Changes Are Coming to California Contractor License Bonds

Author, Matt Gaynor, Director, Surety Department, Rancho Mesa Insurance Services, Inc.

Currently, all contractors licensed in the State of California are required by the Contractors State License Board (CSLB) to have a $15,000 contractor license bond on file with the state. This amount has been in effect since January 1, 2016.

Effective January 1, 2023, State Bill 607 will require the contractor license bond amount to increase from $15,000 to $25,000 (California Business and Professions Code Chapter 367).

If you are a contractor and currently have a $12,500 bond of qualifying individual (BQI) for your company, the BQI bond is also required to increase to $25,000 effective January 1, 2023.

Although we have several months to get this in place, touch base with your bond agent to discuss the timing of the increase relative to the anniversary date of your CSLB bond.

You may be required to pay a prorated additional premium to cover the increase.

The term of your bond may be prorated, which would change the renewal date.

Bonding companies may not offer renewals on their current bonds. If this is the case with your bond company, you will need to put a new bond in place on the effective date of the cancellation.

If you would like more information on how your particular CSLB bond might be affected, please contact me at (619) 937-0165 or mgaynor@ranchomesa.com.

Bondability Letters – Surety Prequalification for Owners and General Contractors

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

In the normal process of bidding a construction project, our contractor clients are required to post a 10% bid bond to guarantee that they will execute and deliver a signed contract along with 100% performance and payment bonds, if they are awarded the referenced project. While this is a requirement for public projects, bid bonds have also become more prevalent for certain private projects. By approving the required bid bond, the surety company provides their stamp of approval that they have reviewed the bidding documents and are willing to support the contractor for the specific project.

On certain occasions, the owners and general contractors will require a less formal surety prequalification in the form of a letter of bondability. Although the owner/general contractor requesting the letter does not have the 10% guarantee provided by a bid bond, the letter of bondability can be issued rather quickly to let the owner know that a bond program is in place for the bidding contractor. If this contractor is deemed to be the low and responsible bidder by the general contractor, they know in advance that the contractor has been through a third-party prequalification by the surety company.

This document is normally issued by the bonding agent and contains the following:

• Name of the current surety carrier, A.M. Best Rating, treasury listing, and length of relationship.

• Approved single and aggregate program bonding amounts.

The other key wording contained in a typical bondability letter that differs from a bid bond is as follows:

“The issuance of surety credit is a matter between the principal (contractor) and surety… We assume no liability to you or any other third party if for any reason we do not execute said bonds.”

This wording is important because unlike a bid bond, the surety company does not have an obligation to provide final bonds if their principal is awarded a contract. While this rarely happens, the bond company will need to review additional information (i.e., contractual or financial) before they agree to provide performance and payment bonds in support of a project. For example, the contract or bond form may contain onerous wording that the surety company is not willing to support.

For more information on letters of bondability and how they affect your business, please contact me at 619-937-0165 or mgaynor@ranchomesa.com.

Bond Companies Thoroughly Track Status of Construction Projects

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

When the bond company approves a performance and payment bond for our contractor clients, they want to keep track of the project until completion - at which time the liability for the bond is no longer on their books. One tool they use to track a construction project is the Work In Progress Report (WIP) which the bonding company analyzes on a quarterly or six-month basis to track the profitability of the project on a percentage of completion basis. When the bond company sees that a project is 100% complete on the WIP or Completed Contract Report, they will mark the bond file as “closed,” once the warranty period has expired.

Additionally, several bond companies will also use a Contract Bond Status Inquiry Form to track the projects. This form is mailed to the obligee (i.e., the owner or general contractor on the bonded project) and requests project information is completed on the form, then returned to the bond company via mail, email, or fax. The questions posed on the form include, “Is the contract completed, and if so, what was the completion date and final contract amount?” In the event the contract is on-going, the form requests a percentage of completion or approximate dollar amount of the work completed to date. The form also asks the owner if they are aware of any unpaid bills for labor or material on the project.

The final area of the status inquiry form provides space for the obligee to fill in remarks. This can be a good or bad thing for the contractor. We have seen responses from owners and general contractors that range from “great subcontractor – excellent to work with” to “I will never hire this contractor again.” Other times, this area is left blank. 

While the primary goal of the status inquiry is to understand if a project is closed or remains open, the remarks section will grab the bond underwriters attention (positive or negative) and that will become part of their underwriting analysis, going forward.

If you would like more information on how the contract bond status inquiry might influence the underwriting of your bond program, feel free to reach out to me at (619) 937-0165 or mgaynor@ranchomesa.com and ask any questions to ensure your bond program is getting the proper attention.

Frustrated You’re Not Getting Paid on a Bonded Project?

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

Getting paid on time by project owners is essential! As construction companies attempt to collect their account receivables, a frustration builds as the overdue payments stretch from 60, to 90, to over 120 days. You might have already paid certain suppliers or subcontractors, and now your cash flow is getting stretched because your receivable has been delayed. If this is a bonded project – you do have an additional avenue of recourse to collect.

You should first obtain a copy of the bond from the owner, municipality, or general contractor on the project. On a public works project this should not be difficult to obtain.

The next step is to work with your bond agent on the best way to contact the bonding company with your claim. Some bond companies will request you send an email to their claims department. Otherwise, your agent will have the bond company claim department address to ensure your claim goes to the proper area to receive attention. At Rancho Mesa, we have prepared letters that you can use as a sample to provide the bond company the proper information so your claim is not delayed.

The bond company should respond to you (usually within 20 days) and have you fill out their claim form and provide the backup documentation required to support your claim. They will then check with their insured to find out if the claim is legitimate and why payment has not been made.

If you would like a better understanding of how your professional bonding agent can assist you in filing a bond claim on a construction project, please feel free to contact me to ensure you are getting the proper direction to collect your money.

Skilled Labor Shortages Prompt Subcontractors to Provide Performance Guaranty

Author, Andy Roberts, Account Executive, Surety Division, Rancho Mesa Insurance Services, Inc.

The construction industry is currently booming. According to a survey conducted by the AGC of America, and a recent article written by Rancho Mesa’s Kevin Howard, the industry shows no signs of slowing down, as 80% of contractors predict growth in 2020. While that’s great news for the industry, we are starting to see some trends that can cause some issues for contractors.   

With an abundance of work, contractors are finding it more difficult to find the skilled labors required to complete a project on schedule. This is causing more and more general contractors, who historically didn’t require their subcontractors to provide a bond, to now require their subcontractors to bond back to them on contracts over a certain amount. 

Bonding back is when a general contractor requires a subcontractor to obtain a performance and payment bond, even though the general contractor is already carrying a bond for the entire project. The bonds from the subcontractor operate in the same way as the bonds that the general contractor provided to the project owner, but now the general contractor has a performance guaranty from the subcontractor. This gives the general contractor an avenue to pursue recourse, should the subcontractor default or fail to perform up to the standards required by the contract, which is something that can happen if the subcontractor is having issues finding enough skilled labor.

Furthermore, this can present a problem for subcontractors who aren’t accustomed to bonding. They would need to get a bonding program put into place in order to work with a general contractor that they may have a long relationship with, who they previously never required a bond back. This makes it very important for subcontractors to have the discussion with the general contractor about potential bond requirements. An upfront conversation with the general contractor can help you avoid getting into a situation where you win a bid, but don’t have the ability to meet the bond requirement.

Fortunately, for contractors that are new to bonds or maybe don’t bond frequently, there are a variety of programs that the different sureties offer, whether it be credit-based, or a more traditional program. We can help navigate those programs and find the solution that works best for their company’s bonding needs. 

If you have additional questions or would like to explore all the different options that each surety offers, please contact Andy Roberts at (619) 937-0166.

Have You Met With Your Bond Company This Year?

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

After a recent meeting between a Rancho Mesa contractor client, the bond company that supports our contractor, and Rancho Mesa as the contractor’s agent, the bond manager sent me an email stating, “now that I have met with [your client], we are willing to increase their aggregate surety line of credit by $10,000,000. Thank you for setting up the meeting.”

In the world of surety bonding, the various financial information the bond underwriter will analyze includes the Balance Sheet, Income Statement, A/R & A/P Aging, Bank Line of Credit, Work In Progress Schedule, and the owner’s personal financial statement. This is to determine the level of single project and aggregate program credit line to support the contractor’s bonding. These items all represent “objective” processes the bond company will use to make their credit decision.

However, it is also important to introduce the bond company to several “subjective” processes to include in their decision making. During a direct meeting between the contractor and the bond underwriter, you may uncover positive items that might make the difference between a yes or no response for a project. Examples might include:

1. Relationships with a certain municipality or a general contractor (in the case of a subcontractor client).

2. Various production schedules that could enhance the profit on a particular project.

3. Equipment savings unknown to the underwriter, etc.

As a home office contract bond underwriter in the late 1980s, I was invited by an agent and our branch underwriter to fly to Atlanta and meet with a certain contractor before deciding whether to support a large project that would require a bond. After walking though the jobsite with the client and reviewing the various estimating schedules for this particular project, I came back with a sense that the contractor could support a higher level of bonding beyond what our analysis of the financial numbers would have allowed. Therefore, we approved the bid for bonding. Although the contractor client came in third on that specific project, we had laid the groundwork for a much larger program of support going forward.

We recommend that you schedule to meet your bond company on an annual or bi-annual basis. If you would like a better understanding of how this meeting might increase your bond line of credit, feel free to contact me, Matt Gaynor, at (619) 937-0165 to discuss ways to ensure your bond program is efficient as possible.

Maximize Your Bond Line of Credit by Collecting Account Receivables

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

We often hear the term “cash is king” in the construction business. When referring to our contractor clients’ bond line of credit, this term is paramount. The various sources of cash listed on a balance sheet (i.e., cash in the bank, accounts receivable, available bank lines of credit) will largely influence the bond company’s calculation of the bond credit line. Let’s focus on accounts receivable.

When we provide the bond company a financial statement from a client, they will often request we include a Schedule of the Accounts Receivable and Accounts Payable statement. Generally, the schedule breaks out the receivables by 30, 60, and 90 day increments. Regarding the open receivable balances scheduled as “over 90 days past the invoice date,” the bond company will subtract this amount from the equity and working capital analysis because they feel that a greater risk exists in the collection of these receivables.

The over 90-day receivables become very important since the collection of these receivables can mean the difference between a bond company approving or declining a specific bid request (for a project which our contractor may already be heavily invested). The bond underwriter wants to ensure that the contractor has sufficient cash coming in the door to pay the labor, suppliers, and subcontractors on current projects – and may not want to take on additional risk if they are concerned about receivable collections needed to pay for these costs.

Being awarded a contract, whether bid or negotiated, is extremely important to a contractor’s success. But right behind the importance of winning and executing the contract, is the contractor’s ability to collect the money to ensure they are getting paid for the work they do. Make sure you have a good receivables team in place so that paperwork is issued correctly/timely, and consistently follow up on late payments to collect your money.

If you would like a better understanding of how the accounts receivable collection process affects your bond line of credit, feel free to contact me at (619) 937-0165 or mgaynor@ranchomesa.com to discuss ways to ensure your bond program is efficient as possible.

Surety Bonds: What Are They, What Do They Do, and Why Am I Required to Get Them?

Author, Andy Roberts, Account Executive, Surety Division, Rancho Mesa Insurance Services, Inc.

When we have clients that are required to bond for the first time, often their first questions are what is a surety bond, how do they work, and why am I being required to provide one.  

In its basic form, a surety bond is a three party agreement between the contractor, called the principal, the project owner, called the obligee, and the surety company. The surety company provides a financial guarantee to the obligee that the principal is both qualified and capable of performing the contracted job.

It is important to note, that while surety is an insurance product, it doesn’t function in the same way that traditional insurance does. Unlike insurance, which protects who obtains it, surety bonds are put in place for the benefit, or protection, of the obligee. As mentioned previously, the bond provides financial assurance to the obligee that the contractor is qualified and capable of completing the job per the terms stipulated in the contract. If the contractor were to default, the surety would be responsible for stepping in and making sure the project gets finished.

When and Why Are Surety Bonds Required?   

Surety bonds are required on most public works projects that are led by federal, state, or local government agencies due to the Miller Act, which was passed in 1935. The Miller Act is designed to protect tax payer dollars, by requiring performance and payment bonds on all federal projects in excess of $150,000 and payment bonds for federal contracts between $35,000 and $150,000. Most states have similar legislation, known as “Little Miller Acts,” although the bond threshold varies from state to state.  In addition to these jobs that require bonding, an increasing number of private owners and construction lenders are requiring surety bonds as well, in order to provide protection on their private jobs.

This article serves as a basic overview of performance and payment bonds, what they do, and why they are required on certain jobs. For additional information about these topics or additional information about the process of getting bonding for a job, please contact us at (619) 937-0166.

Additionally, we will be hosting a webinar, “Surety 101: Bond Basics” on August 27, 2019. I will dive deeper into the different types of contract and commercial bonds that are often required of contractors, and also the process of what is needed in order to get a surety bond program established with a surety. 

Home Care Dishonesty Bonds and Client Property Theft Coverage Are Not Created Equal

A common misconception in the home care industry is assuming a Home Care Dishonesty Bond is the same as having coverage for theft of client property. Many business owners don’t realize that Home Care Dishonesty Bonds, following the payment of a claim, will seek reimbursement from the business owner. That means the business owner is ultimately going to pay the claim if they don’t have an insurance policy to cover this type of act.

A bond is different from traditional insurance in that a bond is in place to protect the consumer (i.e. the client) in the event that a business becomes insolvent or refuses to pay a claim. In the case of home care dishonesty bonds, the bonding company acts as a safeguard for the client. In the event of a proven loss, the bonding company steps in to pay the client, and then seeks reimbursement from the business.

There are insurance companies that provide Theft of Client Property Coverage (sometimes called Third Party Coverage) under the general liability insurance form. This acts on behalf of the business owner.  Should someone accuse their employee of stealing, this insurance would pay the claim and not seek any reimbursement from the business owner.

It is worth looking into your current general liability policy to see whether or not your company is truly covered for theft of client’s property rather than be surprised when you receive an invoice from the bonding company.

If you have any questions about this topic, please contact Rancho Mesa Insurance Services at (619) 937-0164.

Time To Renew Your Bond Line of Credit

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

The majority of Rancho Mesa’s contractor clients have a fiscal year, end of December 31, for their company financial statements. During March, April, and May we collect a variety of financial information from our contractors to update the bonding company. The underwriting items we request include the 12/31 CPA financial statement, along with the work in progress and closed contract schedules. We also request an updated bank letter, account receivable/account payable schedules, and a personal financial statement from the owner.

Once this information is collected, submitted to, and reviewed by the bond company, they may follow up with questions or require additional information to explain what has been submitted. They will also ask the bonding agent to request single bond and aggregate bond program “parameters” based on the contractor’s estimate of work over the next 12 months. This information forms the basis for the bond agent’s line of authority that the bond company will provide to the bond agent.

The line of authority provides the agent with approval to execute the bid, payment, and performance bonds for their contractor client within the negotiated single and aggregate limits. The bond agent line of authority also includes certain conditions that would fall outside the agent’s authority to approve the bond request; therefore, the agent would need to submit the request to the bond company for approval. Some of the conditions that fall outside automatic approval include:

a.) a bid spread in excess of 10% between the first and second bidder.

b.) a project located outside the contractors’ normal geographic area for work.

c.) the contractor taking over work of a defaulted contractor, etc.

The agent line of authority is an efficient way for the bond agent to service their contractor client accounts without requiring approval from the bond company for every project. Upon receipt of a new bond request, the agent will review the project information to ensure it falls within their authority, and then they will execute the bid or performance bond and deliver the bond to their client. The line will usually expire on April 30th of the following year – which restarts the process to collect the financial information for the bond company to renew the agent’s line for another year.    

If you would like a better understanding of how the bond line of authority affects your bond program, please contact Matt Gaynor, at (619) 937-0165.

The Benefits and Risks of Third Party Indemnity

Author, Andy Roberts, Account Executive, Surety Division, Rancho Mesa Insurance Services, Inc.

For a contractor that is wanting to bid a job, or has won a job that requires a bond they are not able to qualify for on their own, one option to increase their bond capacity and ability to qualify would be to have a third party indemnify to their surety. While there are definite risks, this type of agreement can be very beneficial to both parties.   

For the contractor, the main benefit is the additional financial backing provided by the third party that will help alleviate concerns of a surety that might lead to the contractor running out of money, therefore, not being able to complete the job as contracted. For the third party, they can negotiate what their compensation will be through the contractor, since they are taking on a financial risk by signing the indemnity agreement. This type of agreement should not be entered into lightly because there are risks for both the contractor and the third party.

A Surety Bond Indemnity Agreement is a signed agreement which states the principal will indemnify the surety company, should a claim occur. When a third party also signs this agreement, they are opening themselves up to the risk of having to indemnify the surety should the contractor that is doing the work fail to complete it, forcing the surety to step in to complete the job. This becomes even more likely if the contractor becomes insolvent, making the third party next in line for indemnity purposes. While there is risk associated with this type of agreement, there are ways to mitigate that risk and that is for both the contractor and the prospective third party to thoroughly review each other’s businesses.   

When a third party is providing indemnity to support another businesses project, it is vitally important that they have a firm grasp of that company’s current capacity, capital and character, and this is the same for the contractor. The contractor needs to know that if they do get into trouble on the job, the third party does in fact have the ability to help them out of the situation.

For any questions regarding third party indemnity, please contact Rancho Mesa Insurance Services at (619) 937-0164.

How Accurate Work-in-Progress Schedules Can Positively Affect Your Bond Program

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

When meeting with new contractors looking to qualify for increased bonding capacity, one of the first items generally discussed is the work-in-progress (WIP) schedule. Understandably, the balance sheet and profit & loss statement get the most attention when compiling financial information for the bond company, but the WIP, whether on a quarterly or six month basis, allows the bond company to gauge how well the contractor has estimated their projects and how conservative they have been on a project’s profitability. Preparation of an accurate work in progress schedule is the only way to gauge the true profitability of the company.

The WIP or status of contracts schedule is used to track the progress of contractors’ projects from start to finish. The schedule discloses the details of each contract’s percentage of completion, and profitability to date in the current reporting period.

The major components of the WIP include:

1. The Contract Amount (which may go up and down throughout the contract based on change orders).

2. The Costs Incurred to Date (we recommend to charge as many costs back to the project as possible).

3. Total Estimated Costs (should be updated on a timely basis).

4. Billed to Date (billing the project on schedule).

The accuracy of the WIP schedule is extremely important since the bond company will provide capacity to the contractor based on profit to date for each project. The bond underwriter will track the projects over a certain period to determine if profits typically close higher or lower than the original estimate. For example, let’s look at a contractor who initially estimates his projects at 15% profit when they start up, yet historically closes them out at 20% at completion. If the contractor anticipates a $100,000 profit on a project and the work is 50% complete, the bond company may provide an additional $500,000 of capacity on that $50,000 profit (10% case) even though the project has not been closed out. 

On the reverse side, a bond company will have major concerns when they review a WIP schedule from a contractor that typically closes out projects at less than the original estimate.

If you would like a better understanding of how the work-in-progress schedule affects your Bond Program, please contact Rancho Mesa Insurance Services, Inc. at (619) 937-0165 to discuss ways to maximize your bond capacity.