Contract Provisions to Review for Successful Projects

Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.

Contracts are not always the most fun to read, but are certainly important for all of us in the construction industry.

As a subcontractor, you are bound to the contract once you have signed it whether you understand everything that is in it or not.

Let’s consider a few key provisions in a construction project agreement that can impact your bottom line more than others. With a goal of mitigating certain impacts along the way, addressing these items prior to signing your contract should be considered as a best practice in the industry, and, we hope, support your success.

Contracts are often tedious to read, to say the least. Any business owner can proceed at their own risk, of course. But, we want to share a few things for you to consider that might offer some support and protection.

Delays

What does the contract say? What is a reasonable penalty? Business owners should always confirm just what types of delay clauses they could be responsible for (e.g., liquidated and consequential come to mind), and since there are most always liquidated damages that could be charged to you for delay of a project, make sure your contract is clear about what those are.

As a subcontractor, you are bound to the terms and conditions of the prime contract between the owner (whether a public agency or private entity) and your general contractor. These can be referred to as “flow down” provisions when it comes to things like damages, warranty, etc. 

Best Practice: Always ask for a copy of the prime contract if you are a subcontractor. Make sure you read that, too, for anything that could impact you.

Mobilization

What can you bill for, and when? 

Sequencing of Scope of Work

What happens when another trade interferes with your work? What are your rights and responsibilities of putting your client on notice when you have these impacts? Can you be compensated for any additional costs relating to these impacts?

Material Cost Escalations (and lead times)

Does your contract allow for cost escalations? How do supply chain issues affect you and how can you mitigate some of that exposure?

Change Orders

What can you reasonably expect to achieve to cover OH&P? 

The best practice for change orders is documentation from day one and early communication to your client. When everyone bunches up at the end of the job with a ton of change orders, the owner may have less of a pool of funds to draw from (for contingencies, etc.) than they may have at earlier stages of the project.

It’s important to know that the surety companies and underwriters are contract savvy as well and we do our best to understand what the obligations are within the contracts. You should expect some questions about some of these contract provisions which, at the end of the day, are intended to make sure you are best protected along the job’s progression.

There just may be something about the surety’s relationship with their principal and communication about these contracts which results in bonded jobs being more successful than non-bonded jobs.  But, that’s a topic for another article and podcast!

A Deeper Dive Into Professional Liability

Author, Lauren Stumpf, Marketing & Media Communications Specialist, Rancho Mesa Insurance Services, Inc.

In Episode 319 of Rancho Mesa’s StudioOne™ podcast, Vice President of the Construction Group Sam Clayton interviews Executive Vice President Daniel Frazee as they continue their conversation on general liability policies and move deeper into a key exclusion that is often seen as they negotiate terms and conditions on behalf of their clients and prospective clients.

During the episode, Frazee explains what professional liability is and why it is excluded on general liability policies. He gives a summary of what types of contractors typically have professional liability exposure and reasons for why they may have it. Frazee also describes specific options contractors can look at when it comes to securing stand-alone policies.

Episode 319 can be listened to below, or on your favorite listening platform. If you would like more information, please contact Daniel Frazee at dfrazee@ranchomesa.com, or Sam Clayton at sclayton@ranchomesa.com.

A Brief Discussion on Pollution Liability

Author, Lauren Stumpf, Marketing & Media Communications Specialist, Rancho Mesa Insurance Services, Inc.

In Episode 315 of Rancho Mesa’s StudioOne™ podcast, Executive Vice President Daniel Frazee and Vice President of the Construction Group Sam Clayton discuss pollution liability, and why virtually all general liability policies exclude this coverage.

Frazee and Clayton talk about general liability policies and delve deeper into some key exclusions they often see as they negotiate terms and conditions with underwriters.

Clayton also explains the specific options contractors can look at when it comes to securing stand-alone policies.

Please listen to the full episode below, or on your favorite listening platform. If you would like more information, please contact Daniel Frazee at dfrazee@ranchomesa.com, or Sam Clayton at sclayton@ranchomesa.com.

Contractor Strategic Planning with Kevin Brown of RBTK, LLP

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

In my recent StudioOne™ podcast episode with Kevin Brown, Of Counsel with the CPA Firm RBTK, LLP, we discuss the anatomy and considerations that go into strategic planning for your business.

The podcast addresses questions, such as:

• What do you want your business to accomplish? 

• What steps will help my company achieve its goal(s)?

The episode includes a discussion of the importance of developing a succession plan.

If you would like more information on Episode 309, please contact Kevin Brown at kbrown@rbtk-cpa.com.

Matching Contractors with the Right Bond Company

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

Like any great match-maker, a surety bond agent needs to fully understand both parties in order to match the contractor with the right bond company. 

In a previous article, we explored key factors that a contractor should consider when hiring a surety bond agent, highlighting experience, some additional value adds, and agent appointments. Agent appointments are an important factor to consider, because one of the most important roles of a surety bond agent is making sure that their clients are paired with the right surety bond company. In order to do this, an agent needs to have an in-depth understanding of both their client’s business and the bond companies that they work with.    

In order to properly match a client with a bond company, it is vital that the agent take the time to really understand the client’s business: review financials, review the business plan, and get a firm handle on what the contractor’s goals are for the company. Doing this will allow the agent to get a thorough understanding of the client’s specific bond needs and will help them narrow down the marketplace to a handful of bond companies that would be the right fit. While it is very important to have a good understanding of the client’s business, it is equally important to have a strong understanding of each bond company’s appetite.

There are more than 100 bond companies out there and they are all a little different. They all have different limitations with regard to the size of bonds they can write. They will have different underwriting standards for when a client is required to start providing CPA-reviewed financials. They have different classes of business that they favor. Some bond companies value personal financials more than others. This list goes on, making it vital that agents have a thorough understanding of their markets, and have good relationships with their underwriters so that clients are placed with a bond company that will be a good partner for them as they look to accomplish their goals. 

It is important that an agent have appointments with a variety of highly rated bond companies while also possessing a deep understanding of those markets because contractors need to be able to trust that their agent has them placed with the bond company that is the right fit for their business. Rancho Mesa has long-standing appointments with over 20 highly regarded bond companies, in addition to close working relationships with those underwriters. 

As you look to build a successful bond program that can help your construction firm grow profitably, contact me at aroberts@ranchomesa.com or by phone at (619) 937-0166.

Best Practices for Growing Your Surety Program

Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.

You may know that the surety client/agent/underwriter relationship is different from other lines of insurance.

Whether you are new to the bonding process, or have been doing bonded work for years, there is a handful of important items that can assist with securing the best relationship for your bonding needs. It boils down to a few key areas: timely information, accurate information, and regular communication.

For contractors who only need small or infrequent bonds, communication may be very basic and minimal. For example, if we establish your support with a surety who has an “express program,” these programs are based on clean, personal credit and perhaps some track record of completed projects. So, there may not be a need for as much communication as there would be if an account is in a more “standard” or “preferred” program. We always want to understand and share details on the jobs you are looking to do, and have completed, but there’s generally no need for a personal relationship with the underwriter in these types of programs.

Once you are established with a more standard surety relationship, the timely information the surety expects to receive is key. However, with regular and clear communication, we also hope to add value to the relationship between our clients and the underwriter in support of the contractor’s needs. 

Communication about financial information will ensure that proper attention is given to the accurate details that confirm important benchmarks. Questions like: does equity track? is the operation profitable? how is the cash looking? are percentage of completion entries noted and match what’s on the work in progress report (WIP)?

Regular communication will not only include this financial information, but also conversations about the work you have completed and the work you will complete. Be prepared to provide trends from year to year, profitability year-to-date, and specific information on current or completed jobs noted on the WIP (whether certain jobs are bonded or not). All of this information is designed to better understand your operational processes and goals, thus presenting the most complete information to the surety.

Being proactive in this relationship is always our goal. We will do our best to facilitate the information that is needed, and work to share the information that will facilitate the best support for you.

We are your advocate with the surety underwriter – and happy to facilitate these conversations and/or meetings to ensure that your surety needs are adequately addressed and met.

Regular and open communication with your surety agent and underwriter, like any relationship, is a Best Practice that will serve us all well.

To discuss your surety program, contact me at awright@ranchomesa.com or (619) 486-6570.

Take Advantage of Contractor Express Bond Programs

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

Several years ago, I put together an article on various credit driven surety bond offerings that require a one-page application to qualify for bonding. Quick and simple! At that time, the maximum limits offered by various carriers was $350,000 for a single bond.

Last week, I received separate emails from two of our partner surety carriers offering single bond programs of $600,000 and $750,000, respectfully. Again, these quick and easy bond offers are solely based on personal credit scoring. In other words, if the owner of a construction company pays their personal bills, then they most likely will have the ability to qualify for a decent-sized bond.

There is no need for company financial statements to qualify for bonding in these programs. Instead, the contractor completes a “fast” application requesting personal financial information about the owner(s). The bond company will run the personal credit of the owner(s). If the personal credit is decent, the bond will be approved. A response is provided within 24 hours of submission. 

The program responds to requests for bid bonds, performance and payment bonds, and letters of bondability. Several carriers provide a “pre-qualification” feature so you can determine if you will qualify for the bond before you bid or negotiate a project that will require a bond. This pre-qualification feature is helpful for owners that are concerned they may have low credit scores.

The standard premium rate for these programs is 3% of the contract amount. Based on the strength of your personal credit, and the type of work you are looking to bond, we have seen this lowered to 2%. 

Therefore, if you are considering a project that requires a bond and you are not a big fan of collecting a lot of paperwork for one project – don’t fret. We may have a solution to help you win that job.

If you would like more information on how to qualify for these programs, please contact me at (619)937-0165 or mgaynor@ranchomesa.com.

Managing Your Surety Relationship for 2023 and Beyond

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

Over the past two years, there has been a lot of talk about a looming recession. If a recession happens, its severity remains to be seen, but regardless, it is important for contractors to be taking an active approach in building their relationship with their bond company and utilizing the services of a surety specific agent. 

Surety companies are conservative and err on the side of caution when it comes to providing bonds, which makes it imperative that the contractor build a strong relationship with their management and underwriting teams. Annual meetings should be conducted, as this provides the underwriter valuable insight into the company while also allowing them to build a more personal relationship with the contractor. Additionally, it is important that there is regular communication between all parties throughout the year regarding the contractor’s financials and performance on jobs, as this type of discussion can help build trust between both parties. This may seem pretty standard, but it is not easily accomplished unless a contractor is working with a surety broker that specializes in the bonding industry.    

The surety industry is specialized and relationship driven, which makes partnering with the right broker even more critical as the country moves into unprecedented financial times. Effective brokers know each carriers’ appetite; they have relationships with those underwriters and should be able to easily determine which surety will be able to provide a program to match the contractor’s needs. This type of knowledge and experience can greatly benefit a contractor in the event the economy begins to turn and surety markets begin to limit capacity and/or pull back from offering bond programs.    

In this most uncertain time, contractors should begin building and, in some cases, re-building their surety relationships. With considerable work lined up in Southern California over the next few years, strengthening these bond programs can allow for maximum capacity and potentially profitable growth. 

For any questions about managing your surety relationships or to discuss if we can assist with any bond-related needs, contact me at aroberts@ranchomesa.com or call my direct line at (619) 937-0166.

Utilize Payment Bonds as a Backstop for Getting Paid

Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.

Contractors may do their work and meet their contractual obligations, but on some jobs it’s harder to get paid than on others. As in any business, your collection activities are key to getting your money. Don’t be afraid to be a squeaky wheel. There are a couple of things I’d like to share as either a reminder, or perhaps an education, that all contractors should know and consider.

Know where your money is coming from. If you are working on a public works job, it is of course coming from the public agency/owner of the job. If you are working on a private job, there are more questions to be asked.

If you are working as a general/prime contractor or a sub-contractor on a private works project, always confirm the financing – always. Make sure you document your job file with information as to where the money is coming from, and specifically cover your scope/line items of work. There may be a construction loan. If so, you will typically obtain that information for your preliminary notice purposes. If not, don’t hesitate to ask for some verification as to where the funds are held. Your surety will commonly pursue the source of the financing, if you are asked to bond the job. 

What do you do if you are struggling to collect what you are owed? First and foremost, be aware of what your basic payment protections might be.

Your most likely assurance of payment for undisputed work would be the payment bond. Payment bonds are a primary protection to sub-contractors and suppliers if they are working for a prime contractor who has had to provide their bonds to the owner. There is an investigative process in the event of a claim against the bond, but the surety is there to make sure all valid claims are paid.

Sub-contractors, if you are working for a general contractor, you will want to make sure you get a copy of any payment bond that might be held by the owner for the general contractor’s work.  

Suppliers, you may have payment bond protection as well, depending on who you are working for on the job and the type of job (i.e., federal, public or private).

Public works project bonds are required on most public works jobs of $35,000 or more (but can vary by agency) and Federal jobs of $150,000 or more.

Private works project bonds are rarely required of the general contractor, but it is important to ask if they are to document your job file. Otherwise, your best options are the stop notice to the lender and/or mechanic’s lien.

Best practice here is to always ask for a copy of the payment bond from your general contractor. Confirm one has been provided to the owner if you are a sub-contractor or supplier. If you are a lower tier sub-contractor, find out if the sub-contractor you are contracted with had to provide a bond and obtain that for your job file! If you are a supplier, ask about those payment bonds that might protect you as well.

What if a payment bond isn’t in place to cover you? There are various remedies short of litigation that may be available to you. These include mechanic’s lien filings, and/or stop notice to the lender/owner of a project. 

Mechanics lien can be used if the job is on private property (needs to be recorded with the county recorder). At the very least, this puts you in a generally secured position on the title of the property when it is sold. It’s not a quick remedy, or even guaranteed payment, depending on other liens already filed ahead of you.

Stop notice may be useful if the project is for private works (filed against the construction lender). This notifies the lender that you are owed money. You will have to file a bond to accompany your stop notice, but when properly filed, it requires that the lender withhold monies until your matter is resolved. Again, there is a process involved here and it’s often not a quick remedy, but it should be considered.

If you are working on a private job and there is no payment bond filed on the project, the stop notice and/or mechanics lien are key.

It's important that you know your lien rights and filing times whether you are working on a public or a private project (the various protections have certain timetables, e.g. after notice of completion, etc. that have to be considered for you to have rights to these various remedies). If you are a member of a trade association, you no doubt have a member who is an attorney. They can provide the current timelines for the various lien rights. We can also offer referrals to construction attorneys who can provide you with the timetables for the purposes of these various filings or related support.

Pursuing these remedies are best practices. It doesn’t hurt to file the preliminary notice on any job when you begin your work. Everyone is entitled to managing their relationships the way they see best for their business, but hopefully some of this information will be helpful.

If you have questions about payment bonds, contact me at (619) 486-6570 or awright@ranchomesa.com.

Five Things to Know Before Your Annual Surety Meeting

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

November is the month that I meet with our contractor clients to discuss how the current year will end up and begin planning for the next year. We will also touch base regarding the items our surety carrier partners will want to hear about when we schedule our annual meetings (after the December 31, 2022 financial information is available).

Similar to having an open book test, if our contractor knows in advance what will be requested, they can prepare accordingly and anticipate any “red flag” type items that might be of concern for the bond company. Below is a general list:

1. Items on the balance sheet with an emphasis on cash, accounts receivable, borrowing against the bank line of credit, and equity.

   An aging schedule of the accounts receivables will be very helpful to determine what amount is in excess of 90 day collections.

2. The revenue and net profit or net loss from the income statement to reflect if 2022 was a profitable or losing year. Also, a discussion of any Paycheck Protection Program (PPP) money that was loaned to the contractor and if the entire amount was forgiven in 2022.

3. They will review the work in progress and completed contract schedules to discuss which projects were successful and others that lost money. Be prepared to provide additional detail on any problems connected with losing projects and steps taken to correct this on future work.

4. Potential new opportunities you anticipate in 2023. Will any of these projects exceed your current program, contain work outside your normal scope or geographic territory? Be prepared to address how you will manage additional risk that may be a concern to the bond company.

5. Tax Planning. What additional withdraws do you anticipate to cover taxes, etc.?

If you would like more information on how your bond carrier might analyze your 2022 financial information, please contact me at (619)937-0165 or mgaynor@ranchomesa.com.

Employee Retention Credit

Rancho Mesa's Account Executive of the Surety Department Andy Roberts is joined by Tina Jani, CPA and Partner at Covell, Jani & Pasch LLP, to discuss the Employee Retention Credit.

This podcast is designed to provide general information as to the subject matter covered. Neither the publisher nor the presenter by and through this presentation is rendering legal, accounting, or other professional services. If professional advice is required, you need to contact your tax advisor, the presenter, or the publisher for their services under a separate engagement contract.

TRANSCRIPT

Andy Roberts: Hello everyone and welcome back to StudioOne, our safety and risk management network. I’m Andy Roberts, Account Executive in the Surety Group with Rancho Mesa and joining me is Tina Jani, who is a CPA and Partner at Covell, Jani & Pasch LLP. Today we are going to be talking about the Employee Retention Credit, which is something many contractors remain unaware of.  Welcome to the show, Tina.

Tina Jani: Thank you very much for having me. I am very excited to be here!

Andy: As I mentioned the Employee Retention Credit is something a lot of contractors haven’t heard of, but what is the ERC?

Tina: The ERC is an economic recovery program created by the CARES Act – the same legislation that created the Paycheck Protection Program (PPP).

Andy: That’s interesting that it was brought about by the same legislation that provided for the PPP but what brought about the need for the ERC?

Tina: The US government introduced the program to help businesses with employees who got affected either by full/partial shutdown rules or if the gross revenue went down by certain percentage in 2020 and 2021.

Your business may qualify for a stimulus check of up to $26,000 per employee by claiming employee retention tax credits.

Andy: You mentioned percentage. Can you elaborate what are those percentages?

Tina: Yes, absolutely! The key percentages to keep in mind are:
a. For 2020 - 50%
b. And for 2021 - 20%

What that means is you take 2019 as a base year. Then you compare your Quarterly Gross revenue for the year 2020 and 2021 with the same quarter in 2019. If your quarterly gross receipt went down by 50% in any quarter in 2020 or 20% in 2021, you are eligible for the Employee Retention credit for that particular quarter.

Please keep in mind that these are just key points. The actual rules are much more detailed and generous.

Andy: This is all great information. So when did the program start and when did it end?

Tina: The program started on March 13, 2020 and it ended for regular business on September 30, 2021. There are special rules for new businesses started after February 15, 2020 or if you are  severely financially distressed employer  that makes you eligible for the ERC for the fourth quarter of 2021 as well.

Andy: Does that mean it’s too late to apply for the ERC?

Tina: No, absolutely not. You can go back and amend your payroll tax return which is form 941. The statue runs for three years from the date the original 941 was due. You can still apply for the ERC by filing form 941X. The first statue will for Q1 2020 will run out on April 30, 2023. Businesses still have from 6 months to one and a half year to go back and amend their payroll tax returns and apply for the ERC. However, we highly recommend that businesses pay attention to this credit as soon as possible.

Andy: Do you have to prove that your business was affected by COVID to be eligible for the ERC?

Tina: No, you don’t have to prove that your business was affected by COVID. As long as you show a drop in the gross revenue and that can be because of any reason, your business is eligible for the ERC.

Andy: Can you give me an example of a client that didn’t know about the ERC until you told them and how they benefited?

Tina: It is interesting that almost every business was familiar with the PPP loans but not very many businesses are familiar with the ERC. When we started working on the ERC, we contacted all our clients including our largest client and asked for their gross revenue analysis. We made them aware of the ERC and they were eligible for two quarters, total $2.8m. This is just one example. There are numerous businesses out there who are eligible for the ERC and has not applied yet.

Andy: That was all great information and this sounds like a credit that can have a big influence on a contractor’s financial statement, which as you know, in the world of Surety Bonds is very important because a contractors financials are the driving force behind what they can qualify for when it comes to a bond program. This was a somewhat basic overview of the ERC and how it works and I know it’s more complicated and requires the help of an expert like yourself, so how would you recommend a company owner start the process of determining if they qualify for the ERC?

Tina: ERC is a very generous program that a small business owner should not ignore. The process is very simple and straightforward, especially under gross revenue drop method. Basically, you start with comparing your gross revenue. They should contact their CPA or tax professional to start the discussion I am happy to answer any questions and can be reached at my email address pjani@cjp-cpas.com or my phone 760-737-0700.

Andy: That’s great to hear. Thank you so much for joining me Tina to discuss this very important topic.

Tina: Thank you for having me.

Choosing the Best Surety Partner for Your Contractor Bonding Program

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

The Rancho Mesa Bond Department is currently appointed with 25 surety carriers to support our contractor clients with all sizes of bond programs. It is key that the contractor is matched with the correct bond company to ensure timely approval for bonding. For both new and existing clients, we look at several factors to ensure you are partnering with the bond company that will provide the best single and aggregate bond program at the most competitive rate.

During our initial meeting, we will determine the program size required to make your company successful. We discuss the underwriting requirements of several surety markets to determine the best fit. Two questions that assist us in the process are:

1. What financial presentation do you have at your fiscal year end (i.e., audit, review, compilation, internal) and how often do you prepare internal financial statements?

2. What was your largest single project and what do you anticipate needing in the next two years? (Same question is asked for aggregate program.)

Then, we will discuss the bond markets that best fit your needs. Below is a general breakdown of five categories of bond placements:

1. Fortune 1000 and larger regional accounts – we work with seven large carriers with US Treasury approved limits in excess of $500,000,000. The bond company will typically require annual audited financial statement and quarterly internal statements.  

2. Accounts with a strong balance sheet, bank line of credit, audited or reviewed financial statements, and quarterly work in progress schedules – 11 middle market carriers can support these programs where an occasional bond will exceed $50,000,000.

3. Accounts with good balance sheets but also lean on the personal net worth of the owners. The largest segment of 15 carriers support these contractor accounts. 

4. Accounts were the personal net worth of the owners is stronger than the company assets and essential to support bonding. There are 5 players in this area.

5. Credit-based bond programs for contractors that only require an occasional bond under $750,000. These require the least amount of paperwork, but also the highest premium rate. Several national bond companies offer small bonding programs. 

If you would like more information on how your particular company matches up with a particular carrier, please contact me at 619-937-0165 or mgaynor@ranchomesa.com.

Blockchain Technology May Further Digitalize the Surety Industry

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

In my previous article and podcast, “Surety Industry Forced to Innovate,” I discussed a few technological advancements within the surety industry and how the ultimate goal would be issuing bonds to obligees digitally. While that is still some ways off, the technology is here and there are companies and organizations already exploring how blockchain technology may be the answer when it comes to fully digitalizing the surety industry.    

Simply put, a blockchain is a shared digital ledger that records transactions between parties and is permanent and verifiable. Applying this method to the surety industry, an electronic record (i.e., bond) would be created and shared with all parties to the bond, and any changes to that bond would be automatically added to the record so that every party who has access to it can see the history of the changes. This type of technology and the fact that it’s an immutable record, would alleviate the need for wet signatures, raised seals, and notary acknowledgements, which would increase the speed at which bonds can be issued, while also cutting some costs that are associated with issuing hard copy bonds. As mentioned, these systems are still being developed, but there are companies and surety organizations that are actively working to make this technology commonplace within the industry.   

The Institutes launched the Institutes RiskStream Collaborative, which has spearheaded the effort to introduce blockchain technology to the surety industry. 

“The power of attorney use case was the logical starting point and we’re excited to advance it forward. We are also excited that it will lead to many more downstream use cases, including Bond Signature and Verification,” said Patrick Schmid, vice president of the RiskStream Collaborative. 

Institutes RiskStream Collaborative started by piloting a program digitalizing the power of attorneys and this is now moving into its second phase. This initiative has garnered support from major surety associations like The International Credit Insurance & Surety Association, the Surety & Fidelity Association of America, the National Association of Surety Bond Producers. 

Rancho Mesa is committed to utilizing technology and strives to always be at the forefront when it comes to advancements and changes in order to help our clients stay ahead of the curve. And, while issuing bonds digitally using blockchain technology won’t be happening tomorrow, there are bond companies in Europe along with the Institutes Riskstream Collaborative that are testing the process. And, its participants view this as the future of issuing bonds, which makes it an important topic for us to address and monitor. 

For questions about technology in surety or your surety needs, contact me at aroberts@ranchomesa.com or call my direct line at (619) 937-0166.

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.

Five Contract Provisions to Consider

Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.

When the surety provides the performance and/or payment bond required by a contract, that contract is the basis of the surety’s guarantee. Simply put, the bonds follow the contract. Because of this, there are a few key things that the surety is going to want to review, and you should do the same. The goal is to make sure you, as the contractor, have everything in place to ensure your success. 

1. Liquidated Damages

Typically, contracts will have a liquidated damages provision. This is generally the per day penalty imposed in the event you are the cause of a delay for the completion of the project. If you are acting as a subcontractor and can only find vague verbiage in your contract with the general contractor (GC), it probably implies that you are held to the same liquidated damages as the GC is to the owner. Make sure you know the actual value or dollar amount of the liquidated damages and consider your bid amount accordingly. Just because you don’t see a dollar amount per day in the contract doesn’t mean you won’t be held to that flow down provision from the prime contract.

Private jobs may be more flexible. Most all public jobs will have something in the prime contract about liquidated damages and they can get pretty steep. We’ve recently seen invitations for bids that include $40,000/day liquidated damages. How many days delay would it take to eat up your profit on a given job? If you do run up against these higher liquidated damages, consider either conditioning your bid to include verbiage that either caps those liquidated damages to some dollar amount that is reasonable, or include a provision that you will only be responsible for a proportionate share of the liquidated damages based specifically on your work that may have caused any delay.

2. Retention

The standard retention for public works contracts in California is 5% for the prime contractor as a result of the efforts of our subcontractors association. Notably, this standard practice is scheduled to sunset in 2023. There is a bill in Sacramento to make the standard permanent. You can bet groups are lobbying to support the 5% standard as it has proven to be a good number.

Knowing the standard retention is important when negotiating your contract. If you are a subcontractor to a GC on a public works project, review the contract for the retention provision. You may be agreeing to abide by a percentage that is higher than what the GC is having withheld by the prime contract. For example, you may be asked to agree to a 10% retention instead of the standard 5%. That is a business decision you can make, but at least you know the law and consider it in your negotiations.

On private works projects, the owners can set their retention amount. And, we continue to see that being set at 10% for the prime contracts.

3. Indemnity

California law sets a limit to some extent on what one party can be liable for to another party. That said, some contracts may be out of date (i.e., broad form indemnity was the law of the land years ago), or the contract may have been drafted in another state. So, make sure that your indemnity provision clarifies that in no event will your duty to indemnify the other party be greater than what is defined as your scope in your contract and that you are not responsible for work performed by other trades.

4. Insurance Provisions

Insurance requirements are greater in some contracts than others. Limits of liability needed can change from contract to contract. It is best practices is to have your insurance agent review the contract before you sign. Make sure you have the coverages you need and include the cost in your contract amount. We’ve seen umbrella limits increasing with some public and private owners, so account for those increases.

5. Warranty

The standard warranty for workmanship in California is one year after completion. We do see some public owners wanting to extend that to a two-year warranty. In some trades and in some contracts, it might be longer. When presented with a longer term warranty, ask yourself if it is reasonable to expect you will be in a position to respond to a warranty item in X number of years after completion. We strongly suggest that you limit the warranty to no more than two years. In some cases, where bonds are required, the surety may ask for verbiage to be added to the contract to limit the surety’s liability to one or two years, and we will then include that in the bond form, if the provision exceeds the two years.

I have always held the belief that knowing a good construction-oriented attorney is as important as any other professional service provider you have to support your business. Consider that it is probably cheaper to have an attorney review your contract before you sign it, then to be put in a position to have to defend yourself later. A good legal resource can provide valuable input if you come across something new, or not well understood. We have some good resources that we can recommend. Contact me at (619) 486-6570 or awright@ranchomesa.com if you would like to discuss your surety needs or if we can provide other resources to support your business.

Surety Industry Forced to Innovate

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

Rarely are the words surety and technology advancement synonymous, and that’s because it’s hard to introduce advancements to an industry where so many obligees still require raised seals and wet signatures on the bonds they are receiving. However, due to some challenges that bond companies, insurance agencies and obligees have faced during the pandemic, the industry is being forced to innovate. E-signatures on bond documents are becoming more commonplace, and electronic powers of attorney and digital seals are being adopted with the eventual goal of creating a surety bond creation process that is wholly digital.  

General Indemnity Agreements executed by a contractor/principal when they are establishing a surety program with a bond company, have traditionally needed to be executed in front of a notary and the original document, with the wet signatures, provided back to the bond company. Now, more and more bond companies are moving away from this archaic practice and allowing these documents to be signed digitally. This is an important change as it shows the industry’s willingness to implement changes that are in the best interest of the principal. Another change that is being brought about is the use of electronic powers of attorney (POAs), and digital seals.

A couple of years ago, very few bond companies utilized electronic POAs, opting instead to mail agents hard copies that needed to be dated using a typewriter. While this method is still being used, more and more sureties are opting to provide their agents with e-POAs that they can print as needed. In addition to this change, digital seals are also starting to be more commonplace. These can be affixed to the POAs and the bonds themselves when they are transmitted digitally. The importance of these two changes is worth noting as they are steps towards creating a process which allows for the creation of a surety bond by solely electronic means. 

Getting to a point where contract bonds are done only electronically is still a way off, but the technologies that are needed are available, making it necessary that the surety industry continues to embrace technology to improve our processes, and to ensure we are providing bonds in the form, whether electronic or paper, that clients and obligees want. 

For questions about technology in surety or your surety needs, contact me at aroberts@ranchomesa.com or call my direct line at (619) 937-0166.

Construction Law and the Future of the Industry With Carlin Law Group

Rancho Mesa's Director of Surety Matt Gaynor interviewed Kevin Carlin of Carlin Law Group on Wednesday, March 23, 2022 to learn about his background, where he started his law career, and current hot topics in the construction industry. Kevin is a well-respected construction attorney here in Southern California who represents a number of Rancho Mesa clients.

One topic of discussion centered on payment disputes.

MG: Are you seeing a lot of payment disputes right now?

KC: No, as your listeners know, the construction economy is on fire right now as there has been a ton of money sloshing around as a result of low interest rates and stimulus. While there are a few payment lawsuits going on right now, contractors seem to be more focused on getting the next job rather than chasing the money they are owed on the last job. Most of my cases right now seem to involve demands for defense and indemnity on large complex public, commercial and hospitality projects. These cases are highlighting how important, and frightening, indemnity language in prime contracts and subcontracts is, and how important it is to have good insurance. Most contracts contain indemnity language where if you are 1% at fault, you agree to pay 100% of the liability. Most people in the construction industry do not know about this or appreciate this risk because it’s never a problem until it’s a problem. These are the risks that make it so important to have the right coverages and policies of insurance, which is where you guys come in.

Listen to the full episode to learn more about Kevin and the Carlin Law Group.

What to Consider When Hiring a Bond Agent

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

With the passage of the Infrastructure Investment and Jobs Act, there is $125 billion of federal funds available for procurement. This provides a significant amount of federal construction work which will be put out to bid, with a vast majority of it requiring bonding. For contractors that may have never bonded before or bond infrequently, this is a clear opportunity to build revenues. With that in mind, it is critical that these contractors have a good surety bond agent on their side to help them navigate this process. Here are some questions and things to look for when evaluating if an agent is the right fit.

Experience  

It is important to note how many years an agent has been in the industry, but it’s more important to make sure they are a surety specialist. Surety bonding is a very specialized insurance product, and an agent that focuses solely on surety will have a better understanding of what the different bond companies value when they are reviewing a new contractor because each bond company has a different appetite. Additionally, agents that focus solely on surety will have developed stronger relationships with bond companies. This relationship is important because bond companies want to work with agents that are knowledgeable and have good reputations within the industry. 

Agent Appointments

Which bond companies does the agent have an appointment? This is an important question to ask, as bond companies are very conservative and the better bond companies are much more selective with the agents that they appoint. When asking this, it is also important to note how many bond companies the agent is appointed with. Having access to numerous sureties, while maintaining key relationships with the main companies, allows an agent to find the best bond company for each contractor.

Additional Value Adds

Surety bonding is a complicated industry, and if a contractor's goal is to increase their bonding capacity, it is vital that the agent provide additional services, like a detailed review of the company’s financials, and yearly analysis of a contractors single and aggregate bond limits. These services are important because they help the agent and the contactor get on the same page with regards to the current bond program, while also allowing them to game plan for the future, and set goals for how to increase bonding capacity. In addition to these in-house services, an agent should be able to recommend a good construction CPA and reputable banking contacts that know what a contractor needs to maximize their bond credit.

Bond agents play a vital role and partnership for contractors, which makes it very important that a contractor performs proper due diligence when hiring an agent. At Rancho Mesa, we have surety only specialists whose expertise is used to ensure our clients are placed with the right bond company to suit their needs. 

To answer any questions from this article or discuss if we can assist with any bond related needs, contact me at aroberts@ranchomesa.com or call my direct line at (619) 937-0166.

Understanding Single and Aggregate Surety Bond Limits

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

When we work with the bonding carriers on surety credit programs for our contractor customers, we traditionally put into place single and aggregate bond limits. This provides our contractor clients certain parameters when they are considering a maximum project size for bonding purposes.

The single limit is a guide the contractor can use on a per project basis as they consider various projects to bid or negotiate.

The aggregate limit is the total of all current projects using a “cost to complete” calculation. The cost to complete would be the estimated costs on a project (less) the costs to date. As an example, a contractor may have a $5,000,000 single / $20,000,000 aggregate bonding program.

A few important points to consider:

• The limits are not set in stone. This is important to understand. The bond company will often raise the single and aggregate limit if the right type of project presents itself.

• We include the bonding limits when we prepare a bondability letter for our client. If you are looking at a project that might exceed your single bonding limit, be sure that the required limit listed is sufficient to support the projected amount. For example, if your limit is typically $5,000,000 and the project requires a bondability letter for a $6,000,000 job, it is important that you secure pre-approval from your agent/bond company to increase the amount of the single limit on the letter.

• The bonding limits are often determined by the contractor’s fiscal year-end financial statement. This is one of many factors to set the limit but an extremely important consideration.

One final consideration is that bonding limits listed on a letter are often just a guideline reflecting the normal size of the projects our contractor clients usually bid. Based on their financial ratios and project history, some clients, for example, will qualify for a $10,000,000 limit but only list $2,000,000 because they rarely consider projects over that amount.

If you would like more information on how your particular bond limits are determined, please contact me at 619-937-0165 or mgaynor@ranchomesa.com.

How Year End Financial Statement Preparation Influences Bonding Programs

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

As a contractor looking to qualify for a contract surety bond program, your team should be aware that company financial statements will be required by underwriters in most cases. This is largely due to the fact that a company’s financials, their balance sheet and an income statement, represent the primary source of information that a surety will use when building a bond program. And, the way this information is presented goes a long way in determining the amount of credit that a bond company is willing to extend. There are a few different options for presenting year-end financials, with the two most common being internal financials and CPA-reviewed financials.  

Internal statements are prepared either by the contractor in-house, or by a hired bookkeeper, and are often accepted by surety companies for contractors that do not bond frequently and/or only bond smaller projects under one million dollars. The reason for this limitation is internal statements are not viewed as being overly reliable because they have not been prepared by a third party CPA. If a contractor is looking at a bigger job or looking to grow their bond program, then it is worth the investment to have a CPA complete a review for the fiscal year-end financial statement.    

A review from a CPA provides a deeper dive into a contractor’s financial statements and will usually include notes about the financial statements regarding revenue, accounts receivables, accounts payables, and other financial events that occurred over the course of the year. And, while there is a larger cost associated with a review, between $10,000-$15,000, as opposed to providing an internal year end statement, the surety gains a greater understanding of the company’s financials over internal statements. Additionally, they consider a CPA review more reliable and trustworthy, thereby willing to offer increased bonding capacity to qualified contractors.  

Providing CPA-reviewed financials adds additional overhead to a company’s budget, but it can be vital to ensuring the maximum bonding capacity is provided when it’s need it most. Furthermore, to emphasize the point, it is important that contractors select a competent, proactive bonding agent and construction CPA in order to map out a successful strategy for year-end financial preparation. The right partnership can help your firm build the highest possible level of bond credit as you build toward the future. 

Finding an experienced CPA with a construction financials background can be a challenge. I can help recommend someone who can assist your company.

To answer more questions from this article or discuss if it may be time to make the jump to a CPA review, please email me at aroberts@ranchomesa.com or call my direct line at (619) 937-0166.