Being a problem solver is a great way to deliver value for your customers. When it comes to surety bond problems, do you have any creative solutions? Are there tricks up your sleeve that would make your client say “Mr. / Ms. Bond Fixer, I’m sure glad I called you today!”
OK, try your hand at solving these surety bond problems. They may have more than one good solution, but I will give at least one for each at the end.
1. The company owner is willing to give personal indemnity, but the spouse refuses. Your solution?
2. The underwriter has approved a performance bond but collateral is required (money the contractor lets the surety hold as a security deposit against possible bond claims.) The contractor doesn’t have the cash to put up. Your solution?
3. The subcontractor is required to provide a P&P bond, but no surety will support it. Your solution?
4. In order to support a Performance Bond, the underwriter requires a CPA Reviewed financial statement. The client didn’t anticipate this and only produced a Compilation (lower quality) report at their last year-end. Your solution?
5. A property owner has awarded a project to the contractor, but he is being required to issue a performance bond to the local township. The underwriter declines this stating “there is no contract for the performance bond to cover.” Your solution?
6. Company Working Capital is too low. Main problem is that Accounts Receivable were overdue at fiscal year-end. Your solution?
7. An old line excavation contractor can’t get bonded because their Net Worth is too low and the Debt to Equity ratio is too high! Your solution?
Feel free to post your ideas on how to fix these bond problems
1. Indemnity – Get the spouse to sign a “non-transfer agreement” prohibiting the indemnitors assets from being moved over. Other possibilities: Spouse indemnity that excludes certain assets, capped indemnity with a maximum dollar value or trigger indemnity that is active only under special circumstances.
2. Collateral – Can another party put up the money? Could be in the form of a loan to the company owner. Maybe an interested subcontractor or supplier will put it up so the contract can proceed (and they get the work.) How about using Funds Control with a hold back that collects the collateral account from the contract funds as the work progresses?
3. No subcontract bond – The general contractor could add a retainage clause to the contract, or increase it in lieu of the bond (hold back some money until completion as a security deposit.) On a short term subcontract, make a single payment for the full contract amount at the end when the work is satisfactorily completed.
4. Compilation FS – Have the CPA go back and do the additional work to upgrade the report. Sometimes, if it is late in the fiscal year, the underwriter may proceed with bond issuance based on proof that the next CPA statement will be a Review. Get a copy of the engagement letter with the CPA.
5. No contract – The underwriter is correct. There is no contract with the township, it is with the property owner. A bond on the property owners contract would be for the wrong amount in any event. A Site or Subdivision bond is the correct way to protect the interests of the municipality. It would guarantee the construction of the “public improvements” such as roads, sidewalks, sewers, etc. Caution: The property owner should be the applicant for this bond (not the contractor!) or they should at least be an indemnitor.
6. Slow Receivables – Slow receivables are disallowed by analysts based on the expectation that they will never be collected. Obtain a current update on the collections of the A/R list from the financial statement date. If they have subsequently been collected, they are included in the Working Capital analysis despite being old on the FS date.
7. Low NW – After years of operation, depreciation can wipe out the asset value of heavy equipment on the Balance Sheet. Document the current value to re-capture these dollars for the financial analysis. Get a copy of the equipment floater and a current appraisal to determine the current “forced sale” value.
8. Other problems – Think we listed all the possible bonding problems in this article? No, we left out a few million! When you get tough bond problems, or just want the help of experts, give us a call. That’s all we do! We have the markets and the expertise.
Source by Steven Golia