Building a Productive Surety Relationship

Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.

Having represented contractors and developers of all types and sizes for many years, I have plenty of examples of what works best for clients to maintain a level of surety support that helps them meet their growth goals and objectives: updated financials and proper communication.

Updated Financial Paperwork

No one likes to deal with unnecessary paperwork; however, as companies grow and they streamline certain reporting information (i.e., financial statements and work-in-progress reports), their surety relationship can grow with them. It is not all about the paperwork, however; that is only one way to measure what your business can expect in the way of surety support.

Regular file updates to annual and perhaps interim business financials (depending on the frequency of your bonding needs, including possible internal or CPA supported reports), personal financials, cash verifications, and status of your backlog is the basic paperwork that is needed to maintain a current file for an active surety relationship.

An important thing to note is that posting even the smallest of net profits at the end of the year, and making sure that your balance sheet tracks the equity from year to year, helps the surety feel confident in your ability to manage this aspect of your business.

Communication

Beyond the paperwork that is needed, communication is an integral part of the surety relationship, as with any healthy relationship.

Depending on the frequency of your bonding needs, regular communication might be limited to only a few questions each time a bond is needed. These questions are often regarding the scope of the work if you are looking at jobs that are outside of your historically performed projects or territory. The questions may include:

• Is this a typical job for you or outside your normal scope?

• Have you worked for the owner or general contractor before?

• What do you like about the job and/or what do you see as the challenges on the job?

So much of the relationship tends to be communicated on paper. Unfortunately, face to face meetings just don’t happen the way they used to. So, to the extent a client can let us know of things that impact their business, good or bad, in between financial reports or with updated financial reports, it is all for the better.

Examples of things to communicate might include:

• New work opportunities in which you do not need our services or a new client that is bringing you more work

• Increasing work opportunities and job sizes

• Moving into any new areas of work (scope or geographically)

• Hiring new staff for the office and/or field management

• Investing in new or upgraded accounting systems

• Considering a new bank relationship

• A problem job. (Let us know before we see a problem reflected in the financials and have to ask the question. Again, whether it’s bonded or not.)

This is just a quick overview of how to build a productive surety relationship. Rancho Mesa strives to support our clients and their bonding needs on a regular basis. Every relationship is a little different, but the basics of good communication and information sharing are always key to the mutual success of these relationships.

For questions about your surety program, contact me at (619) 486-6570 or awright@ranchomesa.com.

Stand Out Among the Crowd with a Surety Prequalification Letter

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

In advance of a project bid, some owners and general contractors will want to pre-qualify the subcontractors to ensure they can handle a project of a certain size. A simple and efficient way to accomplish this would be to have the surety agent that supports the contractor’s bonding program prepare a surety prequalification letter. 

As opposed to a bid bond, which carries a 10% penalty if the contract is awarded and the subcontractor does not provide the final bond, a surety prequalification letter (also known as a bondability letter) is less formal and does not carry any guarantee. 

The letter will typically include some or all of the following items:

• The name and A.M. Best rating of the bond company that issues bonds for the account. It will also confirm that the bond company is included in the U.S. Treasury List of Certified Companies and licensed in the state where the project will take place. The letter may include a reference to how long the contractor has been supported by this particular bond company.

• Single and aggregate bonding limits for the contractor to determine if they have ample surety credit to qualify for the particular project. The letter may also include information regarding the amount of surety credit currently available within the program limits. It is important that the surety agent and contractor discuss the project size in advance to ensure the letter conveys that the contractor has sufficient available capacity for the particular project.

• A paragraph where the surety agent recommends their particular contractor client for this project noting that they have not had any problems with past bonded projects schedules, budget, and workmanship.

• The letter may sometimes include the premium rates for the client contractor if that information has been requested by the owner/general contractor that requested the letter.

The final paragraph of the letter will have wording that notes “this is issued as a bonding reference letter” and should not be considered as a bid or performance bond. Additional underwriting of the contractor may be needed if the owner desires a more formal document such as a bid bond.

If you would like more information, or to discuss the client-broker-carrier relationship, please contact me at (619) 937-0165 or mgaynor@ranchomesa.edu.

Transitioning from a Credit-Based to a Standard Surety Program

Author, Andy Roberts, Account Executive, Rancho Mesa Insurance Services, Inc.

When sureties began offering credit-based programs, there were only a few surety companies who would offer this type of program and the limits were low, most often around $250,000 for a single project and aggregate. However, over the past few years, there has been an increase in the number of surety companies that are willing to offer these types of programs. The limits offered have also increased with some companies writing $1,000,000 for a single project and aggregate bond based solely on an owner's personal credit score. These programs are great for contractors that are getting started with bonded work, or don’t bond frequently and are not looking to provide the information necessary to set up a standard program. However, for contractors looking to grow and need additional surety capacity in order to achieve that goal, they should be aware of the steps that will need to be taken in order to transition from the credit-based program to a standard bond program. The first, and most important step will be the company financials.

Standard bond programs are written primarily based on the financial strength of the company. Sureties will be looking to obtain the last two fiscal year-end financial statements, balance sheet and income statement, and the most recent interim balance sheet and income statement that are available. They will evaluate the current cash position, working capital, and equity in the company to determine a single and aggregate bond limit.

In addition to the company financials, the surety will want to evaluate the personal financial statements for all the owners. Personal financial statements are an important item that surety companies will evaluate. Similar to the corporate financials, assets and liabilities will be evaluated along with the personal credit of the owners. Surety companies want to ensure that the company owners are current with their personal obligations before providing surety credit to their company. 

Another important item that a surety underwriter will want to review before providing a standard surety program, is a current work in progress schedule. Being able to provide a current and accurate work in progress (WIP) schedule will be a requirement from a surety underwriter. The WIP monitors project progress and performance over time, and plays a critical role in determining the maximum amount of bonded work that a contractor can take on at one time.     

While these are just a few things that surety underwriters will be wanting to evaluate in order to set up a standard bond program. There are other items that contractors can consider, like hiring a CPA for their year-end financial statements and getting a bank line of credit. 

For contractors that are looking to graduate from a credit-based program, increase their current surety capacity, and want to explore further strategies that can strengthen their bonding program, contact me at (619) 937-0165 or via email at aroberts@ranchomesa.com.

Subcontractors: The Prime Contract and Its Impact On Your Rights and Responsibilities

Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.

Reviewing contracts is not everyone’s favorite thing to do. But, I would like to share some quick thoughts on why asking for and reviewing the prime contract (before you sign your subcontract, ideally) can be important for subcontractors. This can help strengthen your position if certain conflicts arise.

I have had the pleasure of knowing Pam Scholefield of Scholefield Construction Law, here in San Diego, for many years. Pam and I are both active and involved in NECA, as well as the Women’s Construction Coalition. Pam has an impressive background not just in her law practice and involvement in the industry, but in her education and prior job experience. Pam was an engineer for General Dynamics when female engineers were quite rare. She gained a valuable skillset that led her into the legal realm, and her passion for construction law and subcontractors, particularly.

I recently attended a class that Pam presented for one of these associations. The topic was contract terms. Diving into the weeds a bit, there were some key points that I’ve found to be relevant for all subcontractors. Each subcontractor can, of course, assess their own risk. I just want to address a few things that might make a difference and help you avoid certain disputes.

A few things to consider:

1. Does the prime contract always prevail if there are differing provisions in the subcontract?

2. It may prove in your best interest to incorporate your proposal into the subcontract.

3. Are things like warranty, payment terms, and liquidated damages negotiable in the subcontract?

4. When should you request a copy of the prime contract, at bid time or before you sign the subcontract?

Do not sign the subcontract until you are clear about your key issues. Those issues may be different for different jobs, but knowing about key provisions and terms up front may well prevent you from some nasty attempts at negotiations later in the job. Better contracts can translate into more profitable, and certainly more successful, projects.

Surety Bonding: Understanding the Client-Broker-Carrier Relationship

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

People from outside the surety bond industry will sometimes ask if we work for 1) the carrier (bond company) or 2) the contractor client. This is an easy one. While we are approved to issue bonds by the 20+ carriers we are appointed with, make no mistake that we work 100% for our clients. 

The thought for this article came about when a potential new client mentioned to me that he felt his broker was not working very hard on his behalf to increase his aggregate bond program. During a phone call where the client was providing the broker with a narrative of information to pass along to the bond company, the broker mentioned that he didn’t want to, “push too hard” because he had a number of accounts with the bond company and did not want to negatively affect that relationship.

Whether a broker has 1 or 10 accounts placed with a particular carrier, you should ethically treat each account individually, working as hard as possible to create the best program for your client. Our industry promotes very high standards regarding the servicing of our accounts, and the State of California requires agents to complete three hours of ethics training every two years. I am certain this is covered during the training.

Looking at this from the carrier viewpoint, if the bond company supported an account mainly because a broker placed numerous accounts with that company (yet the underwriting of the account did not meet the bond company requirements) that would open the door for them to accept undue risk of future losses. At some point, one of these accommodation-type accounts will fail and cause a loss that the bond carrier could have avoided. 

If you would like to discuss the client-broker-carrier relationship, please contact me at (619) 937-0165 or mgaynor@ranchomesa.com.

Navigating Contractor Challenges in 2024: Insights from the Surety Association of San Diego

Author, Andy Roberts, Surety Account Executive, Rancho Mesa Insurance Services, Inc.

In a recent special StudioOne™ Podcast episode, I’m joined by my three fellow board members of the Surety Association of San Diego as we explore some of the biggest challenges facing contractors in 2024 and beyond.

Challenges Ahead

As we look ahead, contractors are bracing for significant hurdles, including:

• Inflation and Material Costs

• Supply Chain Disruptions

• Labor Shortages

• Bonding Capacity Constraints

All of these issues can have a direct effect on a contractor’s bonding capacity, making it important that they get the most out of their surety relationship.

Maximizing Your Bond Program

To navigate these challenges effectively, contractors can take proactive steps to maximize their bond program:

• Work with Experienced Surety Agents

• Financial Preparation and Accounting Processes

• Transparency about Financials and Backlog

• Regular Meetings with Underwriters

By taking a proactive approach to identifying and addressing current and potential future challenges, contractors can maximize their bond program and position themselves for success in 2024 and beyond. By working closely with experienced surety agents, optimizing financial management practices, and fostering open communication with underwriters, contractors can navigate the complexities of the construction industry with confidence.

Getting to Know Our Trade Associations – Meet Andy Berg, Executive Director of NECA San Diego

Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.

As we have shared with our clients and viewers in the past, Rancho Mesa finds a tremendous amount of value in memberships of various trade associations. Becoming involved in these associations by attending events, and participating in committees, ultimately at board level, has allowed for a deeper understanding of the construction industry that we bond. I have found value in following legislation changes that affects the industry, as well as learning about the issues and processes available for contractors to run safer jobs, be more competitive in the industry, and manage contracts and financial reporting. It has made me better at what I do as a surety agent.

Over the years, I’ve had the pleasure of developing a great relationship with Andy Berg, Executive Director of the National Electrical Contractors Association (NECA) San Diego. This past year, Rancho Mesa was honored to be the recipient of NECA’s Affiliate of the Year Award.

NECA represents the union electrical construction industry, locally and nationally, and is a strong voice for its members on matters on advocacy, education, training, and a vibrant labor force. Andy joined the staff of NECA San Diego in 2002 as the Director of Local Government Relations & Economic Development, and earned his position of Executive Director in 2007.

I had the pleasure of getting to know Andy many years ago when I was involved on the San Diego American Subcontractors Association (ASA) board. NECA was a member of ASA, and Andy joined us on the government relations committee, meeting with local public agency policy makers. I learned most of what I know about communicating with public agencies from Andy, both construction and surety related. He has been a wonderful mentor to me over the years. Collaboration with other groups in the industry is important for the greater whole, and NECA has proven that they are all about advancing their industry, in this regard.

When I speak about the value of association memberships in guiding and forming our careers in the greater construction industry, this relationship with Andy will always be at the top of my list regarding the benefits of forging meaningful connections.

Listen below for the full podcast interview with Andy where he discusses his successful history and issues facing contractors today.

Performance Bonds for Private Equity Contractors

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

We have entertained several recent submissions from our construction division prospects looking for bonding support of their companies that are majority owned by a private equity firm. The traditional surety market will push back on private equity submissions pointing out the goodwill and large amount of debt listed on the balance sheet. Throw in the limited indemnity package offered in support of the bond program and we have created a perfect storm for the account to be declined without any actual underwriting taking place. But there is hope!

Let’s first take a step back. For our standard construction bond program, we preach the retention of capital and net profit as the best way to increase your bonding facility. The bond company will also look to company and personal indemnity to ensure they are protected in the event of a bond claim. This is in deep contrast to the private equity arena where the payment of monthly interest on debt and write-off of goodwill often translates into a net loss on the income statement translating into reduced net worth. Also, no personal indemnity is afforded to support the bond program. In fact, only limited indemnity from the principal is available.

Fortunately, a number of large commercial surety carriers are willing to look beyond the net worth underwriting roadblocks and concentrate more on cash flow, available bank credit, and other working capital items to consider a bonding program. 

By providing quarterly financial updates, work in progress schedules exhibiting strong gross profit margins, and generating advance discussions of potential acquisitions, the broker and client can get out ahead of potential underwriting distractions.

If you would like more information or want to discuss what is needed in support of a bond program for your private equity owned company, please contact me at (619) 937-0165 or mgaynor@ranchomesa.com.

Unlocking Working Capital in Construction: Options for Reducing or Releasing Retention

Author, Andy Roberts, Surety Account Executive, Rancho Mesa Insurance Services, Inc.

Retention is a very common practice within the construction industry that typically involves 5-10% of each payment to the subcontractor being withheld until the project has been completed. The purpose behind this is simple, it is designed to make sure that subcontractors satisfy their contractual agreements before they receive their last payment for the work they have done.  While this practice serves a real purpose, it can cause significant issues for subcontractors if the payments are delayed.

Regardless of the reasons why a retention payment could be delayed, whether it be overall project completion delays or if there are issues with the work performed, the delay in payment can cause significant cash flow issues.  For subcontractors that do a lot of bonded work, cash flow issues will have a direct impact on their working capital which can have a negative impact on their bonding program.  However, there are some strategies that subcontractors can employ to get their payments released sooner, like negotiating the terms of the retention release in the contract. 

Prior to signing the contract, it is important that a subcontractor review and attempt to negotiate any unfavorable retention release terms. One option is negotiating a 10% retention down to 5% in the contract.  Should that not be achievable, subcontractors can provide performance and payment bonds which might convince the project owner and/or general contractor to lower the retention amount or release the retention sooner.

Performance and payment bonds protect the project owner and the general contractor in case the subcontractor fails to fulfill their contractual obligations, which is the main reason that retention is being withheld.  Therefore, the presence of bonds on the project may allow a subcontractor to negotiate terms that are more favorable to them, potentially lowering the percentage withheld from each payment, or even getting it released at earlier points within the project.   

While retention remains a standard practice within the construction industry, it can cause significant issues for a subcontractor should those payments be delayed.  So, negotiating these terms in all contracts is vital while also using the ability to provide bonds on the project as a solution to getting more favorable terms. 

Should you have any questions about this or you are having issues with retention being withheld, reach out to me at aroberts@ranchomesa.com or 619-937-0166.

Anne Wright Explores Philadelphia Surety with Mike Hall

Rancho Mesa’s Surety Relationship Executive Anne Wright sat down with Mike Hall, Vice President of Surety for Philadelphia Insurance Company to explore what makes Philadelphia Surety unique and the programs they offer businesses placed with them.

Transcript

Anne Wright: Welcome. This is Anna Wright, Surety Account Executive here with Rancho Mesa Insurance and we’re going to talk a little bit about how we place business with our surety companies. We have a lot of options. Our clients rely on us to obviously be the professionals they expect handling their business, but also making sure we get the right surety relationship that's going to serve them best with all the terms, conditions and long term relationship.

So I have Mike Hall here with me today. Mike, you want to do a quick introduction?

Mike Hall: Sure. Hi, my name is Mike Hall with Philadelphia Insurance, Vice president and I run the Western region, which includes the northwest, Northern California, Southern California and Hawaii. I’ve been doing surety for 29 years, and Anne and I have known each other for, I would say, probably 27 years of that. So we've been doing business a long time and I'm happy to be here.

AW: Well, thank you for being here. We appreciate it. So when we are looking at placing a piece of business with a surety, you know, we're looking at the type of contractor developer, the type of work they do, the job sizes they need, who they do work for, and then the various underwriting information that they have that's available. So again, we have lots of choices in lots of markets, but we found Philadelphia to be a very strong market for some of our best clients, for many years. I think Philly's been around for 11 years.

MH: Philly Surety has been around for just over 12 and a half years. And then Philadelphia Insurance itself has been around for 60 plus years.

AW: Okay. So they brought in some great talent with Mike and some of his peers to run the surety division. It's been very successful. So we found it a very good market for a lot of our accounts. With regard to Philly, what we find sets you apart from some other sureties, again, the relationships. It's very important that we have the personal relationships with the underwriter. So when you say we've been working together and known each other for 27 years, that matters, obviously. What do you think sets Philly apart from some of your competitors?

MH: I would say one thing that sets us apart is we're A++ 15 ranked by AM Best. That's the highest ranking you can get. There are other sureties, but there's only a handful of them that get that ranking. I think we provide good service and a consistent underwriting approach. So the broker in the account knows exactly what to expect as we're going through the underwriting process.

AW: Yeah, it's an excellent point. Something we have to take into consideration with a lot of public agencies and general contractors, the AM Best rating is an important tool that they use to determine what's acceptable as a surety company. So there's a lot of A- surety companies out there right now, which is still an A, and it's still you know, it's not a big negative. But to be able to say you've got that A++ 15 rating is definitely huge for you all.

MH: It definitely comes into play on the commercial side of the house when they're looking at large appeal bonds or bonds of that nature.

AW: Gotcha. Okay. Yeah, well, you know, some of the smaller to midsize accounts, though, you know you write those, too. So I would typically think that the very large general contractors or developers are going to need that A++ 15 rating. But it's nice to know that Philly is available for some of other accounts that we've been able to place with you along the way. So it's not just meant for mega companies.

MH: Exactly.

AW: And you also have a small contract program. You are one of the early entrants, I think, into the, what we call, the Express program.

MH: Yes, we have on the contract side, we have it's called just Contract Express, and it's for programs of job sizes, $500,000 single up to $1,000,000 aggregate programs. We can go a little bit larger in that area, but that's just kind of typically where they, where they operate. And then on the commercial side, we have Commercial Express, which handles those small statutory bonds.

The agent or even the account itself can go online and purchase a bond there, prints it out, prints out the bond form for you and you ready to go.

AW: Very efficient.

MH: Yeah, it's very efficient. And then standard contract, we go up to programs of $300 million. There's other competitors of ours out there that do substantially more than that but-

AW: It fits your needs.

MH: Yep.

AW: So, very good. We look at claims handling as being an important part of the surety relationship as well. We, obviously we all underwrite to avoid claims. We underwrite to a zero loss ratio, but claims happen. So do you have anything you can share about your claims people and how well they work to resolve issues?

MH: Yeah, our claims department is great and in addition to just the normal claims handler, we have one local here in Southern California, but we also have an engineer on staff. So if you had a situation where there's maybe a big bid spread and our account was confident in their number, we could have the engineer talk with the account, go through the project, walk through it, get a better understanding, and then they'll just provide that additional feedback to the underwriting team.

And then we make the final decision on whether we write the final bond or not. We also have accountants on staff, so if the account is in difficult situation, we can send the accountant in and go through the books and records, get a better assessment of kind of what's going on. You know, that makes sense to finance the account through the project, or is it better to take, you know, some other approach to resolving the claims situation.

AW: Sure. So value added services that exactly through the project.

MH: Exactly, and we also offer up early on in the underwriting process, we have the ability to take collateral. We can also use funds control to maybe get over some hurdles in the underwriting process.

AW: All right. So again, all the tools, that's wonderful. Well, I know there was a recent newsletter that came out from Philly and they talked about selecting the right relationship and they mentioned reputation, size and service. And again, that's what our clients look for in us, and that's what we look for in our sureties, and Philly certainly fits the bill when it comes to reputation and size of the company and service to us as the agents and then our clients to get them on their way and grow the relationship and grow their business. And again, the value that you bring has been a great experience in my career with you. So, thank you for that.

MH: Likewise.

AW: So as a broker, we're going to find any way, any reasonable way, to get the bond done. If we can do it with Philly, we're going to do it with Philly. Mike is one of our go-to’s and we appreciate you being here today in StudioOne™.

MH: Thank you for having me.

AW: You're welcome. If anyone has any questions, you can contact me awright@ranchomesa.com.

Thank you.

MH: Thank you.

Need a License, Permit, or Court Bond? Rancho Mesa Can Help

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

During our recent budget discussions for the 2024 fiscal year, the Rancho Mesa Surety Department looked at a breakdown of the bonds we wrote in 2023.  As expected, 90% of our bond revenue was represented by the typical performance and payment bonds, subdivision bonds, bid bonds, bond riders, and consents of surety for our construction clients.

One area that surprised us was the volume of bonds classified as “non-contract” that we provide for both our construction and human resource clients.  While these type of bonds are small in size (bond amounts are usually $25,000 or below) they make up a large volume of bonds since many of our accounts require at least one or two of these.  Below I have identified four categories of non-contract bonds and several examples:

1. Court and Fiduciary: Plaintiff bonds include attachment, replevin, mechanic’s lien, and garnishment. While defendant bonds include appeal, supersedes, release of lien, and temporary restraining order bonds. We also placed various probate bonds to cover executors, administrators, guardians, and conservators.

2. License and Permit: Businesses and professionals may need mortgage brokers bonds, CA contractor license bonds, sales and use tax bonds, alcohol bonds, and compliance bonds.

3. Federal Official and U.S. Government: There are several types of bonds including public official bonds, U.S. customs bonds, and notary public bonds for those doing business with or for government entities.

4. Miscellaneous: Additional miscellaneous bonds could include financial guarantee bonds, utility deposit bonds, insurance program bonds, and lost securities bonds.

With over 1,000 types of bonds classified as “non-contract,” it can be overwhelming to determine which category of bond might fit a certain circumstance. That is where a Rancho Mesa bond agent brings value to provide direction and assist in placing the correct form of coverage.   

If you would like more information on various miscellaneous bonds that you might encounter, please contact me at 619-937-0165 or mgaynor@ranchomesa.com.

Strategies for General Contractors to Minimize Liability

Author, Lauren Stumpf, Marketing & Media Communications Specialist, Rancho Mesa Insurance Services, Inc.

In Episode 355 of Rancho Mesa’s StudioOne™ podcast, host Andy Roberts, an Account Executive in the Surety Group at Rancho Mesa, is joined by Ted Lee, a Contract Bond Underwriter at Liberty Mutual Surety, to discuss strategies for general contractors to limit their liability when working with subcontractors. Ted shares his background and experience in the surety industry before delving into the main topic.

They explore two key strategies that general contractors can use to mitigate liability:

1. Subcontractor Prequalification: Ted emphasizes the importance of how general contractors select their subcontractors. If they choose based solely on the lowest bid, there may be risks associated with subpar quality. To mitigate this risk, it's suggested that general contractors require a prequalification letter from the subcontractor's surety. This helps ensure that the subcontractor is bondable, providing added assurance to the general contractor.

2. Performance and Payment Bonds: Requiring performance and payment bonds from subcontractors offers immediate protection to general contractors. Performance bonds protect against subcontractor default, while payment bonds guard against potential liens from lower-tier subcontractors and suppliers. These bonds could also enhance a general contractor's bonding program, potentially allowing for higher bonding limits and more favorable terms.

The conversation highlights the role of the general contractor's surety in evaluating the prequalification process and bond requirements. Ted explains that this evaluation helps the surety understand and support the general contractor's risk mitigation efforts.

They also mention that some general contractors may have automatic bond requirements for certain project sizes, but for those who don't, bond companies may step in and require subcontractor bonds when needed.

In conclusion, the podcast episode provides valuable insights for general contractors looking to limit their liability and manage risk by implementing subcontractor prequalification processes and requiring performance and payment bonds. Andy and Lee also recommend seeking assistance from insurance agents with expertise in surety bonding to navigate these processes effectively.

Listen to Episode 355 below, or on your favorite podcast listening app.

Are Bonded Projects Really Better Performers than Non-Bonded Projects?

Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.

The goal of the surety, in any relationship, is to ensure that the bonded job is completed successfully, is profitable for their client, and is without claims.

In their attempt to understand the risk versus reward of a given bonded project, the surety can add some value by reviewing certain aspects of a particular request. 

To that end, the surety considers each request for a bond on its own merits. If the bond is for a routine project (based on the contractor’s history and track record), then it will likely be a pretty routine process for issuing the bond based on the contractor’s past performance, history, etc. However, something out of the wheelhouse for a given contractor might find the surety contemplating certain details about the request. They may ask more about the type of project and past experience on similar jobs and resources needed. The surety may want to know if this project has an adequate schedule, the profit and related costs of the job, information about the owner requesting the bond, bond forms, and the contract. In reviewing the contract, the surety is not just looking at the general form of the contract, but also various provisions like payment and retention terms, liquidated damages, schedules, etc. And, you might find your surety agent asks what you like about the job or what challenges you see in the job if it is outside of your normal scope and size. Every now and then, a client comments that they appreciate these discussions – and the extra set of eyes to make sure key factors in the job, bid, or contract were not missed.

Many sureties can also provide some input relating to contract review, especially if a client is working for a new project owner, or a general contractor who has a reputation for being tough. 

And, if your work is for a private owner, the surety will typically want to confirm that there are construction funds earmarked to make sure the contractor gets paid. That information should be available in generalities in the preliminary notice information, but having the surety asking to confirm specifically that their contractor’s money is available to pay for their line items (and any contingency) can be a real benefit.

Also, keep in mind that the contractor (the business owner) typically has their personal indemnity on the line if things go wrong and the surety has to respond to a claim – one might presume that the contractor is paying extra attention to a bonded job where there is more on the line.       

So, at the end of the day, the services provided by underwriting the bond request can add that extra value in making sure there is no loss. The extra attention may also result in a more successful project.   And, the job should be a good performer.

Don’t just take my word for it. Overall, the industry agrees that unbonded projects have a higher likelihood to default, or have more significant problems. The case can certainly be made that with the partnership and value of the surety team supporting a contractor in their efforts to have a successful job, more attention is paid to those critical components to ensure that this is the case.

An article by Vicki Speed, “A Study in Surety Effectiveness, Reassessing Exposures,” published in the July 10/17, 2023 issue of ENR Magazine confirmed the value of surety bonding. According to a survey of owners and developers cited in the article, “bonded projects are more likely to be completed on time or ahead of schedule.” 

Remember, the surety is not here to tell you how to run your business or your projects. Only to support your success. It should be seen as a valued partnership that is beneficial to the owners who require the bonds.

For more information about bonding jobs, contact me at (619)486-6570 or awright@ranchomesa.com.

Unraveling Residential Exclusions: Navigating General Liability in Construction

Author, Lauren Stumpf, Marketing & Media Communications Specialist, Rancho Mesa Insurance Services, Inc.

In Episode 339 of Rancho Mesa’s StudioOne™ podcast, Vice President of the Construction Group Sam Clayton interviews Executive Vice President Daniel Frazee as they discuss the importance of Residential Exclusions in General Liability (GL) Policies for companies in the construction industry.

Sam and Daniel highlight how these exclusions impact coverage for various types of residential work within the construction industry, such as single-family homes, apartments, and more. Daniel emphasizes the need for construction firms to be specific about the type and location of their residential work, as different carriers have varying interpretations of residential exclusions. He also touches on Wrap/OCIP policies, which can provide broader coverage for subcontractors working on residential projects.

The episode highlights the significance of understanding existing residential exclusions for Rancho Mesa construction clients and suggests considering a policy audit to ensure proper coverage.

Overall, the podcast provides valuable insights into navigating residential exclusions and their implications for construction businesses, urging listeners to proactively manage their insurance coverage.

Episode 339 can be listened to below, or on your favorite listening platform. If you would like more information, please contact Daniel Frazee at dfrazee@ranchomesa.com, or Sam Clayton at sclayton@ranchomesa.com.

Risk Tamed and Rewards Claimed: Requiring Subcontractor Bonds

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

We often receive questions from our contractor clients regarding if/when they should require a subcontractor to provide the protection of a performance & payment bond for a project. Although the premium charged for the bond will add cost to the project – on many occasions the benefit of the bond will far outweigh the cost. Here are several benefits that might assist in your decision:

1. The subcontractor would have gone through a prequalification process of the surety. The surety will evaluate the subcontractor’s financial strength, experience, and ability to perform the work. This can be extremely valuable if you have never worked with this subcontractor on past projects.

2. Provides protection that the subcontractor will pay their suppliers and lower tier subcontractors. The payment bond transfers the risk of these payments to the subcontractor’s surety.

3. If the subcontractor has a critical role in the overall completion of the project or a special expertise - the bond can protect against additional costs or delays due to a default.

Your bond company may require you to obtain subcontractor bonds when a trade exceeds a certain parameter (for example: $500,000) as a condition of the program they provide. 

We recently supported a contractor client on a project that was two times larger than any project they had completed in the past. The decision to bond back the three largest subcontractors made the bond company comfortable enough with this transfer of risk to support the project. 

We have other clients that have suffered subcontractor losses in the past and now require subcontractor bonds on all their projects.

If you would like more information on the bonding of subcontractors, please contact me at 619-937-0165 or mgaynor@ranchomesa.com.

Taking the Mystery out of Bonding for Public Works Projects

Author, Andy Roberts, Account Executive, Rancho Mesa Insurance Services, Inc.

Obtaining bonding for public works projects can be a complex process but understanding what bonds are, why they are required, and what information the bond company needs can take a lot of the mystery out of the process and make it seem a lot less daunting.

Bonds are a financial instrument which provide a guarantee, provided by the bond company, to the project owner (Obligee) that the contractor (Principal) will fulfill their obligations per the terms and conditions of the contract that has been awarded to them. We most often see bonds on public works projects as they are required by law but we also see general contractors and lenders require bonds in some instances. Specifically looking at public works projects, there are laws in place requiring bonds on these projects because they are funded by tax payer dollars, making it important to mitigate the financial risks associated with these projects and protect those funds.  With this basic understanding of what bonds are and why they are required, how then do contractors go about getting bonded?

Depending on the size of the project that requires a contractor to get a bond, there are a few different options. Many surety companies offer bond programs solely based on the credit of the owners, and so long as personal credit is good, the surety will offer support. The limit for these types of programs are typically maxed out at $750,000 per project and aggregate depending on the bond company. In order to go above these limits, more financial information must be obtained: contractor questionnaire, three years of company financials (balance sheet & income statements), personal financial statements from all owners, and bank statements verifying the cash amounts listed on company and personal financial statements. After reviewing all of the provided information, the bond company and surety broker can determine the contractor’s eligibility for the appropriate size bond program.

Having the ability to secure bonds can provide additional revenue sources to help a contractor grow their business. This makes it important for contractors to seek out an experienced bond agent that can not only guide them through the process but also educate them so that the process is not overwhelming.

If you have any questions or would like to start putting your own bonding program in place, I can be reached at aroberts@ranchomesa.com or 619-937-0166.

Contract Provisions to Review for Successful Projects

Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.

Contracts are not always the most fun to read, but are certainly important for all of us in the construction industry.

As a subcontractor, you are bound to the contract once you have signed it whether you understand everything that is in it or not.

Let’s consider a few key provisions in a construction project agreement that can impact your bottom line more than others. With a goal of mitigating certain impacts along the way, addressing these items prior to signing your contract should be considered as a best practice in the industry, and, we hope, support your success.

Contracts are often tedious to read, to say the least. Any business owner can proceed at their own risk, of course. But, we want to share a few things for you to consider that might offer some support and protection.

Delays

What does the contract say? What is a reasonable penalty? Business owners should always confirm just what types of delay clauses they could be responsible for (e.g., liquidated and consequential come to mind), and since there are most always liquidated damages that could be charged to you for delay of a project, make sure your contract is clear about what those are.

As a subcontractor, you are bound to the terms and conditions of the prime contract between the owner (whether a public agency or private entity) and your general contractor. These can be referred to as “flow down” provisions when it comes to things like damages, warranty, etc. 

Best Practice: Always ask for a copy of the prime contract if you are a subcontractor. Make sure you read that, too, for anything that could impact you.

Mobilization

What can you bill for, and when? 

Sequencing of Scope of Work

What happens when another trade interferes with your work? What are your rights and responsibilities of putting your client on notice when you have these impacts? Can you be compensated for any additional costs relating to these impacts?

Material Cost Escalations (and lead times)

Does your contract allow for cost escalations? How do supply chain issues affect you and how can you mitigate some of that exposure?

Change Orders

What can you reasonably expect to achieve to cover OH&P? 

The best practice for change orders is documentation from day one and early communication to your client. When everyone bunches up at the end of the job with a ton of change orders, the owner may have less of a pool of funds to draw from (for contingencies, etc.) than they may have at earlier stages of the project.

It’s important to know that the surety companies and underwriters are contract savvy as well and we do our best to understand what the obligations are within the contracts. You should expect some questions about some of these contract provisions which, at the end of the day, are intended to make sure you are best protected along the job’s progression.

There just may be something about the surety’s relationship with their principal and communication about these contracts which results in bonded jobs being more successful than non-bonded jobs.  But, that’s a topic for another article and podcast!

A Deeper Dive Into Professional Liability

Author, Lauren Stumpf, Marketing & Media Communications Specialist, Rancho Mesa Insurance Services, Inc.

In Episode 319 of Rancho Mesa’s StudioOne™ podcast, Vice President of the Construction Group Sam Clayton interviews Executive Vice President Daniel Frazee as they continue their conversation on general liability policies and move deeper into a key exclusion that is often seen as they negotiate terms and conditions on behalf of their clients and prospective clients.

During the episode, Frazee explains what professional liability is and why it is excluded on general liability policies. He gives a summary of what types of contractors typically have professional liability exposure and reasons for why they may have it. Frazee also describes specific options contractors can look at when it comes to securing stand-alone policies.

Episode 319 can be listened to below, or on your favorite listening platform. If you would like more information, please contact Daniel Frazee at dfrazee@ranchomesa.com, or Sam Clayton at sclayton@ranchomesa.com.

A Brief Discussion on Pollution Liability

Author, Lauren Stumpf, Marketing & Media Communications Specialist, Rancho Mesa Insurance Services, Inc.

In Episode 315 of Rancho Mesa’s StudioOne™ podcast, Executive Vice President Daniel Frazee and Vice President of the Construction Group Sam Clayton discuss pollution liability, and why virtually all general liability policies exclude this coverage.

Frazee and Clayton talk about general liability policies and delve deeper into some key exclusions they often see as they negotiate terms and conditions with underwriters.

Clayton also explains the specific options contractors can look at when it comes to securing stand-alone policies.

Please listen to the full episode below, or on your favorite listening platform. If you would like more information, please contact Daniel Frazee at dfrazee@ranchomesa.com, or Sam Clayton at sclayton@ranchomesa.com.

Contractor Strategic Planning with Kevin Brown of RBTK, LLP

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

In my recent StudioOne™ podcast episode with Kevin Brown, Of Counsel with the CPA Firm RBTK, LLP, we discuss the anatomy and considerations that go into strategic planning for your business.

The podcast addresses questions, such as:

• What do you want your business to accomplish? 

• What steps will help my company achieve its goal(s)?

The episode includes a discussion of the importance of developing a succession plan.

If you would like more information on Episode 309, please contact Kevin Brown at kbrown@rbtk-cpa.com.