Published On: Sat, May 18th, 2019

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It may not be in your official job description. But this article is the start of your new vocation as an official Bean Counter!

A major area of surety bonding is “Contract Surety.” This refers to bid and performance bonds for construction contracts. When we set up a new account, an amount of bonding capacity is established and the individual bond requests are processed within that line. It is possible for a client to use up the full capacity of their line, then our underwriting department could consider granting an exception to support additional work.

Efficient management of the line can minimize instances where an exception is needed. Here’s where the bean counting comes in.

We manage bonding capacity the way a bank runs a credit line. A series of individual transactions (bonds) can equal the full capacity amount (referred to as the “aggregate”). Bank credit lines work the same way. For the bond or bank customer, it is advantageous to maximize the available credit. Prompt reporting of bid results helps accomplish this objective.

The Importance Of Reporting Bid Results Promptly

  • When a bid bond is approved / issued, the underwriter debits the amount against the aggregate capacity. However, the full contract amount is used, not the dollar value of the bid bond. Example: A 10% bid bond for $100,000 actually uses $1 million of aggregate capacity. Therefore, when it is known that the bid is not likely to result in a contract award, this fact should be reported so we can restore the capacity.
  • Detailed bid results are needed on low bids in order to process to the final bond. Example: Our guy has a low bid for $5,000,000. The second bidder was $5,400,000. Third bidder was $5,550,000. Because our bid was less than 10% below the second bidder ( the Bid Spread ), the adequacy of the contract amount is supported. If our client was more than 10% below the second bidder, there would be an additional evaluation before proceeding with a final bond.
  • Bid Spreads – in cases where the bid spread is excessive, it is important to have a prompt discussion with us. If there is a bid calculation error, and the contract price is inadequate, there is a limited amount of time to withdraw the bid without penalty (such as a bid bond default / claim).
  • Low bids may be for lesser amounts than the original bid approval. Example: We approve a bid for an estimated contract amount of $9 million, but the actual bid goes in at $8,500,000 due to last minute changes and reductions. Therefore, when the low bid results are reported, $500,000 in capacity is restored to the aggregate.
  • Postponements – sometimes bids are postponed at the last minute, with no immediate reschedule date. The bid approval may never be used. When a bid dies on the vine, we restore the capacity immediately.
  • Withdrawal – Sometimes clients decide not to bid a project after ordering the bid bond. They may have determined that the plans are unclear or unacceptable. Advise us so capacity can be restored.

If you are now sufficiently impressed with the importance of minding these small details, you may don your green eyeshade and declare yourself an Official Bean Counter. It’s not glamorous, but it is necessary for proper management of the bond account. (Actually, we think it’s glamorous!)

Steve Golia is an experienced provider of bid and performance bonds for contractors. For more than 30 years he has specialized in solving bond problems for contractors, and helping them when others failed.

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