Every real estate transaction carries high value and a lot of risk with it. Surety bonds protect the investment of a project owner and ensures he gets value for his money. Contractors working on real estate projects have to furnish surety bonds before they are awarded the contract. They have to furnish maintenance bond in particular, which ensures that the building they build will stay in the optimum condition for at least a specified time. After that period, any defect or fault will not be covered under the scope of the bond.
Different Parties to Maintenance Bonds
• Contractors, purchase these bonds to showcase the quality of their work and durability. They have to get these bonds as a mandatory document to win the project.
• Project owners, who keep these bonds as a surety that their real estate project will be delivered as per contracted terms. If there is a default, they will be compensated for it and won’t have to cover for the default from their pocket.
• The surety company, which issues the bond runs a full check on the contractor’s background. They have to run these checks to make sure that they are putting their money on the right person. Before they issue the bond they create necessary channels required to later recover the money from the contractor in case he defaults.
More about Maintenance Bonds
Under maintenance bonds, contractors have to pay the entire money of the bond value in full, as compared to an insurance bond where the premium is just a fraction of the insurance value.
In case of a default, the contractors at times try to pay in cash for losses directly to the project owner. A maintenance bond restricts them from doing such a thing outside the scope of the bond.
Everyone expects that the person they hire should complete the assigned job. But there can be instances when that job is not completed as intended, or not completed at all. A surety bond binds the contractor taking up the project to deliver what he committed to do. In case he doesn’t, the surety bond compensates the loss incurred by the project owner, charging the contractor for the same later.
Understanding Performance Bonds
Performance Bonds ensure optimum performance by the contractors throughout the project duration. These bonds are the most commonly used surety bonds for public work contracts that have an estimated value of $100,000 or more. However, that is only one of the conditions for issuing them. These bonds can also be used for managing company operations that may not be bound by this cap. Bidding could be done initially, post which the winning contractor has to furnish a performance bond as a guarantee for successfully completing the project.
These bonds create a win-win situation for all, bringing lucrative contracts for contractors and ensuring highly satisfying results for the project owners.
How Performance Bonds Work
Performance bonds safeguard the interests of the project owner if a work is not done satisfactorily or if the contractor has defaulted deliberately or even unwillingly. Since this risk of default is always there, surety bond institutions (banks/insurance companies/private lenders) run an extensive check on the contractor’s history before issuing the bond. They take into account his past experience, risk capital, financial statements, and more. Under the circumstance where the contractor’s history doesn’t seem credible enough, he is not issued the bond, thereby denying him the chance to win a contract too.
This way, there is a very little scope for a miss to ever happen. And if it happens, the surety bonds take care of the losses. There are rarely any government or private projects involving large investments that happen now without performance bonds.
Commercial bonds are required for licensing by commercial enterprises and professionals. The bond is meant to ensure that the principal follows the rules and regulations of the industry and the government. If you need a commercial surety bonds Florida, you can purchase one from a surety company by following these steps:
– Decide on the type of commercial bond you need
There are many types of commercial bonds, such as a contract bond, non-contract bond, license & permit bond, bid bond and more. The bond required will depend on circumstances. Some bonds are required as part of a bidding process or a contractor contract. First, you need to know the type of commercial bond you require.
– Look for a surety company
Finding a reliable surety company is pretty easy with a simple web search. But it’s important that you look for the right company. Look for a company that specializes in commercial surety bonds Florida and has a good credit rating. The credit rating of the surety company will reflect on your own credibility.
– Fill out the form
Most surety companies today take applications through their website. You can simply fill the form and submit it, along with the required supporting documents. You will have to submit financial documents like bank statements and balance sheets. Your application will then be assessed by an underwriter and background checks will be done. Finally, if your application is accepted, you will have to pay the bond cost to buy the commercial surety bonds Florida.
Contractors commonly are required to have bid bonds, performance bonds and payment bonds. If you work as a contractor, sooner or later you will need to be bonded. It’s important to pick a reputable contractor bonding and insurance company. Here’s a simple primer on picking the right company:
Do your research: There are many bonding and insurance companies to pick from. You can do some online research and ask your peers in the industry for their recommendations. Make sure you go through the insurance companies’ websites and understand their terms and conditions.
Check credit ratings: Just as the insurer will check your credit ratings, you should also check the insurer’s rating. Their credit rating will affect your own position. If you submit a bond from a company known for unreliability or dishonest practices, your application may be rejected. Check the ratings given by independent agencies that score bonding companies.
Licensing: Make sure the contractor’s bonding and insurance company is licensed to operate in your state. If you are working in more than one state, go with a company that is licensed in all the states you are operating in. Many bigger companies will have multi-state licenses.
Treasury listing: Bonds are most frequently required for state or federal projects. A treasury listing, commonly known as a T-listing, means that the company has the approval to write bonds for federal projects. A T-listed bond also acts as an automatic check for its reliability.
To be approvedfor a T-listing, a company goes through rigorous scrutiny from the U.S. Department of the Treasury.
Bond capacity: If you are dealing with multiple bonds, the bond capacity of the contractors bonding and insurance company becomes critical. Every company will have an aggregate bond limit beyond which it cannot issue bonds. If you need multiple bonds across different states, the aggregate limit becomes very important
Never has so much been given with so little information or effort…as part of the CARES Act, Congress has enabled the SBA to issue 100% federally guaranteed loans to businesses and entities in operation on February 15, 2020. These loans have been given to small business concerns, non-profits, individuals operating as sole proprietorships, eligible self-employed individuals and Tribal concerns through participating banks with no credit risk to the banks.
Considering the enormity of the project and related processes, the SBA has done and continues to do an outstanding job of working with the participating banks in establishing the processes for determining and getting the money in the bank account(s) of literally millions of companies under what is being called the PPP (Paycheck Protection Program). The maximum loan is the average monthly payroll costs incurred during the 12-month pre-funding period multiplied by 2.5 (250%). The maximum loan is around $10 million. The terms and conditions are historically unheard of for government loans (grants):
- NO GUARANTEE – No personal guarantee required.
- NO COLLATERAL REQUIREMENT NON-RECOURSE – The SBA has no recourse against any individual shareholder.
- NO FEES – The SBA will not collect a fee from the recipient of the loan.
- COMPLETE PAYMENT DEFERMENT RELIEF of principal, interest and fees for a period of not less than 6 months and not more than a year.
- FOR AMOUNTS NOT FORGIVEN, the maximum loan term in 10 years, the maximum rate is 4%, zero loan fees and no prepayment fees.
Based on the rate in which the economy seems to be rebounding, the PPP has served us all very well.