Secrets of Bonding: Show Me The Money!

January 3, 2022 0 Comments

Laurel and Hardy. Ben and Jerry. Surety of companies and money. They just go together!

Let’s take a look at the focus surety companies put on money when they offer offer and yield bonds. It is a question of survival. If requested, the bond hopes to complete the project with the remaining (unpaid) funds from the contract. We will see that they track a series of elements. Learn about them here so you know what’s to come.

Of course, there is a significant financial assessment of the applicant (the construction company), a subject on which we have written extensively. Visit the article topic index on the “Secrets” website. Here we will only talk about the adhered construction project.

One of the first questions about money is “how is the work financed?” Most bonded jobs are public works. This means that the project is paid for with taxes. In private contracts, work can be financed in several ways. For commercial buildings, the project owner may have a Advanced Payment Bond  construction loan or reserve funds in an escrow account. In either case, the surety underwriter wants to ensure that the contractor is paid after incurring labor and material costs. Failure to receive payment could bankrupt the business and lead to claims on all open bonds.

Regarding the new contract, the bond will ask:

How often will the contractor be paid?
Is a part of the contract amount paid in advance, immediately when work starts?
Are there liquidated damages: a financial penalty applied per day for late completion of work?
Once the contract is in place, the surety wants to control the money:
Is the work progressing profitably and therefore heading to a successful conclusion?
Does the contractor’s turnover correlate with the degree of completion? It can be dangerous when they get too early in billing work aggressively.
Are suppliers of labor and materials paid on a current basis (by the contractor / bond client)?
Does the project owner pay the contractor according to the written payment terms?
Sometimes underwriting problems are solved using a “fund manager.” This procedure is intended to allow the contractor to perform the work, while the money is handled by a professional payer. The payer pays all suppliers of labor and material, plus the contractor. This procedure minimizes the possibility of claims under the Payment Bond.
When the project comes to a conclusion, there are some important transactions at the end:

Final payment: the contractor collects the last regular payment according to the contract. There may be a requirement for the surety company to issue consent for this payment to be released. If there are any issues or problems, they can withhold that approval. Insurers may request to view lien releases (from suppliers of labor and material) to ensure that everyone has received payment, ensuring that there are no claims for payment bond.
Hold release – Contractor can now collect a percentage of the contract amount that was methodically held (held) as collateral for the protection of the project owner. Bond consent may also be required for this. The owner will not turn over this money unless all loose ends are resolved, which is known as a “to do list.”