Facility bonding

Contractors have new choices in bonding facility

The days of one-size-fits-all bonding facilities are over
Thursday, March 13, 2014
By Fred Moroz

For many years, not a lot changed with respect to the kind of bonding facility that bonding companies offered, and contractors could hope to receive. Sureties charged an annual service fee of typically $1,000 to $2,000. This covered the issuance of any and all bid bonds, consents of surety, bonding pre-qualification letters and other bonding documents required for tenders.

When contract bonds (final bonds) were required, they would charge a bond premium based on pre-established bond rates and calculated on the value of the contract.

Contractors pay the same annual fee whether they received a hundred bid bonds or none at all. Many also paid bond premiums based on the same rates, regardless of how large the contract was or how long the project went on. But until recently, many contractors were not given the choice to calculate the premium differently and save some money.

Over the past few years, bonding companies and bond brokers have broken the one-size-fits-all mold and have developed bond facilities that better suit certain types of contractors.

One type of bond facility that was born from recent innovation is the zero-fee bonding facility. Many contractors who only needed one or two bid bonds a year did not feel that it was fair to pay the same annual service fee as a contractor who received 50 or 60 bid bonds. It made more financial sense to simply not bid those one or two tenders, and save the $2,000 service fee.

The surety industry recognized that they were losing potential clients, so they developed the zero-fee bonding facility. To offset the loss in revenue from not charging an annual service fee, sureties charge a slightly higher rate on their final bonds. Since final bond premiums are a flow-through cost, and service fees come straight out of the contractor’s pocket, the zero-fee route makes sense for contractors who are not frequent bond users.

Another new type of bond facility that only recently became possible is online bonding, or web-based bonding. Although it has been available in the U.S. for several years, it has only been available in Canada for less than one, and is only available through one surety market at the moment.

Quickbond is meant to be quick and easy. Although one of the largest sureties in Canada backs it, its market focus is on the small contractor. Quickbond is targeting two segments of the contractor market that has steered away from bonds in the past: the ‘too small for traditional bonding’ and the ‘big enough but not cost efficient to bond’ contractors.

The bonding industry previously had a place for small contractors. In fact, there were sureties that specialized in small contractors and small bonds. But bigger sureties bought those sureties, and those big sureties focused on bigger contractors.

There are many other construction companies that are big enough and successful enough to qualify for standard bonding, but the costs involved with a bond facility do not justify having one. Even if a contractor opts for a zero-fee facility, they are required to produce accountant prepared financial statements for one or more companies. This could cost $5,000 and up.

Quickbond does not require financial statements. Instead, they base their qualification on the contractor’s credit score and a few quick underwriting questions. Even when small bonds were more prevalent, they never caused sureties many losses as long as they were backed by a contractor who could be trusted. Quickbond charges a $400 annual and $250 for each bid bond issued. Many contractors will find the total cost to get bonds to be lower once all the costs are added up.

Another type of non-standard bonding is directed at the other end of the marketplace: the large and long-term projects. Contractors get a discount for everything else that they buy in volume, why not get a discount when they buy a large bond? Well, the idea is actually not new. Sureties have been offering large and long-term rates (LLT) for many years, but many contractors just did not know that they existed.

Traditional bond rates stay the same, no matter how large a bond or contract is. In addition, those bond rates are an annual rate, based on contracts with a one-year maximum duration. There can be a hefty anniversary premium charged for bonded contracts for longer durations.

How LLT rates work is that instead of being a separate bond facility, they are a separate rate scale that is offered by all of the major sureties within the current bond facility. The rates are scaled down as the contract value goes up, and there is no anniversary premium when LLT rates are used. On large contracts, it is not uncommon to save hundreds of thousands of dollars in bond costs.

Fred Moroz is vice-president of construction bonding for BFL Canada in Vancouver.

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