Bid Bonds, Performance Bonds, Labour and Material Bonds – These three guarantees have something in common: Time.
I often encounter contractors and manufacturers that ask me about bonding and how it works. They are often taken aback when they find out how long
it takes to set up the facility and how involved it really is. I wrote an article a while about the technical
process of applying for a bond, but i don’t think I approached the personal side of bonding and what it means to a business.
Applying for a bond in a detail rich process. I have written about the first step in becoming bonded – establishing a facility. This is the step where the insurance company determines whether or not they want to back your company up in your attempt do land the bid and/or any future bids.
The insurance company wants to know all about the company, its finances, its projects, its capacity to handle the work, its capacity to finance the project, the capacity of the owners to remain solvent and whether or not the company can get credit (in the form of a bank letter)
You see, in order to stand behind you and bond you to a project, the insurance company need to ensure that you and your company can handle the work. Can you handle the extra capacity or the extra workers? Can you handle the extra expense?
Let’s take an example of a $2,000,000 dollar contract that requires a 50% labour and materials over a 2 year period. They are asking to guarantee $500,000 per year (not so bad right)? The risk will change from company to company – some companies only have $500,000 in sales in a year – this will result in the company moving 100% over its capacity whereas a company with $1,000,000 in sales will only need 50% more capacity.
When your company becomes bonded, it opens up a new world of clients and contracts. The companies that award contracts will see you as a contender, the insured limits from the insurance company will allow you to manage your company and to know how much you can truly handle and you will eventually start making allot more money.