The last line of the estimate is the most complex
Picture this: The estimate is complete, including all direct and indirect costs, and overhead and net profit have been calculated as well. Any applicable additional taxes have been added to the bid. Finally, it’s time to fill in the last empty line of the estimate. If the project is one that requires the contractor to post bonds, the amount of money allocated to securing the required bonds must be included.
Understanding the purpose and basic mechanics of bonding becomes a big part of the game plan when a project is considered from the company’s viewpoint. If the company is unable to complete the bonding procedure, then the estimating crew spend should move on to other projects.
Bonds are basically financial guarantees that the company bidding the project will be able to complete the project. Should the contractor fail to do so, then the bonding company would have to step in and complete the project. Bonding a job is actually insurance for the customer, promising them a completed project to some degree.
Bonds used to be a minor part of project costs. With increasing costs having to be covered, as well as increasing risks being underwritten by the insurance companies that provide the bonds, the premiums have risen steadily. The current costs vary widely. The pricing for various bonds is very much in proportion with the company’s financial stability as well as overall ability to complete the projects in the judgment of the bonding company’s underwriter.
There are several ways to complete the bonding procedure. Using the company’s cash flow is one way to meet the requirements. This can be done by posting a cash bond; with the low interest earned by savings investments, the assets are better used in more productive ways. Therefore, most companies will opt for bonds that serve as an insurance policy and the price will vary from company to company.
The first bond required for a bondable project is the bid bond. The bid bond guarantees to the owner that the contractor can get a bond. If subsequent bonds cannot be issued, the bid bond will be forfeited with the costs being charged to the contractor —although this rarely happens if the company keeps abreast of its bonding line. Most bondable projects will usually require a 50 percent payment bond, as well as a 50 percent completion bond.
The payment bond is obviously to insure that a contractor pays the required wages and materials cost. The completion bond, on the other hand, insures that the job will be completed.
Bonding requirements, if required, can be found in the invitation to bid and special or general conditions of the specifications. Most bonds call for a 50 percent bonding line for each the payment and performance bond, the sum of which will be the total project price. The fees are based on the project price and are usually entered near the final price of the bid.
The bottom line
Aside from the costs, what other information may affect the ability to bond a job? The company’s financial condition is of prime concern. It should be noted, however, that the way the bonding company looks at the financial health of the company is not the method used by an accountant or the IRS. The bonding underwriter is by nature extremely conservative. An example might be the purchase of a new piece of equipment included in the assets of a company. While this is normally considered to be a positive sign, the underwriter will still insist on a better bottom line, so the new equipment may be an added tax liability.
The most important consideration affecting the estimating load is the amount and status of the company’s work in progress. Bonding companies set limits of what the underwriter considers to be the ability of a firm to handle the overall work load. If the prospective bid exceeds the bonding limit, the company may not issue any bonds. In some situations it may be of help to have the general contractor underwrite the bond by picking up part of the bond risk. This is similar to cosigning on a loan, and how many folks will do that?
Many contractors have pointed out to underwriters that while they may be close to the bonding capacity, that part of their workload is in stages of completion that the financial risk is reduced considerably. This approach has seldom worked, as underwriters don’t view the work picture as contractors do.
Estimators should inform themselves of bonding game ins and outs so they don’t waste valuable time and energy. I personally took the underwriter to lunch and received an education well worth the time. EC
DAVID is a professor of electrical technology at Long Beach (Calif.) City College, a consultant and an expert witness. He can be reached at 562.597.1877 or at email@example.com.