6 Proven Strategies in Reducing Construction Performance Bond Costs
If you’re working in the construction industry and involved in any ongoing projects, you most likely hear the term bonds. To explain it further, bonds are generally used for a wide variety of purposes particularly in the construction industry. With the other common bond options such as license and payments bonds existing, still, performance bonds are still a good option to use. This type of bond is one of the common types of surety bonds and works suitably on public work projects. With this bond, contractors can able to fulfill the obligations listed and specifically spelled out in the contract.
It is already understood that performance bonds come at a high price. Generally, it costs about 1% to 10% of the total contract current amount and it could possibly be higher than the usual estimated percentage. There are several factors that can ultimately affect the performance bond costs. Below is a quick guide to understand what performance bonds are all about, its importance and purpose as well as a few useful strategies in reducing the usual higher costs associated with it.
How It Works?
A performance bond will be going to protect the owner against any losses if the contractor has failed to do the job completely or fully unable to deliver the project on time and per contract provisions. In some cases, a few contractors in the midst of the construction have unfortunately declared bankruptcy disallowing them to continue the work or manage project. It is during this type of circumstance that the surety is best of use and applied for it will be accountable for compensating the respective owner for all the losses. This compensation is best described as the covered amount under this type of bond.
Financial intuitions nowadays have different application requirements varying on a few factors such as the contractor’s capability, the project’s volume, and the complexity and difficulty of the particular project. Usually, the majority of the insurance companies will be going to ask the following info below:
· CPA-prepared financial statements (2 years minimum)
· Application of the surety
· A copy of the awarded contract
If by any chance, you are going to choose the recommended option of using business financials upon the application of a performance bond, the items below should be present in the statement itself as well.
· Complete disclosures and notes
· Balance sheet
· Work schedules
· Cash flow statement
· Income statement
Take note that if any of these items are currently missing from the financial statements, expect that the surety company will raise its red flag and most likely will not approve your application. The listing, keeping and tracking the above-listed items is easier if a project management software is used. The tool itself has proven its usefulness in every construction phase. There is no way that contractors or project managers will never be considered in using this.
Factors Determining the Performance Bond Costs
A few factors are identified below in terms of determining the rate for your bond. This is usually offered by the surety bond company that you choose:
· Personal credit score
· Liquid assets
· Personal choice of the surety bond agency
· Professional experience in the industry
· Financial statements
· Citizenship status
Why Requiring a Performance Bond is Necessary?
It works both ways for clients and the contractor.
1. For the contractor — it is usually a prerequisite under the contract’s terms
2. For the client — it can guarantee a satisfying project completion by a contractor
So the next question will be, when are these bonds required? For federal construction projects, performance bonds are essentially needed together with bid and payment bonds if the project itself will be going to exceed to $100,000. The requirements for requiring this bond depend on local jobs and state locations. Private projects are not requiring this type of bond but it can possible especially if it considered a huge and complex project.
Lowering Construction Performance Bond Costs
1. Working with a Strong Surety Bond Company
Choose wisely! If you wanted to avail of the best pricing available, selecting the ideal surety bond company is a must. Select the bond company that has a strong reputation and take a look at their respective portfolios. In this way, you can able to figure out what is suitable for you. It is an obvious sign that you’re on the right track. The company itself will be providing accurate details and information regarding on how they are going to determine the price of the performance bond.
Bond companies could vary when it comes to the quality of bonds they’re going to provide as well as the reliability. According to the A.M Best Rating, companies that are labeled as A-rated and above are usually considered as one of the most reliable companies in the country. Generally speaking, this type of company usually have larger access to selected markets. On the other side, T-listed companies labeled by U.S. Department of Treasury (DoT) are being approved to write and provide bonds for federal government contracts. Make sure to obtain a bond from any of these labeled companies!
2. Further understand the Basics of Credit
When determining the price of construction contractor bond price, personal credit is certainly one of the most vital factors. Hence, it is important to recognize and identify what goes into building a strong credit and at the same time maintaining it. You may begin in reviewing your personal credit score and make sure to take a look at the history as well in the credit report. Here in this report, the following info is to be seen:
· Detailed information about Payment history
· A complete list of past and current accounts
· Credit availability info
· Liquidations
· Collection of accounts
Take a closer and thorough review of the credit report in order for you to see if there are possible listed errors. If you find one or a few, resolve it right away with the credit agency or the lender. In this way, a strong track record is produced and it can able to reduce the costs of performance bonds. It is also important for the contractors to save and keep every single important document and file. Good thing that construction management software is available and utilized today. Keeping track of the saved files such as this is way easier.
One way also to reduce the bond costs is through improving personal credit scores. Personal credit score has a huge impact on a surety. Below are some tips that you can do to effectively improve your credit score:
· Paying bills and other related obligations on time (payment could be above minimum amount)
· Paying any credit card balances (keep it at least 30% under the limit)
· Paying off debt instead of unsettling it
· Prioritize outstanding payments (taxes and collections)
· Clear all credit card balances and minimal use of the cards
3. Learning about Bond Pricing
All types of bonds and how it should be processed are certainly difficult to understand at first. But once you finally have the idea and basic understanding of how the pricing works, getting the best suitable bond for the project is definitely easy. Know that performance bond is normally priced based upon on a percentage from the total amount of the bond required. It typically ranges between 1% and 10%. Further understanding and knowledge about these basic pricing structures will definitely help in securing a cost-effective bond for your business.
4. Avoiding Bond Claims to Happen
Nobody from the parties involved wanted a performance bond claim to occur. But there are several instances, when the contractor has been dealing with financial concerns that can result to a possible delay and incompletion of the job. If this happens, that would probably be the best time to look over for help through bonds. If this will be accordingly considered and done, the project owner can be given assurance that the contractor’s concerns will never ruin the construction job.
Never default on a contract — this is probably the best way to effectively avoid a performance bond claim. If the contractor has sensed that they might be unsure about their working performance, picking up the phone and reaching out immediately to the surety company and ask for detailed info regarding the current concerns is definitely the right absolute way.
5. Organize Business Financials
Having everything organized such as the financial records from previous projects, assets, and liabilities, payments in one place is an easy way for you to acquire a more favorable bond price coming from a surety bond agency. That is why, an organized record-keeping system will sound fantastic from the agency regardless of credit is a huge issue. With the use of construction project management software, sorting and tracking all financial records is easy.
Additionally, increasing also your liquidity (working capital, assets- liabilities) is also considered as an indicator of the financial capacity of yours. A medium-high liquidity ratio is a valid proof to the surety that you have an excellent capacity after you take good care of the liabilities. Hence, this is also evident that you are reliable enough in handling a claim so well which is really something to be considered.
Improving the liquidity, it requires you to accumulate any uncollected debts before sending the application for a performance bond. Refinancing short-term loans and turn it into long-term ones is also another way to increase the working capital.
6. Obtaining a U.S Citizenship
There is so much higher risk in some markets for Non-U.S. citizens and so much inconvenience at the same time. There are several markets that might even totally exclude non- U.S. citizens from availing opportunities. In this case, it was obtaining a bond. Yet, this still makes a sense to most sureties in a way because there are a lot of complexities to deal with for a claim if the concerns are from non-U.S. citizens.
If obviously, you are not a legal U.S. citizen yet, apply now for a U.S. citizenship. By being a citizen of this country, it will abruptly influence you and your bond rate at the same time in a more positive and increasing way. In short, it will be easier for the agencies to bond you at any favorable rate because you are a legit U.S. citizen and definitely have strong ties to the country.
Key Takeaways
With all the tips and strategies presented aiming to reduce the bond costs and improve personal credit score, one of several important things that need to be considered in order to prevent issues from happening such as escalating payment issues and other related issues — is to have efficient communication between all involved participants and crew on a particular construction project.
Pro Crew Schedule is the best construction management software available in the market today. With the use of this software tool, scheduling of tasks, tracking of the crew, and keeping files is easy. Get now a live demo for free.
