Unlike insurance, in which the buyer purchases the product for their own protection, a performance/payment bond is ‘purchased’ by the buyer for the owner/client’s protection. In other words, the bond is a hurdle put in place by the owner. In order to work for the owner, the contractor (the Principal) must pass the hurdle. (The owner, (the Obligee), is the entity requiring the bond and could be the actual ‘owner’ or another contractor.) So, one may assume that the only beneficiary of a surety relationship is the owner. This ‘one-sided’ view of suretyship is misguided and bonded principals need to know the benefits they receive as a result of their surety relationship.
Since bonded principals must pass through a rigorous level of underwriting prior to establishment of their bond line, the surety (with all of the resultant underwriting knowledge) should be viewed as a business ally and contacted frequently for advice and direction. In this way, the surety operates as an ‘extra set of eyes’ in matters regarding the principal’s business plan, their competition, and the local business environment. To only call on one’s surety for advice/direction when a bond is needed, is missing the chance for advice and guidance from a business ally. (Remember: the surety is a
for-profit entity that wants to write many bonds for you. By routinely seeking their input/direction, you ‘cement’ your relationship with the market and you can gain valuable information with which to better your company.)
Another overlooked benefit of an established surety relationship is in new business acquisition. Too often, contractors only react to bond requirements (hurdles) when they can/should be proactive and offer a bond to potential owners even when a bond is not required. (The premium for the bond can be passed on to the owner in your bid.)
Let’s assume: Contractor A established a bond line because Owner B required a bond of Contractor A. So, Contractor A sought the services of an experienced surety broker who assisted in establishing a surety line with Surety C. The contract was signed, the work was completed, and the bond was released. Now, let’s further assume that Contractor 1 is in negotiations with Owner D and Owner D’s contract makes no mention of a performance bond requirement. With an established bond line, Contractor A may have an advantage over his competition. (If the competition is not bonded and/or bondable, then bring that to the owner’s attention!) Why not offer Owner D a letter of bondability from your broker that glowingly states that you are bonded and backed by a highly rated surety and that your surety would look favorably on providing a bond for the job in question if asked. By bringing to the attention of the owner the fact that your firm is bondable, you immediately drive a wedge between your competition and the owner. (“Why doesn’t this other company have one of these ‘bondability’ letters?)
As touched on above, another benefit of an established bond line is the ally you have in your surety. When/if a dispute and/or claim should arise, the surety will not simply ‘pay’ the owner. The owner’s claim must be proved and the surety is there, as your ally, between you and the owner seeking to settle the claim. This alliance should not be underestimated…the surety wants your firm to succeed. When you succeed, the surety succeeds, when you lose, they lose. As a for-profit entity, the surety has a vested interest in making sure your firm is around for a long time and that you will continue to win new bonded work which will result in new bond premiums for the surety.
Don’t overlook the advantages of your surety line!
Tim Hutton, CPCU, AFSB
timothyjhutton@gmail.com
(703) 220-7771
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