Performance Bonds for construction contracts as well as performance and payment bonds for service contracts are a specialty of The Coyle Group. Whether this is your first bond, or you’re an experienced New York or New Jersey contractor who has obtained bonds in the past, we are here to help you get your bond and get it quickly. We have the expertise and relationships with some of the largest surety underwriters in the country to expedite your bond needs. If you’ve had trouble with obtaining surety bonds in the past this is no reason to not seek out a second opinion from us. Our broad market representation gives us access to underwriters seeking out business from top tier high credit rated contractors, to contractors with less than stellar credit.
Traditionally, Surety Bonds (Performance Bonds are a form of surety bonds) are underwritten on what are called the principles of the three C’s:
- Character – Does the contractor have a good reputation? Is their character strong enough that they will fulfill their obligations under the contract to be bonded?
- Capacity – Does the contractor have the skill, experience and strength to handle the total work in progress schedule as well as the work proposed for the bond.
- Capital – Does the contractor have the financial strength to finance the completion of the work?
Because surety bonds are an absolute financial guarantee, underwriters need to make certain that the contractor with which they are doing business with, will fulfill the promises of the bid they are submitting to the owner of the project. Therefore very fundamental underwriting questions need to be asked which are then documented within the bond application and related documents such as bank statements, and financial statements.
Let’s review some basics:
A New York surety bond is not a contract of insurance nor is it an insurance policy. As mentioned it is an instrument of guarantee. The Surety (which is often an insurance company) will guarantee the faithful performance of the “obligation” of a contractor (known as the “principal” within the bond). The obligation stated in a bond is that the principal will honor their bid and perform the project as described. A Contract Surety Bond is typically broken into three sections or parts:
The Bid Bond – This is the first part of a contract bond which guarantees that the Principal (Contractor) will honor their bid submitted to the Project Owner (also known as the Obligee) if they are awarded the contract. Should the Principal refuse to honor their bid, the Obligee may sue the Principal and the Surety for the penalty or “penal sum” of the bond which is typically between ten to twenty percent of the bid amount. The purpose of the bid bond is to hold the Principal to its obligation, and should that fail, to fund the costs of rebidding / re-letting the job incurred by the owner. In some cases, contractors will submit their bid to an owner with a certified check in lieu of a bid bond, if they have the financial ability to do so.
The Performance Bond – This bond assures that the contractor will perform the job for which they have bid and undertaken according to the contract’s terms, price, specifications and time frames. If the Principal defaults on those obligations, or is terminated for default by the Owner, the owner may require the surety to complete the contract as guaranteed. Default, is of course the worst possible outcome for a bond, because it forces the surety to either: complete the contract by hiring a new contractor to finish the work as required, or select a new contractor to contract directly with the owner, or allowing the owner to complete the work with the surety funding the amount of work to be completed. In any event, the surety will suffer a financial loss and then look to the defaulting contractor to “make good” on the penalty they suffered. The surety enforces this repayment of the penalty by the Principal through the indemnity agreements executed prior to the execution of the bond. In most cases the owners of the contracting firm will sign the indemnity agreements as officers of the entity as well as signing as personal guarantees to back the obligation.
The Payment Bond– Often the Payment Bond will be incorporated into the Performance Bond as a requirement of the contract. What the Payment Bond does is guarantee the Project Owner (Obligee) that the bonded Contractor (or Principal) will pay all the subcontractors and suppliers who worked on or supplied materials to that specific job. This is necessary to prevent sub-contractors or suppliers who go unpaid from filing a lien on the property or project once the Principal has completed their work. Again, if the bond is called to pay subs or suppliers, the surety will look to Principal be made whole for their loss through the indemnity agreement they signed.
Maintenance Bonds – This bond will assure that a project will remain free of defects in workmanship or materials for a specific period of time following completion of the project or work on a project.
As you can see, the surety assumes a significant amount of risk to guarantee the performance of a contractor, which is why so much underwriting information is needed to complete a commitment to offer a bond. It is also the reason why many bonds require collateral as well as personal guarantees on the indemnity agreements the contractor provides to the surety. While the underwriting can be somewhat complex, it’s not impossible to get through. Keep in mind that the larger the bond, the greater the underwriting will be. From our offices in New City, New York, we suggest that well prior to needing a bond, you should complete an initial bond underwriting profile based on the typical bond size you may need to obtain. With a submission to the surety marketplace we can provide you an indication of the per bond limit and aggregate bond limit (all bond limits outstanding at any one time) you will qualify for, and what the cost of the bonds will be. This pre-underwriting will help establish your bond line which will be available for the first bonded job you wish to bid. Here are few underwriting traits that bond underwriters are looking for from successful contractors:
- They highly organized and disciplined within their field.
- They stick with their niche and withing their geographic territory.
- They rely on outside advisers when undertaking large projects or new risks.
- They budget well and have strategic plans and goals stretching beyond a single year.
- They generally have longer term vision than their competitors.
- They have very solid accounting and internal controls which are managed by a qualified CFO or controller.
- They manage cash flow, and watch receivables closely.
- They understand where their profit margins are and track profitability on all their projects.
- They can answer virtually every question a surety may ask, or quickly find the answer to a question they can’t answer immediately.
For more information on how we can build your bond program, please contact us in New York by either calling 845-634-3606.
Since 1929, The Coyle Group has been serving businesses with New York Performance Bonds in the Rockland County communities of: New City, Nanuet, Haverstraw, Pearl River, Stony Point, Suffern, West Nyack, Congers, Valley Cottage, Nyack, Orangeburg, Blauvelt, Palisades, and Chestnut Ridge; the Orange County communities of: Goshen, Pine Bush, Middletown, Newburgh, New Windsor; the Westchester County communities of: White Plains, Yonkers, New Rochelle, Bedford, Elmsford. And in New York City – Manhattan, Bronx, and Brooklyn..