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Discussion in 'Business Operations' started by LARSON, Mar 8, 2001.
What does this mean?
Do I need to do this?
Bonding is basically an insurance policy. The bonding company charges you a percentage of the total cost of the job to "bond" it. That means they are guaranteeing the owner that you will perform as promised at the stated pricing. If you don't perform (a "performance bond") the bonding company will pay to have the project completed (or may pay the difference between your price and the 'new' pricing by the company that replaces you. The cost to you is usually anywhere from 1.5% to 3% of the total project cost and it is paid prior to you starting the job. It comes out of your pocket... it never gets invoiced to you like a regular insurance premium.
For a "bid bond", the bonding company guarantees that you will take the job at the bid price. If you don't execute a contract with the owner in a specific time frame, the bonding company "forfeits" the bid bond (usually 5% or 10% of the amount of the bid) to the owner. It's a penalty for your not fullfilling your agreement to do the work, or enter a contract.
A "payment bond" means that the bonding company will pay your subs and/or suppliers if you fail to do so. It protects the owner from having a supplier (or subcontractor) lien the project for non payment of a bill for materials used on the project by you.
Getting bonding is worse than any financial dealing you will ever be a part of in your business life. Banks check credit and references. Bonding companies want to know how often you have sex and if you're any good at it. They want to know EVERYTHING about your business.... employees, credit, why ANYONE posted a bad credit reference.... they ask ALOT of questions and they get answers or you don't get qualified for bonding.
Now... once you get through this microscopic examination - your home free.... and you don't EVER want to forfeit a bond. EVER.
Think the bank is picky by having a personal guarantee ??? Wait till you see the paperwork that the bonding company makes you sign....
If you ever forfeit a bond, you'll never get bonding again unless the bonding company recoups ALL the money they put out. And the are just as bad as the IRS when it comes to collecting. However, there are no payment plans to the bonding company if you forfeit. I've never been there, don't plan on going there and most companies feel the same way. We always complete the job. Awhile back we did a project that we screwed up the bid and we lost over $20,000 on the job.... but we completed it because it was bonded and I cannot afford to forfeit any bond for any reason... ever.
With a bonded job there is no 'walking away' if you get mad.
It opens a great number of avenues to get work once you have bonding capability. Lots of guys don't go through the scruitiny of a bonding application, so the ones that do are usually able to get a much higher buck for the job they are quoting. We NEVER quote a bonded job just to get the job. If we get the project, we always make good money on it because the ramifications of forfeiting a bond are just too great to risk losing it.
By the way... we NEVER bid a snowplowing project that requires a bond. "Adequate Performance" is too subjective in the plowing biz to allow the possibility that the owner will go to the bonding company.
Once you go through the application process for bonding, you'll know if you are a decent businessman......
John thanks for your time. You were a great help to me.
Just an up date on this had lunch with my bonding guy today, looks like in the future people are going to have problems with bonding, three of the largest companies have gone under or stopped issuing any more bonds.
John you forgot to mention that you muct give them your first born male child.
You were lucky if you only had to pledge one kid. You must have GREAT financials then. Mine got both kids and the first two grandkids when they come along. Offered the wife, but they said that would be too much of a drain on resources.......
We went to bid a large job a few years ago and it required a performance bond and bid bond, It took a long time to get all of our paper work together and to work with the agent but it was well worth the effort we are now bonded and are able to bid jobs that others stay away from. Like John said you dont want to ever forfiet a bond because I dont think you would ever be able to get another one, we ended up not getting the job but it was well worth the trouble of getting bonded and now it is just a phone call to the bonding company to get one now. Just my two cents