Electrical contractors can streamline bond application and delivery with Web-based surety management systems.
The slowing economy, high-profile bankruptcies, and Sept. 11th attacks sent the surety industry into a tailspin, forcing more electrical contractors to secure surety bonding. Rather than get buried under a mountain of paperwork, however, some contractors are using Web-based surety management systems to manage their line of credit and keep track of outstanding bonds.
Robert Duke, director of underwriting with the Surety Association of America (SAA), Washington, D.C., defines a surety bond as a type of insurance in which the surety company guarantees the owner that a contractor will fulfill a contract.
“By providing a surety bond, the surety is saying to the owner that this contractor is qualified to perform the project and if not, it will step in and provide protection,” Duke says.
Electrical contractors have been legally required to apply for bonds on federal projects for more than a century, but Web-based surety management systems have just recently come to the forefront. Duke says he is only aware of a handful of Web sites that offer online bonding.
“For the most part, we see the contractors still working through a bond or insurance agent and obtaining the bond that way,” Duke says. “Some of the processes for applying for a bond, however, have been automated, which benefits the contractor by streamlining the process, reducing or eliminating the paper that has to be completed, and improving turnaround times in terms of getting a bond request fulfilled.”
While the surety bonding process is not yet entirely paperless, Duke says automation has increased efficiency within the industry in three different areas — the application process, surety bond issuance, and bond execution. To apply for a bond, an electrical contractor typically calls or faxes an insurance agent, who transcribes the contractor's information and sends it to the surety company for approval. A contractor can now eliminate a step, however, by submitting that information electronically.
Electronic signatures have also streamlined the bonding process. Traditionally, the insurance company had to overnight the bond to the electrical contractor, who physically signed the paper bond with a “wet signature.” Today, contractors can insert their electronic signature into the bond by signing an “e-pad,” a technology commonly used for credit card purchases at department stores or supermarkets.
Along with using e-pad technology to sign their bonds, a few electrical contractors are also applying for bonds online.
Clay Foltz, president of TheBondAgency.com, says electrical contractors are qualified to use the Web-based surety management system, but many haven't yet embraced the technology and still prefer a face-to-face relationship with an insurance agent. For that reason, TheBondAgency.com assigns a local account correspondent to each contractor to provide on-site service and consultation.
“We have a lot of people that apply over the Web and then we establish their account and administer it the old-fashioned way by phone and fax,” Foltz says. “We only have a small handful of clients who are actually using the full capabilities of the processing end of it.”
Some Web-savvy contractors, however, have been receptive to the Internet-based surety management system.
“We're working with a lot of people that have no problem whatsoever in applying for and administering their bonds online,” Foltz says. “More and more people every day are willing to come online, transmit sensitive data, and apply for a bond.”
TheBondAgency.com and its affiliated insurance agency, Dover, Del.-based Delmarva Underwriters, have automated the surety bond application process for electrical contractors. Contractors can visit the Web site, complete a one-page pre-qualification form online, and get pre-approved for a bond. The company then sets up the contractors with a user name and password and a personal home page, where they can complete a detailed application form, update their company profile, and review the status of their account.
Having the contractor's information available on the Web makes it easier to communicate with the surety company, Foltz says. The contractor's financial statements, however, aren't posted on the Web due to their sensitive nature. Instead, they are sent electronically to the surety company through e-mail.
“Our industry is driven by what I call second and third generation faxes,” Foltz says. “The contractor faxes information to me, and then I have to fax it to an underwriter. By the time the underwriter gets it, it's third generation and is difficult to read. One of the hurdles we always struggle with is how to transfer papers. The more I can put out on the Web for the underwriter to look at, the easier it becomes.”
Insurance agencies aren't the only ones developing Web-based surety management systems. A Montvale, N.J.-based surety company is dealing directly with electrical contractors to issue surety bonds online rather than working through an insurance agency.
“We underwrite the account and give contractors their limits in writing like you would with a credit card,” says Wayne Nunziata, president of Colonial Surety Co., which was founded in 1930. “That's very different than what anyone else is doing in the industry. We give the contractor power of attorney to issue our bonds. In essence, the contractors get more control of their business.”
Before electrical contractors can perform online bonding, they must undergo an in-depth application process. After the contractor completes a detailed application and submits two to four years of financial records, Colonial Surety Co. calls each of the contractor's references to make sure the company is running a profitable and professional business.
“If we get bad references, we don't write the contractor, even if his financials are great,” Nunziata says. “If his financials are questionable but we get good references, then we talk to the contractor on where we can go with it. We rely on their ability to perform.”
Once the contractor has completed the application process and been approved for a line of credit, Colonial Surety sends a letter to the contractor confirming its single and aggregate limits. When the contractor accepts the offer, a field representative visits the company to install the necessary software and train the staff on how to use the system. The contractor can then start issuing bonds and drawing upon its line of credit. With the Partnership Account, contractors can manage their company's line of credit anytime and anywhere with a user name and password. Nunziata says his company launched its Partnership Account program last year and now has 250 subscribers.
“Contractors love it,” he says. “We've gotten a considerable amount of new business. People are moving to us not for cost, but control — especially in this market.”
Nunziata says he gives his customers more authority than insurance agents.
“They're given power of attorney to issue bonds up to $10 million in a single project without asking us,” he says. “It's a different way of doing business, but in the long run, electrical contractors will see how they can improve their business that way.”
From an insurance agent's perspective, however, bid bonds and performance bonds are still more of a face-to-face function, says Bill Krumm, vice president of Near North Insurance Brokerage Inc., Chicago.
“The broker has a better handle on the current state of the industry, knows which companies may best suit the contractor's needs, has a relationship with the underwriters, and can aggressively seek the best deal out there for the contractor,” he says. “While electronic delivery of financial- and job-related information is an excellent tool, it is more important than ever to get surety underwriters in front of potential clients. The real gem of the Internet will be the ability to deliver bid bonds, performance, and payment bonds electronically.”
Sidebar: 10 Things You Need to Know about Surety Bonding
Here are some things to keep in mind when applying for a surety bond, either online or through an insurance agent.
A surety bond is a three-party agreement among the contractor, surety company, and owner. Surety bonds used in construction are called contract surety bonds.
The three types of contract surety bonds are bid bonds, performance bonds, and payment bonds.
Surety bonding is like bank credit. The surety company's primary obligation is not to lend a contractor money, but to use its financial resources to back the contractor's commitment to completing the contract.
Since 1893, the U.S. government has required contractors on federal public works contracts to obtain surety bonds. The current federal law, the Miller Act, requires performance and payment bonds for all public work contracts in excess of $100,000 and payment protection for contracts above $25,000.
Contractors undergo an in-depth pre-qualification process before being issued a surety bond. The contractor needs good references, experience matching the requirements of the contract, and the ability to obtain the necessary equipment to do the work.
Surety bonds offer assurance that the contractor is capable of completing the contract on time, within budget, and according to specifications. The risk involved with construction is shifted from the owner to the surety company.
In the event of contractor failure, the owner must formally declare the contractor in default. The surety company may then re-bid the job for completion, bring in a replacement contractor, provide financial and/or technical assistance to the existing contractor, or pay the penal sum of the bond.
The cost of the performance bond is a one-time premium, which ranges from 1% to 2.5% of the contract amount, depending on the size and type of the project and the contractor's bonding capacity.
To bond a project, the owner specifies the bonding requirements in the contract documents. Obtaining bonds and delivering them to the owner is the responsibility of the contractor who will consult with a surety bond producer.
Contract surety bonds assure project completion, guarantee that the laborers, suppliers, and contractors will be paid, and screen out unqualified contractors and irresponsible competition.
Source: Surety Association of America, Washington, D.C.
Sidebar: The State of the Surety Industry
The surety industry is experiencing one of the most tumultuous periods in its history, says Bill Krumm, vice president of Chicago-based Near North Insurance Brokerage, Inc. “We're seeing capacity decreasing, pricing increasing, and underwriting tightening,” he says.
Wayne Nunziata of Montvale, N.J.-based Colonial Surety Co. says the number of reinsurance companies has recently decreased from more than 20 to less than 10. “You have the consolidation of the national companies and the elimination of a lot of local and regional companies because they just went out of business,” he says. “They just wrote too freely.”
The industry has also had a terrible loss ratio, Nunziata says. The pure loss ratio last year, before commissions, expenses, and overhead, was more than 70% last year, compared to 30% five years ago. While many surety and insurance companies have closed their doors, a lot of contractors have also folded. About 10,000 contractors go out of business each year, according to Dun and Bradstreet.
“It's difficult for everyone to obtain bonding right now,” says Clay Foltz, president of TheBondAgency.com. “The recession, even though it wasn't that severe in terms of duration or extent, still caused a lot of contractor failures, which has cost the surety industry some losses. We are in what's called a hard market and that's for everybody, not just electricians.”
Sidebar: For More Information
For more information on Web-based surety management systems, visit the following Web sites.
TheBondAgency.com provides contractors with a user name and password and personal home page. Contractors can prequalify for surety bonds online, download forms, receive bonds by e-mail, and update their company profile.
Contractors can track the amount of bonding they have available and work off a line of credit through Colonial Surety's Partnership Account. The surety company works directly with the contractor rather than going through an insurance agency.
The Surety Information Office's (SIO) Web site has a wealth of information on topics such as the basics of surety bonding, how to obtain bonds, and filing bonds electronically. Contractors can also order a free CD on surety bonding through SIO's Web site.