In the eyes of an owner of a construction project a payment and performance bond is like that warm and fuzzy security blanket that takes all their troubles away. Bonding is one of those construction issues that I never fully understood. And I guess I still don't, but my knowledge probably quadrupled when I actually tried to obtain one for myself.
We've all heard of the requirement for contractors to be bonded and insured and this is especially the case when public entities are using a low bid method of selecting contractors. But really, what are they?
Surety bonds provide financial security and construction assurance by assuring owners that contractors will perform the work and pay subcontractors, laborers, and material suppliers. It's basically a risk transfer mechanism where the surety company assures the project owner that the contractor will perform a contract in accordance with the contract documents. If the contractor defaults or goes bankrupt, the bonding company comes in and finishes the job on their dime.
Bonds are actually a lot older than I thought. I read an article about the first known bond to have been etched in a clay tablet from the Mesopotamian region around 2750 BC. According to the contract, a farmer drafted into the service of the king who was unable to tend his fields. The farmer contracted with another farmer to tend them under the condition they split the proceeds equally. A local merchant served as the surety and guaranteed the second farmer’s compliance - a brave man.
However, even in 2750 BC Mesopotamia, payment and performance bonds were tougher to find than an exploding money clip, and without a code name like 007, it's still tough to get one. I was in hot pursuit (sans Alpha Romeo) of a payment and performance bond this week while putting together a bid for a public repair project. After days of discussions and filling out forms of financials, I was told about two hours before bid time that I would have to put 30% of the contract value up as collateral in order to get a bond. Thanks for the notice.
Just like a municipality doesn't want to take a risk on an unproven contractor, a surety is similarly cautious. This kind of leads me to wonder what good they are anyway; they won't bond you unless the risk of you defaulting is next to zero to begin with. The owner could just as easily write joint checks or contract directly with the sub (who are also bonded by the way) and hire the general contractor as a consulting construction manager.
In private projects however, this is how most work is done. In an effort to avoid doubling up on security (and wasting money), the subs are bonded and the general contract either goes unbonded or acts as a consulting manager. This is the more practical and cost effective way to do it, but when tax payer dollars are on the line, I suppose logic, practicality, and certainly cost effectiveness are all thrown into a BMW Z8 and shredded by a helicopter.
So without a bond my bid was forced to spontaneously self destruct (no, that's Mission Impossible) and I'm back to the drawing, err bidding board, and another trip to the Casino Royale of public works request for proposals.
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There are GC/CM's who have been known to pass down their risk by bonding subs. That has been the hallmark of the "nations largest builder". It it not done to avoid double dipping, the GC is still bonded. However, by pursuing a course whereby you bond the subs a GC can likely leverage his bonding capacity.
ReplyDeleteIn this market, my advice to any owner is to bond your GC. I was in a meeting with an upcoming developer and advised that in light of the 30% DISCOUNT he was buying his project for, the <1% on the bond is a smart move.
Here's why, any GC, even a GC who has a strong financial underpinning can get taken down by sub(s) who bid too low and can't perform. In the best case scenario the GC is left to cover the original bid spread, worst case you're covering the bid spread and their unpaid benefits, materials, second tier subs and suppliers, liens, legal cost....
The GC's are in no postion to get bonds on the subs right now, not unless their sub is dirt low and the GC is the only one with their number (which is dangerous in good times) Carying an additional 2% on half the sheet will not win a job in this market.
So if I'm an owner, smart money is on geting the bond right now.
I too know what you're dealing with on that one. I was laid off after being the director of construction for a large development firm. Having done multiple types of buildings over the years, I thought I'd take a look at bidding a very simple wood frame storage building for a county forest preserve. Total contract around $300,000.
ReplyDeleteTalked to a number of people, my insurance company and another bonding company I found online. I was told they'd process the application and get back to me. My personal savings and other collateral seemed to be pretty decent they thought.
10 days to bid....2 days before they tell me that they can't do the bond. Maybe try someone who does SBA bonding (that's even more of a joke). So I continued to compile my estimate and sub-bids as if I were bidding.
Went to the opening and sure enough, bids were 292, 301, 293 and I had figured 290. So I'm not a lowball schmuck who is going to be financially irresponsible. In point of fact, my degree was in accounting and I'm relatively good financially considering I've been laid off for awhile. But no, I can't win and or complete a project that I could do in my sleep.
I agree. The SBA bonding program is even more of a joke. I don't get what the point even is. There's very little private sector work and whats out there is mainly public/muni/etc. Construction professionals like ourselves can't even have an opportunity to bid on these projects and potentially put others back to work.
It's a shame.
Is the above poster saying there is NO alternative to getting a bond? What about an alternative payment control escrow/disbursement type service?