By Lori Kieswetter
Special to Ontario Construction Report
I have been a surety broker for nearly 30 years and because I created a program for contractors needing bonds on smaller contracts a number of years ago, I talk to newbies every day from across the country.
It was important for me in developing our program that I address the needs of the groups I view as underserved due to the burden of our current industry standard underwriting parameters. These groups are the smaller contractors, the larger contractors doing small contracts and the contractors needing only a few bonds a year. Since many of these contractors are new to bonding, I view training clients as the most vital part of my job. These are some of the common misunderstandings and hurdles I find new bonding clients face:
- Contractors often assume they can simply go out and buy bonding insurance as they would auto or home insurance, simply shopping around for a best rate. Bonding insurance is considerably different and more complex however. In the traditional market, you are required to provide year-end financial statements issued on a review basis, aged accounts receivable and payable listings, and interim in-house statements, among other things. The program I have developed simplifies this considerably, only requiring clients to provide a single-page application and personal financial statements (the rest of the file is put together from our end). Not only does our system simplify the process, it also ensures issues are identified and gives contractors a better assessment of their ability to qualify.
- Another difference between bonds and insurance is the requirement for the contractor to repay the bonding company should claims be paid on any of that contractor’s bonds. Bonded contractors are required to sign an indemnity agreement – which is both personal and corporate – to represent this obligation. In the simplest of terms, the contractor is literally risking his house and car. The bond underwriter views this situation as a way to demand the contractor be willing to stand behind his own work, just as he is asking the bonding company to do.
- Devastating ramifications can result when an estimator fails to fully peruse the specs and instead opts to guess at the answers on a bond request form. As underwriters and brokers, we are depending on them to read it fully, understand all aspects of the contract and pass on the information for us to decide whether we will bond a given job or not. There is no quicker way to diminish the bonding relationship than by being careless about the information provided.
- A common cause of confusion we often see is the requirement for a 10 per cent bid bond. Contractors often interpret this to be a requirement for the bond to read an exact amount. Decades ago, bid bonds were done in an exact amount – usually a percentage of the tender price. This proved impossible to administer as bonds have to be signed as sealed originals and final prices are often not known until the last seconds before closing. When a spec says they want a 10 per cent bid bond, it means they want a bond with an amount shown as “ten per cent of the attached tender.” My advice is to order bonds early in the process with a ballpark estimate and finalize amounts later, once a final price is determined.
- Multi-year projects can also be confusing to all parties. Recently, municipalities tendering regular projects discovered that by doing a multi-year contract, they are able to avoid spending time and money tendering jobs every year. Because a bond guarantees a contract, when the contract is five years in length – or even one year plus four optional years – the bond is guaranteeing the entire term. The bonding industry found these procedures challenging because they are being asked to analyze a contractor’s financials today and predict five years ahead that contractor’s financial strength. The Surety Association of Canada resolved this by way of a special bond form which allows the bonding company to bond a multi-year contract on an annual basis.
- Employee error is another significant challenge to bonding. One of my favorite contractors had a bid bond for a job which subsequently went far beyond his limit and permission to proceed; the use of that bond was repealed by his bonding company. His employee decided independently that he would put in a courtesy bid and simply make the price so high so as to assure they would not be the lowest bidder. They were low, very low. The contractor went bankrupt. The employee is happily working for another company now. Business owners should ensure they have procedures in place for their own protection and remember that bonds are a personal liability.
- Should you use an Agreement to Bond (Surety’s Consent) or a Prequalification Letter? The document being requested is often not clear, even to the party asking. A Surety’s Consent is another name for an Agreement to Bond and is a tender document provided by a bonding company under sign and seal. However, it is not technically a bond. It is in effect a letter from the bonding company confirming they will supply the required performance and/or labor and material payment bond should their client be a successful bidder and enter into a contract. This is a uniquely Canadian concept and has never been tested in court. Although there is no standardized CCA wording (since it is not an actual bond), there are many versions of this document out there. The vast majority of municipalities have developed their own forms but many of those are less beneficial to the municipalities in question than even the industry standard wording. Failure to use the form provided can result in disqualification. To add to the confusion, there also exists a prequalification letter, which is a letter confirming that the contractor has a bond facility in place. Since there are no specs available to underwrite however, no commitment of any kind can be made.
- Contractors should view their broker and accountant as members of their team. Both are trying to help, although by achieving very different goals. The accountant tries to save taxes by making the statement look one way but by doing this he can make it impossible for the contractor to retain an existing bond facility or obtain a new one. There is a middle line the contractor must determine with the help of these two valuable members of his team. The loss of a bonding facility is likely much more costly than the taxes to pay. If the broker is a surety specialist, he or she will be accustomed to having these conversations with the client and his accountant.
Finally, I would caution that while most bond rates for newbies are similar enough that they shouldn’t be the determining factor, there are some astronomical bond administration fees that can be avoided with more careful shopping.
Lori Kieswetter is vice-president, client executive with BFL Canada Risk and Insurance Services Inc. You can reach her at lkieswetter@bflcanada.ca.