Best Construction Surety Bond Practices at Tendering Stage
Author: Mathew Manol
Best Surety Bond Practices at Tendering Stage
The world has evolved tremendously over the past twenty years and the surety world is no different. In the early 2000s, it was still common practice for contractors to send in their bond requests via fax machine. This meant that requests typically would come in at least a week prior to the tendering date and would be processed in sequence.
Today with the work from home realty, it has become commonplace for bond requests to be sent in only a day or two before the closing date. In some cases, even the morning of a closing.
Most brokers have what the industry refers to as ‘broker lines’ for their clients. This means that the broker has pre-approval to issue bonds for their clients up to certain limits. As such, brokers are generally able to expedite bonds requests, even at the last minute. However, while preparing a bond is a relatively quick process, the surety and the broker’s role entails much more than just the administrative task of typing up the bond.
Tender Document Review
First off, it is important that your surety broker thoroughly review the bid documents to ensure the tender bonds are properly prepared. At this stage, the broker is required to determine if the standard CCDC bond forms are acceptable to the owner or if there are specific owner’s bond forms required at the tender stage. Any onerous terms or conditions should also be identified at this stage.
· Does the work include any design/build components?
· Are there are any environmental hazards, efficiency guarantees or uncapped liquidated damages?
· Is the warranty period longer than 2 years?
· Is there a long validity period or bid acceptance period (over 90 days)?
· Does the owner have a specific onerous performance bond wording requirement?
In many cases, contractors commonly work with the same broker for their insurance requirements as well. In these cases, the broker is also reviewing the tender documents to confirm that their client can meet all insurance requirements with their current program.
The broker will also check to see if there are any project specific insurance requirements such as a Builder’s Risk policy or Wrap up Liability. This aspect requires extra consideration right now given the recently updated CCDC 41 and the increased insurance requirements.
For bonding, experienced surety brokers will advise their clients prior to a tender closing of the expected cost for the bonds, namely the performance and labour and material payments bonds. It is expected and commonly practiced that this cost is to be borne by the project’s owner and thus the bond costs should be carried in the contractor’s bid.
For normal projects this is relatively straightforward; however, for multi-year contracts over two years in duration, your broker may choose to negotiate a more favorable premium rating. These rates are known as long term rates and can result in significant premium savings. For highly competitive bids, a broker may also try to negotiate a project specific rating to enhance the contractor’s chances of winning the bid.
Considering the insurance aspect again, your broker may be required to either increase existing insurance limits or to add in a new coverage project or a specific policy. If so, they will also need time to quote these policies in advance of the tender closing date. This will give the contractor cost certainty around these additional coverage requirements and the contractor can then determine the exact cost to carry. This ensures the contractor will not be surprised with the costs once the contract secured.
E-Bonds or Hard Copy Bonds
Another consideration is whether the bonds are to be submitted digitally or if hard paper copies are required. While COVID has accelerated the acceptance of e-bonding, we are still regularly seeing paper bonds required at the tender stage. E-bonds thankfully save quite a bit of time, while hard copy bonds do require all parties to consider the courier time to deliver the bonds.
We strongly encourage contractors to send in any bonding requests at least a few days prior to a tender closing. This ensures that their broker can thoroughly review the tender documents. This will allow them to identify any onerous requirements, confirm the expected contract bond premium and also double check the insurance requirements. All of these steps are key to providing the contractor with not only the correct bonds but also cost certainty upon award of the contract.