Why are some bonds better than others? Why can small ones be harder to come by than big ones?
Construction companies are among the most important clients of a binding company. They are the source of the performance and payment bonds that guarantee your construction contracts. For a surety company (surety), these are probably the largest and most lucrative transactions. So why would the surety risk losing a client by placing strict conditions on an obviously small surety?
There are many different types of bonds, and contractors may need a variety of them: bid bond, performance, payment, maintenance, license, permit, court, are just a few. In this article we will discuss why the big ones (big dollar amount) may be easier to come by than the small ones, even for the same applicant.
The answer to this question lies in the nature of the obligation, not the dollar amount. A good way to illustrate this is to compare a compliance bonus to a salary and welfare bonus.
Performance bonus
Performance and Payment Bonds (P&P) refer to construction contracts. They guarantee that the applicant to carry out the project in accordance with all aspects of the written contract, and to pay invoices corresponding to suppliers of labor and material.
Salary and welfare bonus
Union contractors (companies that employ unionized workers) need this type of bond. insurance program.
It’s just not fair!
P&P bonds range in amount from a couple hundred thousand dollars to tens of millions, while a W&W bond is often below $ 100,000. So why might it be easier to get the big one? Why might it be easier to get a performance bond of $ 500,000 than a union bond of $ 50,000?
The answer is in the nature of the obligation and in the worst case.
Suppose the contractor goes out of business. With a performance bond, the bond goes into the contractors’ place. They must make arrangements to complete the project in accordance with the contract. The recipient of the performance bond (also known as the obligee, the contract owner) continues to pay the remainder of the contract amount as the work progresses. Now they pay the bail by completing the termination. This is called the “unpaid contract amount.” Even if the contractor fails and has no money personally, the unpaid contract amount is a resource on which the guarantee can depend and hopefully you will avoid a net loss on the claim.
The union bond is a promise of pay funds at a future date. It is a financial guarantee, the most difficult type of bond obligation. The insurers will examine your crystal ball … Oh, sorry, we don’t have one.
The surety is to guarantee the future solvency of the construction company, not an easy task. And if they are wrong, if the contractor cannot make his union payments because he has no money, there is no money for bail either.
Q. Who is likely to pay the salary and welfare?
A. The surety (a net loss)
It is the tough nature of some small bonds (salary and welfare, lien release, supersedeas) that makes them exceptionally difficult to obtain, often requiring full collateral. On the other hand, the guarantee can provide the same applicant with a performance bond of $ 300,000 based primarily on their credit report.
Bottom line: it’s just not fair, but we never promised it would be, because the nature of obligations is different. That it is the deciding factor, even more than the dollar amount of the bond.