Secrets of Bonding 149: Be A Surety Bond Fixer

Being a problem solver is a great way to deliver value to your customers. When it comes to bail bond issues, do you have any creative solutions? Are there any tricks up your sleeve that would make your client say “Mr. / Mrs. Bond Fixer, I’m so glad I called you today!”

Well, try to solve these bond problems. They may have more than one good solution, but I’ll give at least one for each one at the end.

1. The business owner is willing to give personal compensation, but the spouse refuses. Your solution?

2. The insurer has approved a performance bond, but a security is required (money the contractor lets the bond stand as a  Performance Bonds security deposit against potential bond claims). The contractor has no cash to deposit. Your solution?

3. The subcontractor is required to provide a P&P bond, but no collateral will back it up. Your solution?

4. To support a performance bond, the insurer requires a financial statement reviewed by the CPA. The client did not anticipate this and only produced a build report (poor quality) at the end of its senior year. Your solution?

5. A property owner has awarded a project to the contractor, but is required to post a performance bond to the local municipality. The underwriter rejects this stating that “there is no contract that covers the performance bond.” Your solution?

6. The company’s working capital is too low. The main problem is that the accounts receivable were past due at the end of the fiscal year. Your solution?

7. An old line excavation contractor cannot get a bond because his net worth is too low and his debt to equity ratio is too high! Your solution?

Feel free to post your ideas on how to fix these bond problems.

Possible solutions:

1. Indemnification – Get the spouse to sign a “no-transfer agreement” that prohibits the transfer of the indemnifier’s assets. Other possibilities: spouse’s compensation that excludes certain assets, limited compensation with a maximum dollar value, or activation compensation that is active only in special circumstances.

2. Guarantee – Can another party contribute the money? It could be in the form of a loan to the business owner. Maybe an interested subcontractor or supplier will place it so the contract can continue (and they get the job). How about using funds control with a hold that charges the escrow account for the contract funds as the job progresses?

3. No Subcontract Bond – The general contractor could add a retention clause to the contract or increase it in place of the bond (withhold some money until completion as a security deposit). On a short-term subcontract, make a one-time payment for the full contract amount at the end when the work is satisfactorily completed.

4. FS Build – Ask the CPA to go back and do the extra work to update the report. Sometimes, if it is late in the tax year, the insurer may proceed with the bond issue based on proof that the next CPA statement will be a Review. Get a copy of the letter of commitment from the CPA.

5. No contract: the insurer is correct. There is no contract with the municipality, it is with the owner of the property. In either case, a surety in the owners’ contract would be for the wrong amount. A Site or Subdivision bond is the correct way to protect the interests of the municipality. It would guarantee the construction of “public improvements” such as roads, sidewalks, sewers, etc. Caution: The owner of the property must be the applicant for this surety (not the contractor!) Or at least it must be an indemnifier.