Requirements on Establishing a Contractor’s Bond Line

Bonding is a concept many of us are unfamiliar with. In this article, we will focus on how bonding affects financing. It is important to understand that bonding is not a type of insurance. The purpose of bonding is to guarantee projects are completed on time or as near to schedule as possible regardless of payment or performance. What the bond does is reassure the owner or general contractor that the company they hire can and will complete the obligation as stated in the contract. If the bond is in fact utilized, for whatever reason, the bonding company is guaranteed re-payment in the amount utilized.

In order for bonds to be obtained there are several requirements that need to be met. One such prerequisite is equity of ten percent or higher. There are several ways this can be accomplished. A company can prove that they have retained ten percent or more in earnings this year within the Stockholders Equity section on their balance sheet. If this has not occurred or cannot be shown due to previous losses or large shareholder distributions a company can inject their balance sheet with equity capital. This will show on your balance sheet in the Contributed Capital section. Check with your accountant and attorney to ensure that this is documented properly and that conversions are done properly.

Another condition that bond companies can ask to see is five to ten percent revenue in a line of credit. This is in place to ensure that if issues arise such as cost overruns, slow payment by the general contractor or owner or disputes on work performed. The surety company can be confident that you there are available funds above the operational cash flow. The line of credit will allow work to continue as stated within the contract which reduces the chance that any use of the bond is necessary.

A line of credit against bonded receivables will never be provided by a bank or other type of financial institution. Bond receivables are funds received from contracts that require bonds. A bank places a lien on a company’s funds, receivables, as collateral in the event of default. Simply a lien can’t be placed on funds that are coming in from current contracts that require bonds. Companies work around this by not having one hundred percent bonded contracts. These non-bonded funds offer security. Companies also use equipment, property or other types of collateral.

Construction bonding as well as bonding in general is needed to reduce the risks associated with projects. Bonding affects financing and helps to ensure projects keep on pace no matter what situations arise with performance or payment.

Construction Bonding Specialists, LLC are dedicated Surety Bond Professionals working with new and experienced contractors to find the most satisfactory bond solutions. CBS is aligned with several Treasury Listed and AMBest Rated Surety markets which allows them to assist with virtually all Bid, Performance and Payment, Financial Guarantee and Supply bond needs. Find out more information at http://www.bondingspecialist.com.

Construction Bonds Help To Decrease Default

Nearly all public construction work that is completed is done so through private sector construction firms.  Jobs are bid on by private sector contractors.  An open competitive sealed bid system is used to determine who is awarded the work.  Many times the work is given to the contractor with the lowest, most comprehensive bid.  With the use of surety bonds the system works well.

A Bid Bond is used to keep flippant bidders from the bidding process.  They do this by promising that the chosen bidder will enter into the outlined contract as well as obtaining the required performance and payment bonds.  If the bidder with the lowest bid cannot honor the contract, the owner is protected.  The bid bond ensures the owner will be covered for up to the amount of the bid bond which is most often the difference between the lowest bid and the next highest bid.

A Performance Bond is an agreement that protects the contractor’s promise, contract.  It is there to ensure that the contract is carried out in agreement with the terms and conditions that were agreed upon, at a certain price and within a certain amount of time.

A Payment Bond shields specific employees, suppliers of materials and subcontractors from nonpayment.  The protection payment bonds provide is to claimants that have not been paid for their goods and services that they have supplied to the contracted project.

It is required, by law, that in most public construction projects that bid, performance and payment bonds are utilized.  These laws have been in place for so long that little thought is given to why they were enacted in the first place.  Contractors that are unable to acquire the bonds required complain that the law is unjust and unfair.  Note that the law is only required on most public construction projects not all construction projects which still allows such contractors to obtain jobs.  However, it is important that we understand why such laws were necessary requiring contractors to post bonds when performing public construction projects.

Before the laws were enacted the failure rate on public construction projects among private construction companies was high.  What would happen is that private contractors became bankrupt before they were able to finish the contracted services.  This left the government with half completed projects which tax payers were left to cover.  The additional costs coming from the contractor’s default added to a substantial hit on taxpayers. 

With government property unable to be subjected to a lien many laborers, material suppliers and subcontractors were left without compensation if the services they performed were not paid for.  The government tried to use individuals as sureties on public construction projects.  This however also failed as many times the sureties themselves were unable to honor their financial obligations.  This chain of events led to the Heard Act.  The Heard Act authorizes the use of corporate surety bonds to secure privately performed federal construction contracts.  In 1935 the Miller Act replaced the Heard Act which is the current law that requires performance and payment bonds on federal construction projects. 

Construction Bonding Specialists, LLC are dedicated Surety Bond Professionals that are aligned with several Treasury Listed and AMBest Rated Surety markets which allows them to assist with virtually all Bid, Performance and Payment, Financial Guarantee and Supply bond needs.  Find out more information at http://www.bondingspecialist.com.

Check Out Our Newly Redesigned Website

Check out the site at www.bondingspecialists.com