Surety Bond Authority Weblog

Despite a large spike in 2007 of state legislation for public private projects (PPPs), last year saw a significant decrease in the number of states that passed such permits. This is likely a result of the diminishing private funding for PPPs due to the current economic conditions within the United States. Additionally, recent reports from the U.S. House Transportation Committee on PPPs could have reflected negatively on them as well. However, international funding may still be an option seeing how PPPs were originally an overseas model. While many are concerned with the concept of PPPs in the United States, state officials should be able to protect public interest in PPPs with concession contracts, in which they have been able to provide oversight and address work force issues.

The only PPP-related enactment of 2008 was West Virginia’s House Bill 4476, which authorized public private projects for state transportation facilities. The new law requires payment bonds and performance bonds, both of which fall under the contract bond category of surety bonds, for qualifying transportation facilities in West Virginia. HB 4476 grants West Virginia’s Division of Highways the authority to determine the surety bond form and amount that is deemed satisfactory for the given circumstance.

Last year, a number of states passed legislation aimed at developing new technical assistance programs and surety bond guarantee programs, most of which were designed to aid small and emerging contractors (contract bonds), and other start-up companies, to include some minority business enterprises.

In the state of California, AB 2376 was enacted which crated the Small and Emerging Contractors Bonding Program, which followed a 2006 executive order from Governor Arnold Schwarzenegger. This newly enacted law tasks the Department of Transportation to work with California’s Officer of Small Business Advocate to create the Small and Emerging Contractor Technical Assistance Program no later than 1 June 2009. This program will provide necessary training and technical support for small business owners and contractors in order to assist such companies in obtaining liability insurance and/or any surety bonds required for them to qualify for public works construction projects. Specific information that the training must require is outlined in the new law. Another objective of the law is to aid the small businesses in qualifying for surety bond guarantees from the U.S. Small Business Administration.

On the other side of the country, in Connecticut, House Bill 5800 was recently enacted. With this enactment the Metropolitan District Commission for Hartford County must establish a new program that helps minority business enterprises in Hartford County acquire necessary performance bonds.

In Florida, HB 889/SB 1734 was enacted, which expanded a pre-existing program, similar to the one in Connecticut’s Hartford County. The new law increases the number of projects that performance bonds , or payment bonds can be waived for emerging companies awarded construction contracts. Previous law allowed three projects, but HB 889/SB 1734 now allow a total of five projects that performance bonds can be waived. Currently in Florida, such bond requirements can only be waived on projects with a estimated value of $200,000-$500,000. Lastly, the new law extends the sunset date two years from 30 September 2009 until 30 September 2011.

Michigan’s “budget bill” for 2009, House Bill 5808, resumes it’s current Department of Transportation program that provides aid to small businesses in the state of Michigan owned by either minorities or women. This assistance is to include surety bonding support.

Not all such efforts were successful. For instance, efforts in West Virginia (House Bill 2510) to institute bond assistance programs for new companies in need of support failed this year. If successful, this bill would have created the Targeted Minority Economic Development Fund, which could be used to encourage smaller start-up companies to form and expand. Additionally, this fund could have provided much needed money to help minority vendors meet bid bond requirements.

Today, everyone is looking for a way to cut expenses, even with state construction bonds (a type of contract bond). Some states that have not matched the federal Miller Act, with a threshold of $100,000, are now thinking about increasing their thresholds. Since there are not many claims under $100,000, it is believed that by changing the threshold to $100,000 taxpayers’ would be saving money.

Those states that have made changes with the threshold of these types of surety bonds are:

• Maine will increase their bond threshold from $100,000 to $125,000.
• California will increase their bond threshold from $5,000 to $25,000.
• Illinois has an increase from $25,000 to $50,000.
• Kentucky’s attempt to increase from $40,000 was defeated.
• New Hampshire’s bond threshold will stay at $25,000.
• Rhode Island would like to increase their threshold from $50,000 to $150,000, but plans have been put on hold until later.

For more information on state thresholds, click on the following link from the SFAA:  http://www.surety.org/GovRel/StateBondThresholds.pdf

In recent years, numerous state bills have been passed that look to hold sureties liable, and put contractors in default, when a contractor violates immigrations laws. Such bills have also made general contractors responsible (or liable) for immigration legislation compliance by all sub-contractors. However, due to the fact that the constitutionality of some of these laws is currently being challenged, the full affect of such immigration laws has not yet been experienced.

The Surety & Fidelity Association of America (SFAA) has been working closely with other interested groups to monitor immigration laws to identify what, if any, impact they will have on the surety bond industry. Specifically, the SFAA has worked to help contractors found in violation of such laws by trying to change the way penalties are handed down. Their thought is that project termination should not necessarily be the first option for a penalty, because terminating an on-going project may end up costing the taxpayers more money. Such terminations have many underlying costs associated with delays, etc, and will ultimately prove to be nonbeneficial to the public entity.

Currently, Mississippi is the only state in the country that passed immigration legislation in 2008 that will have a visible impact on contract surety bonds.

Mississippi’s recently enacted state Senate Bill (SB) 2988 requires employers in MS to hire only legal U.S. citizens, or legal aliens. All employers are required to use “E-Verify”, which is a pilot program aimed at assisting employers in determining whether or not prospective employees are in fact legal U.S. residents. Beginning with contracts that are entered into after 1 July 2008, general subcontractors and sub-contractors must register and fully participate in E-Verify in order to go into contract with a public entity. Employers that comply with this law will be held harmless unless they are found guilty of knowingly/willingly accepting false documents from a prospective employee, or aid in the creation of such documents. Violators will have all of their public contracts canceled, and lose eligibility for state/public contracts for up to 3 years after the infraction. Additionally, they can have their state license and permits suspended for up to year.

As previously mentioned, the SFAA is trying to lessen the severity of this punishment for first-time offenders, and they are hopeful that appropriate revisions will be made to this immigration law in 2009.

Throughout 2008, most retainage legislation focused on trying to limit or completely prohibit the withholding of retainage after projects are 50% complete. Retainage legislation in Alabama, Colorado, Illinois, Nebraska and also Rhode Island was defeated this past year, thanks in part to the efforts of the Surety & Fidelity Association of America (SFAA) and AIA Surety.

The most significant retainage legislation that was enacted was California Senate Bill (SB) 593. SB 593 prohibits California’s state transportation department (CalTrans) from being able to require retainage, and withholding funds. Of note, the law passed in SB 593 does come with a 5-year sunset period, which will give the legislature an opportunity to evaluate the effects of prohibiting such retainage by CalTrans. Additionally, the law states that CalTrans must inform the legislature any time they believe the inability for CalTrans to apply retainage on a given project will actually end up working against the best interests of California.

NOTE: For more information on “retainage”, and how it works and how they are related to surety bonds, read my article titled “What is “retainage” and how does it pertain to surety bonds?”

Retainage is a term that applies to the contracting business, and is therefore important to grasp when learning about contract bonds.  While it is not necessarily a part of the surety bond industry, it is related. 

Retainage is defined as the portion of a contractor’s payment that is withheld until a project is completely finished. In other words, the client won’t pay the contractor the retainage until all work has been completed, in order to provide the contractor with incentive to provide a quality product/work until the very end. Usually, the retainage amount will be negotiated before a contract has been agreed upon, and will be listed as a certain percentage of the project’s overall cost. Typical retainage percentages are around 10%. In some instances, where clients develop familiarity and confidence in a certain contractor, they may offer to forego the retainage requirement.

To illustrate the concept of retainage here is a simple example:

Lets say a customer (obligee) hires a contractor (principal) to do some construction work. The two go into contract for a $200,000 construction project to build some sort of structure. Using the average retainage percentage listed above, 10%, the customer puts into the contract that 10%, or in this case $20,000, will be withheld as retainage. Throughout the course of the construction project, the customer pays the contractor $180,000 for the work performed. Once all work is completed per the terms of the contract, and in a quality fashion, the final $20,000, the retainage amount, will be paid to the contractor.

If passed, Rhode Island Senate Bill (SB) 2323 and 2229 would have allowed anyone who is under a performance, payment or fiduciary bond (claimants, principals and obligees) to file claim against the surety bond company for a bad faith refusal to pay a claim, settle on a claim, or for failing to perform their obligations in a timely manner. The Senate Bill would have authorized claimants to go after both punitive and compensatory damages, and even attorney fees, and other costs associated with the lawsuit.

Senate Bill 2323 happens to be identical to a SB from last year that wasn’t passed either. Rhode Island House Bills (HB) 7766 and 7981 were SB 2323 and 2229 counterparts that went before the State’s House legislation, and these bills were defeated as well. Of note, AIA Surety, CNA Surety and members of The Surety & Fidelity Association of America (SFAA) all testified before both the Senate and House chambers in Rhode Island.

Like many industries in our economy, the U.S. construction market has taken a hit as a result of the recent credit crisis. Many constructions projects throughout the country have either stopped or been slowed down, and subsequently, the construction bond portion of the surety bond market has seen changes as well. Specifically, perhaps the greatest change to the construction bond market is the level with which underwriters of surety bonds scrutinize the cash flow, or financial health, of contractors seeking surety bonds for their businesses.

It’s important to understand why this additional scrutiny is being placed on the contractors’ cash flow by underwriters, because this is happening despite expectations by brokers that rates will be stable for the near future. However, the U.S. construction market’s recent decline forced related insurance rates (premiums) to fall during the second quarter of this year, which was the first quarterly drop in insurance premiums in the past few years. Additionally, the current market situation has caused a major increase in competition for construction jobs/projects nationwide. Construction companies are forced to lower their prices to get much needed jobs, and therefore their profits (profit margins) are naturally going to take a hit. This makes accurate, efficient management of companies’ financial statements essential to their financial well-being, and possibly to the survival of the business. In particular, proper management of the balance sheet, and the statement of cash flows (SCF) is crucial to a construction companies’ success, because often times they can work for up to a couple of months on a project before they begin receiving cash from customers. Construction expenses and payroll can add up quickly in this environment, and therefore cash flow is vital. Underwriters of surety bonds understand this, which is why they are taking a closer look at contractors’ cash flow when determining the level of risk associated with a bond and the premium rates.

On 9 January 2009, the Wichita Business Journal reported that the Wichita-based Martin K. Eby Construction Company Inc. and Liberty Mutual Insurance Company entered into a surety bond program with one another. This deal comes after a roughly four-year period where Eby Construction Co. was unable to purchase the contract surety bonds required in order to work on certain government projects. This inability to obtain surety bonds came as a result of a number of significant losses on jobs in both the states of Texas and Florida. Eby was forced to sell their operations in TX and FL.

In October of this past year (2008), Eby made the positive announcement that they were on the verge of regaining their ability to obtain surety bonds. A significant settlement in a lawsuit with one of their Dallas-based customers may have been the catalyst for this favorable turn of events.

Now that Eby Construction Co. has begun a surety bond program with Liberty Mutual, the company should soon be able to conduct work in the public sector. Additionally, Eby announced that they will be able to place bids to do work on certain profitable jobs in the private sector that they had previously been unable to bid on due to their inability to obtain surety backing (via surety bonds). Two of the private sector jobs mentioned by the Wichita Business Journal were Via Christi Health System and Cessna Aircraft Co.

I recently posted an article on the two major categories of surety bonds: Contract Bonds and Commercial Bonds. However, another much smaller yet significant category of surety bonds are Court Bonds. While this category of bond does not make up as much of the surety bond market as the previously mentioned categories, it is important to understand what they are, and the primary types of surety bonds that fall under court bonds.

In a nutshell, court bonds are a form of surety bonds that are required in many court proceeding in order to allow litigants to engage in the requisite legal proceedings. They can ensure that a person has the necessary protection from possible loss that could come about as a result of courts outcome. Court bonds can also guarantee that a person assigned as a fiduciary carries out his/her duties in accordance with the terms of an agreement or the orders of the court.

Here are the most common types of Court Bonds:

• Appeal Bonds - Required by a court before any appeal is made.
• Guardianship Bonds - These types of bonds ensure that legal guardians of minors or incapacitated individuals will not misuse any funds that are supposed to utilized to support that individual. (also known as Custodian Bonds)
• Probate Bonds - Bonds that are required by the court to guarantee the proper distribution of assets by the executor of an estate whenever an person passes away or becomes incapacitate. (also referred to as Estate Bonds, Executor Bonds, and/or Fiduciary Bonds)