Surety Bond Quarterly Professionals in Surety Bonding
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Posted by Darrel Lamb, CPCU, AFSB
A few years ago one of my contractor clients wanted to bid a $24mm project. The project was about three times bigger than anything they had built to date, but the project made a lot of sense to them and after hearing the plan, it made sense to me, as a representative of the surety as well. We approved it and they got the job. Saying yes makes contractors and agents happy. It feels good to be the one delivering a yes.
The ink was barely dry on the contracts for the new project and the contractor wanted to bid another $14mm job right on top of it. There are a lot of factors that go into a decision, but adding a job that is nearly 2 times larger than anything they have completed on top of this new large project was going to be tough sell and I had my doubts that this project would make sense.
Every surety underwriter knows that saying no to a bid request is an invitation to have the account shop their business to another surety market and possibly lose the account. Much of the new business received by a contract surety underwriter is presented to them because another market said no to a bid.
Fortunately, the contractor and his agent consider me a trusted advisor and they wanted my honest opinion about taking on the extra work. The agent is usually very involved in these discussions and they provide valuable input for contractor and the surety to consider. I told the contractor that my best guess is that he is on track to have the best year in their company history with the new $24mm job is in their backlog. This year is already a win. While I have a lot of confidence his company, I asked him to consider this: I can juggle three balls, no problem. I can do it for a long time. But add in a fourth ball and maybe I can manage that for a rotation or two, but ultimately four balls is beyond my skillset. The thing is I don’t just drop that fourth ball. I drop all the balls. I worry this new job could be that fourth ball. While this metaphor of overextension suggests potential catastrophic consequences, what is more likely for the contractor who is well capitalized, is that two profitable jobs will turn into two much less profitable jobs. It could be that the contractor will work harder to ultimately make less money than had they stayed with the one larger profitable job.
The contractor thanked me for my input and said he would get back to me. He called later to say he would pass on bidding the second job and focus on making that larger job the big win he had planned on. I can tell you now the outcome on the $24mm was every bit as profitable as he had hoped. I think a successful “no” coming from the surety should be communicated from the perspective that this is the best decision for the contractor and not just the best decision for the surety.
I would not want to leave the impression that the surety believes they are wiser than the contractor. Nothing could be further from the truth. The surety understands that contractors are very wise and have a unique perspective based on their vast experience. However, at the end of the day, the contractor’s risk is the surety’s risk. When red flags present themselves in a bid request it is the surety’s goal to reach a mutual alignment in our understanding of the risk with the contractor’s understanding. The agent also plays a key role in this discussion. There are times the alignment cannot be gained resulting in a “no” and sometimes when that happens the contractor may consider another surety that has a different risk appetite.
In another scenario, I recall a contractor I had supplied surety bonds to for many years. He primarily built concrete water tanks. Most of these projects were $5mm and under. Then one day he requests approval for a $40mm high school renovation in a neighboring state. The two red flags this triggers are 1) a new class of work and 2) a change in geographic territory. I told the agent that this is probably a no, but I am open to having a meeting with the contractor for him to appeal.
The meeting started with a very defensive contractor. For years he had bid a specific type of work locally, so I asked him “Why are you interested in a high school renovation in another state?” He replied “Because school work is where the money is”. I struggled with his perspective. As someone who has witnessed countless contractors who bid school work, I know that the margins on school work are very thin and this contractor was certainly making much higher margins on the concrete water tanks he was building. I was concerned that his lack of experience in this area was contributing to some assumptions that were untrue. I asked if he had worked in this new state before. He had not. I asked how he felt about bonding back subs. He said he doesn’t do that and never had. That answer also worked against him, as the jurisdiction where the job was located requires general contractors to back all subs over $50,000. I informed him of this rule, and if he did not factor that requirement into his bid price (and by his admission he would not have since he was unaware of the requirement) he would have had to pay that bond cost out of his profit and that already thin margin would evaporate quickly. This state also gives a 5% bid preference to in state contractors making it all the more difficult to win work when coming from out-of-state and this contractor was unaware of this local preference rule.
Once he realized that my concerns for his bid were strictly because I was an advocate of his best interest, we ended that meeting with him thanking me. He started the meeting thinking, who was I to tell him what he can build and cannot build? Once he realized there were a lot of issues about this work he had not considered, and my intention was to protect his business, he was grateful to have others looking out for him.
We can’t always say yes to every bid, but rest assured that if we say do say no, it is often because we care deeply about the contractor’s success and want them to avoid a potential pitfall.
Old Republic Surety is a relationship-based surety that believes in open, honest and straightforward feedback. We challenge our customers for the right reasons and will never sugarcoat potential issues, but instead work together to find a solution. For contractors wanting more out of their surety program and would benefit from a trusted advisor, consider Old Republic Surety.
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Darrel Lamb, CPCU, AFSB
Darrel Lamb leads Old Republic Surety’s West Region surety operation in all facets of contract surety including business development, underwriting, marketing, agency management, strategic vision, operations, compliance, and employee development. Territory includes Washington, Oregon, Montana, Idaho, Hawaii, Alaska, California, and Utah. Darrel has over 30 years of proven success and is skilled in developing relationships with internal and external stakeholders to drive superior business results.
