A Surety’s Perspective – Snow Clearing Contracts
Author: Jamie Collum
As we enter the summer season, we look back and tip our hats to the contractors who were tasked once again this year with keeping our roads clear and safe for travel throughout the winter. The early months of 2022 saw multiple snow storms that required all hands-on deck across the province of Ontario, as well as around the country.
Contractors in the snow clearing space not only face inclement weather, but also a litany of other challenges such as uncertain work volumes, growing contractual clearing zones and long-term servicing agreements. All of these items also happen to factor into the considerations a contractor must take into account when arranging surety bond support for an upcoming snow clearing bid.
When it comes to snow clearing and your surety bond requirements, here are some items you should consider.
How will my bonds be priced for multi-year jobs? When will payment be due?
As you may expect, the answer to this question is – it depends. There are two scenarios to contemplate and the bond form that is being used will dictate whether payment for bond premiums will be due in full upfront, or on an annual basis.
If the bond form has annually renewing wording, giving the surety the option to cancel the bond on an annual basis, bond premium will be calculated based on the annual contract value. As such, the premium for the portion of work being completed each year will be charged on an annual basis.
If the bond wording does not provide for cancellation on an annual basis, you can expect to pay for the bond premium for the entire contract duration upfront. Unlike an insurance policy, unless the bond wording specifically notes a cancellation provision, the bond cannot be cancelled for non-payment of premiums. As a result, the vast majority of sureties will require payment upfront.
Why does my surety company care what bond forms are used? (and how it benefits the contractor)
As noted above, the surety companies tend to prefer annually renewing wordings as it gives them the option to cancel on an annual basis. While cancellation is quite uncommon, it is very difficult for anyone to provide absolute certainty that a contractor’s financial health will remain in tact over the course of a 3-to-10-year period. For that reason, sureties at least want the option to re-assess their risk in the event of a decline in financial position of their client.
The use of annually renewing wordings also happens to benefit the contractor in a significant way. The contractor is indemnifying to the surety, meaning a loss to the surety ultimately falls on the contractors’ shoulders. When annually renewing forms are used, the value of the bond is typically based on the annual work volume rather than the total contract value. This means the total financial risk under the bond to both the surety and the contractor is ultimately reduced.
What happens if I do not receive the work volume that was expected under my snow clearing contract?
While we don’t call Canada the “Great White North” because of its tropical features, there certainly are winters that are less snowy than others. Contractors may ask themselves, “why am I paying for a bond based on an expected work volume of X when I only received a work volume of Y?”. That is a great question to ask and one that the Surety Association of Canada addresses in their position paper titled “SAC-PP003-Invoices for Supplemental Premiums”. The paper states that as an industry, we have generally accepted that an increase in contract value represents an increased risk to the surety. As a result, additional premium is billed. In contrast, when a contract value decreases or expected work volumes were not provided under a servicing agreement, typically a surety will return a proportionate percentage of the premium. FCA Surety can always assist in this process.
I have a snow clearing contract that requires bonding – who can I contact?
If you require bid bonds or performance bonds for an upcoming snow clearing contract, FCA Surety has the knowledge and expertise to assist you. Andrew Carwright, VP, Surety (416-888-3240) and Matt Manol, Manager, Surety (416-220-3052) can walk you through the simple application process and have you ready for the upcoming winter season.
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