechanic’s liens.

 

Subcontractor Failure is one of the biggest risks faced by contractors. Subcontract Bonds can be a cost effective way to help mitigate this risk.

 

Subcontract Bonds may also be required by other parties such as a Contractor’s bond company or lender. It is common for a bond company to require Subcontract Bonds on critical path trades, unique scopes of work or subcontracts over a certain value such as $250,000.

 

What Do Subcontract Bonds Cost?

 

The cost of Subcontract Bonds depends on the type of work being performed, and the qualifications of the Subcontractor (also known as the 3Cs). Generally this coat is between 0.5% – 3% of the Subcontract amount. You can read more about the price of these bonds here.

 

Are Subcontract Bonds Needed if The General Contractor is bonded?

 

Subcontract Bonds are often needed even when the General Contractor provides Performance and Payment Bonds on a project. The General Contractor’s Performance Bond protects the Project Owner by making sure the project is finished according to the contract. 

 

However, it does nothing to protect the General Contractor. The Subcontract Performance Bond protects the General Contractor by making sure a Subcontractor finishes their scope of work according to the underlying contract.

 

A General Contractor’s Payment Bond does protect some parties but not all. Under a typical Payment Bond, 1st and 2nd tier Subcontractors are protected along with 1st tier Material Suppliers. 

 

However, that leaves lower tier Subs and Suppliers without protection. By requiring Subcontract Bonds, Payment protection can be extended to lower tier Subcontractors and suppliers.

 

How to Obtain Subcontract Bonds

 

Subcontract Bonds are underwritten like other forms of Contract Surety Bonds. Subcontract Bonds $1 million and less can usually be written with a simple application and a credit check of the owners.

 

Larger Subcontract Bonds require company financial statements, stockholder financial statements, project information and an application.

 

There are some additional risks that make Subcontract Bonds more challenging than construction Bonds written to General Contractors. These are discussed below.

 

Challenges to writing Subcontract Bonds

 

The biggest challenge to writing Subcontract Bonds is Onerous Terms from the Upstream Contractor. A look at some common ones are below.

 

Flow Down Clauses

 

A Flow Down Clause or Provision makes the Subcontractor bound to the same terms and conditions as the General Contractor. This can be a challenge for a Subcontractor and their Surety Bond company as they have no direct connection to the Project Owner.

 

Damages

 

Surety Bond companies prefer that Subcontracts spell out Liquidated Damages. However, some contracts require a Subcontractor to share in the Liquidated Damages that the General Contractor incurs. This creates extra risk and uncertainty for the Subcontractor and their surety. It is preferable to have a set limit in the subcontract.

 

Payment Terms

 

Payment Terms are a major concern for all Subcontractors and are scrutinized closely by surety bond underwriters before writing Subcontract Bonds. Slow payments create stress on cash flow and can put a contractor into a bond claim.

 

Surety Bond companies frown upon contingent Payment clauses such as “Pay-if-Paid” and “Pay-when-Paid” language. In fact, it is likely that a bond company will not want to write a Subcontract Bond if Pay-if-Paid language is in the underlying contract.

 

Alternatives to Subcontract Bonds

 

There are a number of alternatives to Subcontract Bonds and each carries advantages and disadvantages.

 

Subcontractor Default Insurance 

 

Subcontractor Default Insurance is an insurance policy taken out to protect the General Contractor against Subcontractor Default. Two big advantages to SDI are the speed at which claims can be paid and that the General Contractor can profit from good loss management.

 

The downsides to SDI are that it is not first dollar coverage meaning the General Contractor must share in the loss. Also, it does not usually offer any protection to other parties. More can be read about SDI vs Surety Bonds here.

 

Subcontractor Pre-qualification 

 

Subcontractor Pre-qualification is the process of reviewing a Subcontractor to determine if they have the capability to finish the contract without defaulting. 

 

A typical Pre-qualification process involves reviewing a Subcontractor’s financial history, insurance, and experience. 

 

Pre-qualification is a great tool and required by most SDI policies. The biggest drawbacks are that it provides no financial reimbursement if a Subcontractor defaults and it can be costly to perform.

 

Indemnity on Subcontract Bonds 

 

Like all surety bonds, Subcontract Bonds Require Indemnity. That means if the bond company pays a valid loss, they will seek reimbursement from the Principal Contractor and any other indemnitors.

 

Subcontract Bonds remain an important risk management tool to ensure that Subcontractors complete their projects and pay their bills. These bonds are easy to obtain for most Subcontractors contact Axcess Surety anytime for all your surety questions and needs.

Published first here: https://axcess-surety.com/subcontract-bonds/

Performance Bonds vs Payment Bonds

Performance Bonds vs Payment Bonds

 

Performance Bonds are often confused with Payment Bonds. Learn more about these two types of contract bonds, how they are different and how they are often used together.

 

What is a Performance Bond?

 

A Performance Bond is a type of contract surety bond. A performance bond guarantees that a project will be completed according to the contract. Performance Bonds are important to make sure that buildings are finished and not left incomplete.

 

These bonds are typically used in construction contracts but can guarantee many types of other obligations such as service contracts.

 

What is a Payment Bond?

 

A Payment Bond is also a type of contract surety bond. Unlike a performance bond, a Payment Bond is used to make sure that Subcontractors and Material Suppliers on the project are paid. These bonds are important because they ensure that a project will be free of mechanic’s liens.

 

Both Bonds are Required by Law

 

Federal construction contracts that are $150,000 or more require that the contractor post both Performance Bonds and Payment Bonds. This is required by The Miller Act. 

 

By requiring these bonds, the Federal Government makes sure their buildings are completed (Performance Bond) and that Subcontractors and Material Suppliers are paid (Payment Bond). This is very especially important on Federal projects as you cannot file mechanic’s liens on Federal Buildings.

 

Additionally, most States and municipalities have adopted similar requirements for Performance Bonds and Payment Bonds on their projects. These are often referred to as “Little Miller Acts”.

 

Costs of Performance Bonds vs Payment Bonds

 

Performance Bonds and Payment Bonds are rated the same way. These bonds are priced according to the size of the contracts they guarantee. 

 

Both performance bonds and payment bonds are often priced on a sliding scale where the rates get cheaper as the contract size increases. However, flat rates are common as well.

 

Typical pricing for both performance bonds and payment bonds range from 0.5 % of the contract amount to 4%. The price depends on the type of work, the financial strength of the contractor and the bond company’s filed rates. 

 

You can read all about Performance Bond and Payment Bond Costs here.

Same Price for Both Performance Bonds and Payment Bonds 

 

Many parties do not realize that there is only one cost to have both a Performance Bond and a Payment Bond on a project. It really is twice the protection for one cost. From a cost standpoint, there is no reason to have both bonds on a project.

 

Underwriting 

 

Performance Bonds and Payment Bonds are underwritten using the “3Cs“. These stand for Credit, Character, and Capacity. This takes into account a contractor’s financial strength, equipment, manpower, internal controls and previous history.

 

There are specific underwriting considerations for both Performance risks and Payment risks. As discussed, both performance bonds and payment bonds are required together on must Public work. When both bonds are required, the Surety bond underwriter has to analyze both the performance risk and the payment risk. Some private contracts only require one bond or the other, however.

 

Performance Bond Underwriting Risk

 

Performance specific risks include things like the type of work. For example, an underwriter may be concerned if a contractor is completing a project outside of their experience such as a school contractor trying to build a treatment plant. 

 

Experience could also apply to a contractor taking on a different trade such as a General Contractor performing concrete work for the first time.

 

Location could be another performance risk. Traveling to a new area carries additional risk for contractors and bond companies.

 

Payment Bond Underwriting Risk

 

Payment Bond specific risk could include things such as project financing. Often a contractor will not be able to pay subcontractors and suppliers if they are not paid themselves. Bond underwriters may want to know financing for the project is approved by the lender and set aside.

 

Another large risk is Payment terms. Bond underwriters look at contract terms and particularly scrutinize language such as contingent Payment clauses. These clauses often contain “pay if paid” or “pay when paid” language that presents risk to the contractor and payment bond.

 

Performance Bonds and Payment Bonds Require Indemnity

 

Both of these bonds are a type of contract surety bond and are not insurance. These bonds require the contractor to sign an indemnity agreement. If a surety bond company pays a valid claim on either a performance bond or payment bond, they will seek reimbursement from the contractor and any indemnitors.

 

It’s easy to confuse Performance Bonds and Payment Bonds. In most cases both bonds are required together. Axcess Surety has expertise in all types of bonds and our experts are standing by to help answer questions and make the process easy. Contact us anytime.

 

Published first here: https://axcess-surety.com/performance-bonds-vs-payment-bonds/

Subcontractor Default Insurance VS Performance Bonds

Subcontractor Default Insurance and Performance Bonds both protect against subontractor Default on a project. Learn more about the differences between these two tools and which is right for your project.

 

What is Subcontractor Default Insurance?

 

As the name suggests, Subcontractor Default Insurance or SDI is an insurance policy that protects the policyholder against an economic loss caused by the default of one of its covered subcontractors. Some contractors still refer to SDI as “SubGuard”, which was the original program developed by Zurich.

 

Like most Insurance policies, SDI is a two party agreement between the insurance carrier and the policyholder (General Contractor or Construction Manager).

 

The increase in SDI usage has caused additional Insurance companies to enter the market and offer the product. Each company has unique underwriting guidelines, limits and deductibles. 

 

What is a Performance Bond?

 

A performance bond is a credit product that guarantees that the Principal (contractor) on the bond will complete the bonded contract according to the terms and conditions.

 

Performance Bonds are three party agreement between an Obligee (General Contractor or Owner), Principal (Subcontractor), and a Surety (Bond company). 

 

Claims Against a Subcontractor Default Insurance

 

Claims against an SDI policy are a major advantage. Once a Default occurs, a claim can be submitted and paid quickly to keep a project moving along. This is often referenced as a reason contractors choose SDI instead of performance bonds.

 

Another major benefit to SDI is that these policies can be crafted to cover additional costs such as indirect cost when a claim is made. No such benefit exists under performance bonds.

 

Subcontractor Default Insurance Deductibles

 

Because SDI is an insurance policy, there are deductibles that must be paid by the General Contractor. 

 

Each policy is different but it is common to have a deductible of $500,000 or more. This means that the General Contractor must have a loss that exceeds this amount before getting any benefit. 

 

Most of these policies also have Coinsurance provisions that can affect the reimbursement amount. 

 

These can be significant detractors from SDI as many contractors cannot afford to absorb one or more losses of this size.

Claims on Performance Bonds

 

When a contractor on a performance bond has been declared to be in Default and a claim is made against the performance bond, the bond company must investigate the claim to make sure it is valid.

 

Investigating a Default is time consuming and may hold up a project. This is one of the biggest disadvantages of a performance bond when compared to Subcontractor Default Insurance.

 

However, making sure the claim is valid is an important aspect of a performance bond as the Principal must reimburse the bond company for any paid loss under the indemnity agreement.

 

Some surety bond companies are now providing bond forms that make some cash available so that a project can continue while a claim is being investigated.

 

Performance Bonds are also limited to completing the contract. Indirect costs are not covered and the bond amount is the most a surety is required to pay to remedy the situation.

 

Performance Bond claims also carry another large downside from the perspective of the Obligee. The Surety on the bond gets to decide how to cure the default. 

 

This can include financing the existing Subcontractor, finding a replacement, taking over the project or just paying the Obligee. This lack of flexibility is a big disadvantage compared to SDI.

 

You can read all about Performance Bond Claims here.

 

Performance Bond Deductibles

 

Performance Bonds are not Insurance and are not subject to deductibles or coinsurance. Surety covers first dollar losses meaning the General Contractor or Construction Manager is reimbursed for the full loss subject to the bond limit. 

 

This is vital for contractors who cannot afford to absorb large SDI deductibles.

 

You can read all about Performance Bond claims here.

Cost of Subcontractor Default Insurance

 

SDI generally costs between 0.35 – 1.35% of the project amount. Sometimes carriers may provide an opportunity to return premium for good performances in these programs. However, SDI has other indirect costs such as pre-qualification expenses.

 

Performance Bond Costs

 

Performance Bond Cost is based on a Contractor’s financial strength, the type of work being performed, and a bond company’s rate filings. Generally, a performance bond will cost between 0.5% – 3% of the contract amount. You can read more details about Performance Bond Costs here.

 

Underwriting Subcontractor Default Insurance

 

Contractors purchasing SDI must go through underwriting with the SDI carrier. This typically involves providing Audited Financial statements, loss history, Subcontractor data, risk management plans and an application.

 

A second part of underwriting is the Subcontractor pre-qualification that must take place in order to use SDI with most Insurance companies. The General Contractor purchasing the SDI policy must either have an internal team prequalifying contractors in the program or use a third party vendor.

 

This additional cost and time is usually significant and should be carefully examined for any contractor considering the use of SDI.

 

Underwriting Performance Bonds

 

In order to obtain a performance bond, a contractor must be pre-qualified by a third party surety bond underwriter. Performance Bond underwriting is based on a Contractor’s financial ability to complete the work, their capacity to complete the work and the underwriter’s analysis of the Contractor’s overall character. These together are referred to as the 3Cs.

 

Unlike insurance performance bonds are written under the assumption of no losses. Therefore, a Surety bond underwriter would not provide a performance bond to a contractor unless they believed the contractor was qualified and capable of completing the contract.

 

Who Does Subcontractor Default Insurance Protect?

 

SDI is a product to protect General Contractors or Construction Managers. The policy does not typically protect other parties such as the project owner, Subcontractors, or material suppliers. 

 

It’s important for project owners to understand that if the General Contractor has issues on the project, there is no protection in SDI to ensure completion. There is also no protection ensuring that the GC or CM will pay their bills and that the project will be free of mechanic’s liens.

 

Likewise, Subcontractors and materials suppliers have no guarantee of getting paid by the GC having an SDI policy in place.

 

This is a product disadvantage when compared to performance bonds.

Who Does a Performance Bond Protect?

A performance bond protects the obligee on the bond. That could be the project owner or it could be the General Contractor if a Subcontractor is the Principal on the bond. 

 

However, at no additional cost, a performance bond can be combined with a Payment Bond. The payment bond ensures that subcontractors and material suppliers are paid on the project, giving them valuable protection. This also protects the project owner by ensuring the project will be free of mechanic’s liens.

 

A Dual Obligee Rider may also be added to a performance bond. This rider extends the bond’s benefits to another party such as a lender.

 

Who Can Purchase Subcontractor Default Insurance?

 

SDI is meant to be purchased by large General contractors and construction managers. Usually, a contractor needs to have $50 million or more in revenue to qualify. However, that is still on the small side with most SDI carriers and some require $150 million or more in Subcontractor expenses to qualify. 

 

Additionally, the contractor needs to have a very strong balance sheet to be able to pay the SDI premiums and absorb the large deductibles.

 

Who Can Purchase Performance Bonds?

 

Any contractor that can qualify can purchase a performance bond. Most contractors can qualify for a $1 million performance bond by just having good credit. Other programs such as the SBA Bond Guarantee Program, funds control and collateral help make almost any contractor be able to qualify.

 

History of Subcontractor Default Insurance 

 

SDI is a relatively new product over the last twenty years. This can be a benefit as more Insurance companies develop product offerings. A listing of some companies currently offering SDI is below:

 

Arch

Axa

Cove

Hudson

Liberty Mutual

 

It can also be negative in that case law for SDI is still relatively new. 

History of Performance Bonds

 

Performance Bonds have been around for a very long time. Case law is well established on both a federal and state level. 

 

Unfortunately, surety has also become somewhat of a stale industry. Innovation and new products are lacking.

 

Summary of SDI vs. Performance Bonds 

 

Both Subcontractor Default Insurance and Performance Bonds have advantages and disadvantages. Many of the biggest and best contractors utilize both products. All parties should understand the use of the product before signing a construction contract that involves either one. 

 

Axcess Surety is a leading expert in performance bonds and construction. Contact us anytime for additional information.

 

Published first here: https://axcess-surety.com/subcontractor-default-insurance-vs-performance-bonds/

New York Auto Dealer Bond

Like many states, New York requires Auto Dealers to be licensed and to obtain a New York Auto Dealer Bond. Learn more about what these auto dealer bonds guarantee, what the cost and how to get one.

 

What Does a New York Auto Dealer Bond Guarantee?

 

A New York Auto Dealer Bond is a type of License Bond. The Auto Dealer Bond guarantees that the Dealer will comply with the requirements of Vehicle and Traffic Law section 415(6-b). These requirements include the agreement by the Auto Dealer to:

 

  • pay all valid bank drafts, including checks, drawn by the Principal for the purchase of motor vehicles;
  • transfer good title to each motor vehicle which the Principal sells;
  • maintain and keep safe all customer deposits related to the sale of a motor vehicle from the time of receipt of such customer deposit until good title has been transferred to the customer; 
  • pay all fines imposed upon the Principal by the Commissioner of Motor Vehicles pursuant to the provisions of the Vehicle and Traffic Law; and
  • repay any overcharges of a customer for vehicle registration and titling charges payable to the Commissioner of Motor Vehicles for registering and titling the sold vehicle.

 

Who Are the Parties to a New York Motor Vehicle Dealer Bond?

 

Chart showing the parties to a New York Auto Dealer Bond including the Principal, Surety and Obligee. . This has orange and blue boxes with a New York license plate in the middle. A car lot in the background.

 

The Obligee is The State of New York. This is the party requiring and benefitting from the bond. The Principal is the Auto Dealer. This is the party making the promise The Surety is the third party bond company that is guaranteeing the Auto Dealer’s compliance.

 

What Does a New York Auto Dealer Bond Cost? 

 

Most Auto Dealers can expect to pay 1% of the bonded amount per year. The premium is required to be paid each year the Motor Vehicle Dealer Bond is in place. Auto Dealers with credit challenges may be required to pay more. Preferred Rates are available for Auto Dealers who can provide strong financial statements.

 

Required Amounts of New York Motor Vehicle Dealer Bonds 

 

New York Auto Dealer Bond Requirements- This chart shows the amount of bond that each type of Dealer is required to post. A dealership is in the background.

 

The required surety bond amounts depend on the type and number of vehicles being sold. 

 

Used Vehicle Dealers that sold 50 or fewer vehicles in the previous calendar year need a bond in the amount of $20,000.

 

Used Vehicle Dealers that sold more than 50 vehicles in the previous calendar year need a bond in the amount of $100,000.

 

New Vehicle Dealers need a bond in the amount of $50,000.

 

Cancellation of a New York Auto Dealer Bond

 

The state of New York requires that the Surety give 60 days written notice to the

New York State Commissioner of Motor Vehicles prior to canceling an Auto Vehicle Dealer Bond. The Surety must also provide notice to the Commissioner when the bond is canceled or lapses. The notices must be sent via First Class Mail.

 

Obtaining a New York Auto Dealer Bond 

 

Obtaining a New York Auto Vehicle Dealer Bond is simple. Most Auto Dealers can obtain them here with a simple credit check. The bonds can then be issued and printed in minutes.

 

Green button for the instant purchase of new york auto dealer bonds for used vehicles, 51 vehicles or more.

 

Green button for the instant purchase of new york auto dealer bonds for used vehicles, 50 vehicles or less..

 

Green button for the instant purchase of new york auto dealer bonds for new vehicle dealers.

 

Bad Credit New York Auto Dealer Bonds

 

Auto Dealers with credit challenges can still obtain these bonds. Additional Information may be required but these bonds can still be obtained quickly in most cases.

 

Claims Against a New York Auto Dealer Bond

 

Should an Auto Dealer not comply with the laws and regulations set forth on the code, a claim may be made against the bond.

 

Recovery against this Bond may be made by a person, including the State, who obtains a judgment against the Principal for an act or omission on which the Bond is conditioned, if the act or omission occurred during the term of the Bond.

 

Examples of potential bond claims include:

 

  • Amounts drawn by the Auto Dealer for the purchase of motor vehicles.

 

  • Overcharges by the Auto Dealer for registration or title fees.

 

  • The amount paid to the Auto Dealer for a deposit, for a motor vehicle in which a good title was not delivered. 

 

Indemnity Required on New York Auto Dealer Bonds

 

If a claim is made against the Dealer Bond, the Surety will investigate the claim. If the claim is valid, the Surety must pay the claim. The Surety will then seek reimbursement from the Principal Auto Dealer and any other indemnitors. In this way, surety bonds differ from insurance.  Auto Dealers should understand this before purchasing a bond. More can be read about Indemnity here.

 

Penal Sum Limits Bond Liability 

 

Claims against a New York Auto Dealer Bond are limited to the bond’s Penal Sum and do not stack liability. This means once the bond limit is reached, the Surety is not liable for any additional amounts regardless of the number of claims or the amount of claims.

 

Other Surety Bonds May be Required

 

Auto Dealers operating in New York may be required to provide additional bonds to the state. A common example is Notary Bonds. Many of the bonds can also be purchased instantly by visiting our New York Surety Bond Page.

New York Auto Dealer Bonds are required by law in order to maintain a dealer license. They are easy to get and affordable for most Auto Dealers. Contact Axcess Surety anytime to obtain these and other bonds. You can also visit our Surety Bond FAQ Page for many common questions about surety.

 

Published first here: https://axcess-surety.com/new-york-auto-dealer-bond/

Contract Bonds and Public Private Partnerships

Getting contract bonds on Public Private Partnerships may be a challenge. Find out more about these projects and how to obtain contract bonds for them.

 

What is a Public Private Partnership?

 

A Public Private Partnership (also called PPP or P3) is a contractual agreement between one or more government entities and one or more private stakeholders to provide a public project and/or service.

 

From a construction perspective, a P3 often involves a long term contract, where a Private construction company builds a Public project using Private dollars. The Contractor pays for the project and collects a profit through the fees generated from the operations of the completed project.

 

P3s have been around for decades and are used by many countries around the world. In the United States, however, P3s are relatively new to most states and municipalities.

 

Many Types of P3s

 

There are many different types of P3 projects. They generally fall into two categories:

 

Greenfield Projects 

These are new construction projects. Some examples may include a new toll road, or the construction of a power plant.

 

Brownfield Projects 

 

These are existing structures that are being converted. Some examples may include the renovation of a treatment plant or treatment plant.

 

Contract Bond Challenges for Public Private Partnerships

 

P3s create challenges for contractors and surety bond companies. These include the following:

 

Long Term in Nature

 

One of the biggest challenges for contractors wanting to provide performance bonds and payment bonds on P3s projects is that they tend to be long term contracts. In many cases these contracts can last 20 years or more. 

 

Surety bond companies typically shy away from long term commitments as conditions change over time, even for the best contractors. 

 

Obtaining contract bonds on P3s will likely require that the maintenance guarantee is limited to a period of 5 years or less.

 

Financing

 

Financing P3 can be extremely complicated. There are endless ways and combinations that Public and private money may combine. Consider an example:

 

A toll road is being built. The contractor is responsible for construction costs and paid through future toll revenue on the road. This contractor will have to obtain financing for construction costs or fund the costs through their own cash and operations. 

 

This presents an extremely risking proposition for the contractor and their surety bond company. Unlike most construction projects, the contractor must finish the entire project before collecting revenue. 

 

Secondly, the toll revenues may not meet Projections. Drivers may find alternative routes, carpool, or find other ways to avoid the tolls. In fact, revenue Projections on P3S are routinely over optimistic.

 

Non Payment Risk to Subcontractors

 

Subcontractors need to be very aware of the financing risks associated with P3s. Subcontractors may be unaware that they are sharing in the General Contractor’s risk. Because the General may not be getting Progress payments, they run a very high risk of not being able to pay subcontractors and suppliers.

 

Subcontractors and Material Suppliers on P3 projects should make sure the General Contractor has a Payment Bond on the project. They should also not let the General get behind on payments. An even better practice would be to have the General Contractor and lender set aside and escrow project monies.

 

Strategies for Getting P3 Contract Surety Bonds

 

There are a number of ways to improve a contractor’s chances of getting their bond company to support contract bonds on a Public Private Partnership.

 

Separate the Construction Obligation

 

As mentioned earlier, surety bond companies do not like long term commitments. Contractors should work to separate the construction phase of the project from the operations phase. The performance bond, payment bond, and Maintenance Bond can cover the construction contract and then the operational contract takes over once construction is complete.

 

Be Prepared

 

This sounds simple but contract bond underwriters view these projects as very risky. Make sure you know the risks and pitfalls and have a plan to overcome them. This should include in-depth knowledge of how the P3 works, a commitment for financing, Projections and stress testing for project revenues, and a plan for if things do not go as expected.

 

Maintain a Strong Balance Sheet

 

Because P3 projects are risky, contract bond companies will want contractors to have more than enough cash, working capital and net worth than required for most contract bonds. They will likely not support these bonds for contractors that are “stretch cases” or overextended.

 

Work With the Right Surety

 

Many smaller surety companies are unfamiliar and uncomfortable with P3 projects at this point. Contractors looking at P3 projects likely need to be working with a top 5 surety company who has familiarity and expertise to support P3 projects.

 

P3 can be extremely risky and many fail. However, the U.S. is likely to see the number of P3s increase in the coming years and contractors and their bond companies need to be prepared to consider these projects. Axcess Surety is an expert in providing all types of bonds. Contact us anytime or visit our Surety Bond FAQ page.

 

Published first here: https://axcess-surety.com/contract-bonds-and-public-private-partnerships/

Contract Surety Bonds and Private Equity

Private Equity continues to make significant investments in the construction industry both in the U.S. and globally. These investments can be great for the industry, but they also create challenges for companies needing Contract Surety Bonds such as Performance Bonds, Payment Bonds and Bid Bonds. Learn more about what contract bond underwriters look for in these transactions and how to make obtaining these bonds easier.

 

What is Private Equity?

 

Private Equity is an investment in a company or companies in exchange for ownership in the company. These investments are often made by an investment group or fund on behalf of a group of owners. You can read more about private equity here.

 

Company Management

 

Contract bond underwriters will be very interested in how the company is managed after the transaction takes place. Will the former owners and management team stay around to run the company or will the PE firm install new managers? Bond underwriters typically favor keeping key people on board for a period of time.

 

If new management is put in place, do they have experience running this type of company? Construction is a challenging industry, even for the best managers. Bond underwriters will be hesitant to support company management without deep industry experience. 

 

Even if the top management changes, keeping experienced estimators, project managers, superintendents, and accounting staff is key to a successful transition and support from a bond company.

 

Indemnity Package

 

One of the biggest challenges for getting Contract Surety Bonds after a private equity investment is the indemnity Package. Surety Bonds are written on The Principle of Indemnity and are a credit product. This means, the company and or owners need the financial ability to reimburse the contract bond company if there is a loss.

 

The problem for contractors purchased by private equity is that the new structure often makes this difficult. In many cases, the construction company is rolled up under the parent firm. The parent firm will often refuse to indemnity, creating a challenge for the bond company.

 

Another possibility is that the PE parent company pulls out all the cash, creating a construction company with negative net worth. Again, without indemnity of the parent, this creates a challenging situation for the contract bond company.

 

Finally, the new management may have no ownership in the construction company. Therefore, they will usually not provide their personal indemnity. This creates a situation where the bond company struggles to get any meaningful indemnity Package.

 

Contract Bond Solutions for Private Equity

 

Collateral

 

One option for contractors with private equity ownership to obtain bonding is to post collateral. Because the PE firms and owners may be unwilling to indemnity, collateral gives the contract bond company some security. The amount of collateral necessary depends on the bond company but 20% of the requested Surety program is standard.

 

Parental Company Indemnity

 

Getting indemnity of the parental PE firm can be a challenge and take time. However, once they understand the reasoning, it is often doable. First of all, this is the cheapest option. Getting parental company indemnity allows the contractor to get better bond rates and terms. Additionally, the company avoids the extra costs associated with collateral.

 

Focus on Cash Flow

 

Although many bond companies focus on working capital and net worth, some put an emphasis on Cash Flow. In cases where the company has solid cash flow and profitability, this can be a great option for obtaining bonding.

 

Other Underwriting Considerations

 

Prospectus of Private Equity Firm

 

Contract bond underwriters may be very interested in the prospectus and history of the PE firm. Firms that intend to hold and operate companies for long periods of time will find it easier to secure Surety bond credit. Alternatively, a PE firm with a history of flipping companies quickly may find it more difficult to get Surety.

 

Distributions

 

Contract Bond Companies will want to understand the distributions required by the PE firm. It is not uncommon for all profit to be distributed back to the PE group. However, distributing all profits will lead back to discussions on indemnity.

 

Private Equity transactions can create challenges for contractors needing Construction Surety Bonds. However, Axcess Surety had the expertise and bond markets to place such risks. Contact our experts anytime. You can also visit our FAQ Page for more information on Surety Bonds.

 

Published first here: https://axcess-surety.com/contract-surety-bonds-and-private-equity/

Underbillings, Overbillings and Contract Bonds

Underbillings and Overbillings are important to all contractors and contract Surety Bond underwriters. Learn more about what they are and what underwriters look for in determining a contractor’s bond capacity.

 

Percentage of Completion Accounting

 

Most contractors should be using the Percentage of Completion (POC) method of accounting. This is the most accurate method of construction accounting and creates both Underbillings and Overbillings. You can read more about the Different types of financial statements here.

 

What is an Underbilling?

 

Underbillings are an industry name for Costs In Excess of Billings on Uncompleted Contracts. Simply put, they are revenue that a contractor has theoretically earned but not yet billed. For example, if a project is 50% complete but a contractor has only billed for 40%, the project is 10% underbilled.

 

Underbillings show up on a contractor’s Work in Progress Report. This report should tie back to a Contractor’s balance sheet where Underbillings appear as a current asset. Underbillings are a Current Asset because in theory, they should be revenue that the contractor can bill for and collect in the future.

 

Many contract surety bond companies base a contractor’s bond capacity as a multiple of working capital. Working Capital is calculated by taking Current Assets and subtracting Current Liabilities.

 

In theory, because it’s a Current Asset, more underbillings should increase working capital and therefore bond capacity. However, this is almost never the case.

 

Underbillings and Bond Companies 

 

Contract Surety Bond companies are skeptical of underbillings because they often turn into losses. From a practical standpoint, underbillings often appear when there is a project dispute, a poor estimate, or bad billing practices.

 

Disputes

 

Underbillings often happen when there is a dispute. The contractor submits a change order for work that has been done but cannot bill for it. This creates an underbilling. Contractors should ALWAYS have a signed change order in hand before doing work outside the contract.

 

For this reason, contract bond underwriters will closely monitor underbillings on a particular project. If the Underbilling remains for more than a billing cycle or two, most bond underwriters will assume it’s a loss and remove it from their analysis.

 

Poor Estimate 

 

Underbillings can also occur when a project was estimated improperly. For example a contractor may realize they have significantly more coats but unable to bill for those costs under the contract.

 

Bad Billing Practices

 

Underbillings also show up when a contractor has bad billing practices. If a contractor has earned revenue that is not in dispute, the contractor should be billing for it. 

 

Constant underbillings are a sign that a contractor has poor accounting systems in place and are a major red flag. Contractors often create Bonds claims and go bankrupt when they have bad systems in place.

 

When are Underbillings Acceptable?

 

There are situations when Underbillings are justified. One example is when a contractor is not allowed to bill for material or equipment until it is installed. 

 

Certain trades also tend to have more underbillings. However, these underbillings should generally be small and Billed quickly.

 

What are Overbillings?

 

Overbillings are an industry term for Billings in Excess of Costs on Uncompleted Contracts. Simply put, these are revenues that a contractor has Billed for, but that they have not yet earned. For example, if a contract is 50% complete and the contractor has billed for 60%, the project is 10% overbilled.

 

Overbillings also show up on a contractor’s Work In Progress Report and should tie back to the Contractor’s balance sheet as a Current Liability. Overbillings are a Current Liability because the contractor has billed for work they have not done. This will lead to a future cost that they cannot bill for.

 

Overbillings and Bond Companies

 

Most contract surety bond companies view some Overbilling as a positive. It is a best practice to stay slightly ahead of Billings on a project. In fact, an accepted industry practice is to “front load” a contract to cover mobilization, insurance and performance bond costs, etc. 

 

Overbillings can be a problem for contractors though. Bond underwriters will want to make sure that a contractor has enough cash and account receivables to offset Overbillings. This is because the contractor will have a cash outflow later in the project. Not having enough cash and receivables to offset Overbillings is a sign of cash flow troubles to come.

 

Job Borrow

 

While being slightly overbilled on a project is acceptable, job borrow is not. Job borrow occurs when a contractor uses Billings from one project to cash flow another project. 

 

Pure Job Borrow occurs when a project is overbilled by more than the project’s remaining Gross profit. Job Borrow is often a sign of cash flow issues to contract bond underwriters and other lenders.

 

Every contractor should Understand Underbillings and Overbillings. Accurate accounting and billing guidelines practices is vital to the success of any construction company. These practices are also essential to contractors needing contract bonds such as bid bonds, performance bonds and payment bonds

 

Contact Axcess Surety anytime for best practices and help with all bond needs.

 

Published first here: https://axcess-surety.com/underbillings-overbillings-and-contract-bonds/