Definitions

Bid security required by project owner.  Bid bonds are provided by surety (bonding) companies on behalf of the contractor.  A bid bond is used to bid a construction project.  Customarily, a percentage of the overall total bid amount – 5%, 10% or 20% – is used as a ratio for the bid bond.  Bid bonds are most commonly used by public agencies – Federal, State, County, Municipal – as is required by statute/law.  A bid bond guarantees that if the contractor is awarded the project, the surety agrees to provide final performance and/or payment bond(s) on behalf of the contractor.   If the contractor refuses to sign into a contract when the low, or chosen, bidder, the owner has the right to take as penalty the amount of the bid bond or the difference between low bid and second place bid.  AG Sadowski historically does not charge for bid bonds.  Our typical turn around on bid bonds is same day.  Often time there is extreme urgency – this is when we perform.

Character

Capacity

Capital

Character is indispensable. It is one’s reputation, repute, honesty and integrity.  It is the hardest quality to quantify, but the most important in surety.  Our strongest relationships are forged with  contractors of strong character.

Capacity is the contractor’s ability to perform the work. It is aggregate sum of labor forces, equipment, project administration, pricing and supervisory controls, total work on hand and expertise in the field necessary to complete the project.

Capital is the financial wherewithal to handle the upcoming project and existing backlog of work. Does the company have adequate working capital, cash flow, and equity base to finance operations and withstand unexpected setbacks.  What are the financial trends? Are margins on work in progress and completed projects consistent or fading? Is the CPA financial statement based on percentage of completion with appropriate notes and schedules? Do the internal statements track and have adequate detail to provide the surety confidence in the internal reporting?

Industry language for performance and payment bond(s) provided after award of the contract.   A bid bond was provided before the job was let (before bid-opening).  At bid opening, contractor was low bidder.  Once the contractor receives contracts he forwards them or physically brings them to us for the issuance of final bonds.  Final bonds are typically needed within ten days of the contract issuance.  We strive to turn around final bonds same day.  Give us the signed contracts and we give you back the contracts with the needed bonds.

General Indemnity Agreement – the formal contract that specifies conditions of indemnity.  Indemnity is the requirement to protect the surety against loss.

The principal and any individuals, companies, or backers who have agreed to protect the surety against financial loss..  Owners of construction companies and their spouses are required by the bonding company to personally indemnify for the bonds they receive from bonding companies.  One of our goals is to work towards limiting our client’s personal indemnity.

The obligee is the entity that required the bond and receives security in the form of the bond that the principal will complete their obligations. For a performance and payment bond this would be the project owner.

A guarantee that subcontractors and suppliers will be paid. Unpaid subcontractors and suppliers can file direct action against the bond for legitimate bills in the event of contractor’s failure to pay.   Performance and payment bonds are typically written together.

A guarantee that the contractor will complete a project in accordance with the terms and conditions of the contract.  It is our job to negotiate strong single project size and aggregate bond programs for our contractor clients with our surety partners.  Difficult cases are often our most rewarding opportunities.

The construction company owner personally indemnifies by signing into a GIA. By personally indemnifying, the contractor puts his or her personal assets on the line.

The party who enters into an obligation with the obligee (bondholder) and guarantees that obligation with security in the form of a bond.  For a performance and payment bond this would be the contractor.

The surety provides credit to the obligee in the form of the bond, thereby guaranteeing the obligation will be completed.  The credit extended in the form of the surety bond is similar to a loan and likewise subject to repayment if the principal is unable to meet their obligations under the bond and a loss occurs.

A contract in which the surety backs contractual promises made by the principal to a third party, who is called the obligee. For construction projects this backing consists of the completion of the project and payment of all legitimate invoices of subcontractors and suppliers.  If the contractor (principal) doesn’t fulfill the obligation, the surety must do so.  In turn, the surety with look to the contractor to be made whole (Indemnity). Surety bonds can include performance and payment bonds for contracts, court bonds, public official bonds, or license and permit bonds.