Why are some bail bonds better than others? Why can the small ones be harder to come by than the big ones?
Construction companies are among the most important clients of a surety company. They are the source of the Performance and Payment Bonds that guarantee your construction contracts. For a surety (bail) company, these are probably the largest and most lucrative transactions. So why would the guarantee risk losing a customer by offering tough terms on an obviously small bonus?
There are many different types of bonds, and contractors may need a variety of them: bid bond, execution bond, payment bond, maintenance bond, license bond, permit bond, court bond, to name a few. In this article we will discuss why the big ones (big dollar amounts) can be easier to come by than the small ones, even for the same applicant.
The answer to this question is found in the nature of the obligation, not the dollar amount. A good way to illustrate this is to compare a compliance bonus with a salary and welfare bonus.
performance bonus
Performance and payment bonds (P&P) refer to construction contracts. guarantee that the applicant to carry out the project in accordance with all aspects of the written contract, and they pay invoices corresponding to suppliers of labor and material.
Salary and Welfare Bonus
This type of bonus is required for union contractors (businesses that employ unionized workers). The W&W bond guarantees that the construction company will pay the union wage rate as needed and make regular contributions to union benefit plans, such as pension and health. insurance program
It’s just not fair!
P&P bonds range in amount from a couple hundred thousand dollars to tens of millions, while a W&W bond is often under $100,000. So why might it be easier to get the big one? Why might it be easier to get a $500,000 performance bond than a $50,000 union bond?
The answer lies in the nature of the obligation and in the worst case scenarios.
Suppose the contractor goes bankrupt. With a performance bond, the security is put in the place of the contractor. They must make arrangements to complete the project in accordance with the contract. The payee of the performance bond (also known as the obligee, the owner of the contract) continues to pay the remainder of the contract amount as the work progresses. Now they pay the bond by completing the termination. This is called the “unpaid contract amount.” Even if the contractor fails and you don’t have any money personally, the unpaid contract amount is a resource the collateral can rely on and hopefully avoid a net loss on the claim.
The union bond is a promise of pay the funds at a future date. It is a financial guarantee – the toughest type of bond obligation. Subscribers will search your crystal ball… Oh, sorry, we don’t have one.
The guarantee is to guarantee the future solvency of the construction company, a task that is not easy. And if they’re wrong, if the contractor can’t make his union payments because he has no money, then there’s no money for the guarantee either.
Q. Who is likely to pay the wage and welfare claim?
A. The guarantee (a net loss)
It is the tough nature of some small bonuses (salary and welfare, bonus release, replacement) that makes them exceptionally difficult to obtain, often requiring full collateral. On the other hand, the surety may provide the same applicant with a $300,000 performance bond based primarily on their credit report.
Bottom line: It’s just not fair, but we never promised it would be, because the nature of the obligations differs. That is the deciding factor, even more so than the dollar amount of the bond.