Contractors Center Point

Bond Claims: Three Mistakes That Can Cost You

The following post was first seen in the December addition of the CFMA Update. The post was written by Scott Wolfe of CFMA.

If an account goes unpaid and you’re unable to collect from your customer, a claim against the payment bond guarantees your cash. Just don’t get burned by mistakes commonly made with the bond claim process. Here are three costly mistakes.

1. Examining the Bond Terms, but Ignoring State & Federal Laws

Every payment bond has “terms” dictating how a claim should be made, but these terms are often irrelevant since state or federal laws control the claims process. If you rely on the bond’s terms and ignore the state law, then you’ll be doomed.

Improvements to state, county, or federal property, for example, must be bonded. Claimants must follow the state or federal procedures to make a claim against these bonds. More than 30 states have some type of preliminary notice requirement to make a bond claim (just like a mechanics lien claim). More than 45 states have a rigid filing deadline for bond claims.

Giving attention to the bond’s terms and not the applicable law is perilous. On the other hand, following the state or federal law for claim-making standards and ignoring the bond’s terms is usually a safe practice, as conflicts between the two are resolved in favor of the statutory standards.

2. Confusing Bonded Projects with Unbonded Projects

Are you sure you are working on a bonded project? Incorrect information can be fatal to your rights.

Generally speaking, projects on federal, state and county properties will be bonded projects and those on private property will be unbonded. Nevertheless, there are always exceptions. It is difficult to know the nature of every project. Incorrect information about a project may leave you protecting a claim you don’t have and ignoring measures that could preserve your rights.

This is a bigger problem than you may think. Construction projects are sometimes the product of Public-Private Partnerships, or the lease of public property to a private business (e.g., airport vendors). It’s hard to know the character of these projects.

Avoid this mistake in two ways: 
(1) Research every project when starting to furnish; and (2) Request a copy of the bond.

3. Not Following Up with Data

Filing the bond claim document is an essential first step to getting paid on a bonded project, but it is not the only step. It is a mistake to think you can file the bond claim and wait for payment. Not only is this very unlikely to happen, but it’s actually dangerous, as your claim rights may expire while you wait.

Follow up with the bonding company. They will ask for backup information to prove your debt. Provide that information and follow up, follow up, follow up.

Many states have a statutory time limit for the life of a bond claim. If the claim representation delays long enough, the life of the bond claim may expire and then you will be out of luck.

As mentioned, the above post was first seen in the December addition of the CFMA Update and the post was written by Scott Wolfe of CFMA. For further information on this post, please contact the construction professionals of McKonly & Asbury.

New SBA Surety Bond Limits

The SBA has increased the single limits for its very successful surety bond program. Essentially - the SBA helps contractors obtain surety credit by guaranteeing the bond for Insurance Company should there be a loss.  This mitigates the insurance companies risk and allows for less stringent underwriting.  It’s been popular over the past few years as balance sheets of construction companies have taken some direct hits.  Here are a few highlights:

Previous maximum - $2,000,000.00

New maximum - $6,500,000.00.  They will go up to $10,000,000.00 but must be performed for a Federal Government Agency

Project Size

Up to 2x the largest completed project ($6.5M - $10M maximum per individual project)

15 to 20x available working capital (for all projects)

 - Lines of Credit are included as working capital
 - Contractors with negative working capital may also be eligible using additional tools (like escrow)

Business Size

Allowable business sizes based on total sales and the number of employees is determined by NAICS code. This varies depending on the type of business. Total sales can be as high as $33.5M in many cases.

SBA Paperwork the SBA has greatly reduced the amount of paperwork needed to utilize the program.

To learn more about this program please contact Greg Marco of McConkey Insurance and Benefits at email gmarco@ekmcconkey.com, telephone 717-755-9266 or contact the construction professionals of McKonly and Asbury, LLP. 

SBA Issues Final Rule to Streamline Surety Bond Guarantee Program

Small construction contractors will have improved access to bonds beginning Aug. 15 under the U.S. Small Business Administration’s Surety Bond Guarantee Program, thanks to a new, streamlined application process. The SBA issued a final rule on July 16 to implement its “Quick Bond Guarantee Application and Agreement.”

The rule simplifies the SBG program paperwork for construction contracts of $250,000 or less, combining two existing forms, the SBA Form 994 (Application for Surety Bond Guarantee Assistance) and the SBA Form 990 (Surety Bond Agreement), and eliminating an obsolete reference to SBA Form 994C. In addition, SBA will not require the principal to complete and submit two other forms for these small contract amounts, SBA Form 994F (Schedule of Work in Process) and SBA Form 413 (Personal
Financial Statement).

To learn more about this new SBA Surety bond Guarantee Program, contact your financial advisor or the construction professionals of McKonly and Asbury, LLP.

Contract Litigation Insurance - A Confidence Booster

Litigation you might say holds no certainty but uncertainty.  From the strategies of your opponent, to the ultimate outcome, the process of litigation is laden with events and decisions over which the participants may have little or no control, and as such it cannot be accurately predicted.  Even the costs and amount of attorney fees to be expended cannot be estimated with certainty.  This is the nature of litigation.  In some cases, a litigant may even be on the hook for its opponent’s attorney fees if he loses.  When a party is faced with the possibility of paying the attorney fees of the other side, the decision to commence litigation or to defend a lawsuit rather than settling is daunting, possibly to the point of total surrender.  Because attorney fees could exceed the amount of the original claim itself, this possibility can be paralyzing. 

Of course you don’t have to worry about any of this if your attorney has assessed your case as a “slam dunk” or a “guaranteed winner”.  Unfortunately, like unicorns and the tooth fairy, such things do not exist in the real world.  Business owners, along with the assistance of wise counsel, must make a realistic assessment of their litigation exposure and risk of loss: a sober, unvarnished review of the strengths, and yes, the weaknesses too.  Studies support this prudent approach, as statistics developed by the Bureau of Justice Statistics have shown that 33% of plaintiffs and 66% of defendants end up on the losing end of their contract disputes at trial.  Although Pennsylvania law generally requires that each party in ligation pay their own attorney fees, it is becoming increasingly common for parties to shift the risk of attorney fee costs to the other side by including an attorney fee provision in their contracts.  

Now it is possible to insure against the possibility of paying one’s opponent’s attorney fees in breach of contract lawsuits by purchasing Contract Litigation insurance.  This relatively new insurance product may provide just the leverage and confidence necessary to initiate litigation to pursue claims or to defend against dubious claims rather than capitulating under the risk of paying your opponent’s attorney fees in the event the court sides with your adversary. 

To learn more about Contract Litigation Insurance and its benefits, please contact Tom Williams of Reager & Adler, PC. Tom can be contacted at twilliams@reageradlerpc.com. To learn more about other trends impacting the construction community contact your construction professionals at McKonly & Asbury, LLP.

SBA Surety Bond Guarantee Program - Can It Benefit Your Construction Company

The SBA (Small Business Administration) has a very efficient, little known program to helps small and emerging contractors get surety bonds up to $2,000,000.  After gathering and signing some initial paperwork – the system is web based and the program is handled by your surety professional.  In the paragraphs that follow is an outline of the program, eligibility requirements and the paperwork required.

At its core the SBA Surety Bond Guarantee Program is set up like reinsurance and participates with many insurance companies across the country.   XYZ Excavating needs a bond and has trouble in the standard market do to a variety of reasons including lack of working capital to not enough net worth.  They go to their local surety professional and he/she recommends them for the SBA program.  The insurance company at that point can take more risk because the SBA will guarantee up to 90% of that bond in case there is a loss.  In a $1,000,000 claim situation the surety is only $100,000 at risk.  They and the SBA underwriters (less strict underwriting guidelines) approve the bond and the local insurance company issues the bond on THEIR paper. The owner or GC does not know that the SBA is guaranteeing the bond.  It’s all behind the scenes.   As stated earlier, the maximum bond amount at this point is $2,000,000. 

For most general building contractors revenues that are less than $33,500,000 will qualify for the program and specialty trade contractors that are $14,000,000 and under are also eligible.  If a bond of over $1,000,000 is requested a CPA reviewed statement is required.  From $501,000 to $1,000,000 a CPA compilation will be needed and under $500,000.00, high quality internal statements will be needed.

At initial request the contractor will need the following:

• Current WIP (Work In Progress) Schedule with start and end dates of each job
• Personal Financial Statement
• Bank Line of Credit Term Sheet
• Contractors Questionnaire (provided by surety professional)
• Most recent 3 years Financial Statements
• Internal 6 month numbers (if applicable)
• Copies of Tax returns on all affiliates/subsidiaries – first 4 pages will suffice

To learn more about this program, contact Greg Marco, Surety Bond Executive with McConkey Insurance and Benefits. Greg can be reached at gmarco@ekmcconkey.com or contact the construction professionals of McKonly & Asbury, LLP.