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Author: Brianna

What’s the Difference between a Surety Company and a Surety Agent?

Surety underwriters and surety agents play different roles in the surety bond process, with distinct tasks and responsibilities. See the differences between companies and agencies here. 🡻

If you have any questions or would like a surety professional to help manage and advise your bond program, contact any surety specialist of the Parrot Surety team today!

Understanding the Cost of a Surety Bond

Whether you’re a new or seasoned bond user, understanding how bond costs are calculated is vital. Surety bonds cost between 1-3% of the bond amount. Bond premium is dependent on a variety of factors that we’ve listed here 🡻.

If you have any questions or would like a surety professional to help manage and advise your bond program, contact any surety specialist of the Parrot Surety team today!

Contractor Frequently Asked Questions

  1. What is a surety bond?
    • A surety bond is a three-party agreement between an obligee (owner), principal (contractor), and surety. A surety bond is a guarantee that the principal will perform the obligations according to the contract and if they do not then the surety can be held liable for the debt, default, or failure of the principal.
  2. Who do I go to when trying to obtain bonding?
    • When trying to obtain bonding, you should contact a reputable and professional surety bond producer. Surety bond producers specialize in providing long-term surety support and resources.
  3. What documents do I need to start the bonding process?
    • 3 fiscal-year-end financial statements
    • Most recent interim financial statements (incl. aging AR & AP)
    • Any bank agreements (loans, lines of credit, & recent LOC statement)
    • Most recent personal financial statement
    • Current work on hand/work in progress report
    • Resume of all owners/key people within the company
    • References letters from prior project owners
    • Accomplishments of the company
    • Statement of company qualifications
    • Contractor questionnaire (producer will provide)
  4. What does my bond producer do for me?
    • Your bond producer will provide invaluable information and business advice. Your producer will provide proficient financial statement analysis skills, timely responses, industry knowledge, and the willingness to guide you through the bonding process. Your Parrot Producer will ask questions and gather information to better understand your business model, business plan, and business goals. This helps the agent assess what bond or bond program needs are required today and what size and scope of bonds may be needed in the future. With this information, the producer will have a good idea of which surety company would be the best fit for your business. Your agent should want to build a relationship with you, as this allows the producer to create a plan to maximize your surety credit and drive the best bond terms for the long run, resulting in a competitive advantage for your company.
  5. Can I get a blanket bond for all my bonding needs?
    • No. Each bond is tied to a specific contract/obligation; therefore, each contract/obligation must have its own bond.
  6. Why are bonds required?
    • In 1935 the Miller Act was passed which requires federal construction contracts over $150,000 to furnish a performance and payment bond. Surety bonds provide the government with prequalification of contractors and as well as remedy should a contractor fail to perform or pay subcontractors and suppliers of a project. 
    • After the Miller Act was passed, states throughout the country saw the benefits surety bonds and began passing “Little Miller Acts”. Each state’s Little Miller Act has different requirements however, they all closely follow the Federal Miller Act.
  7. Why are my financial statements so important?
    • Financial statements are important because they provide the surety of a sense of where the company stands financially. Financial statements are critical when a principal wants to maximize their bond program.
  8. What key items do sureties look for in a financial statement?
    • The financial statement is prepared to GAAP standards
    • Balance sheet
    • Income statement
    • Statement of cash flows
    • Footnotes with any disclosures
    • Current work on hand details (cost to complete, over/underbilling’s, etc.)
    • If the financial statement is CPA prepared
  9. What factors are taken into consideration when trying to obtain a bond program?
    • Capital
    • Character
    • Capacity
  10. What is a general indemnity agreement (GIA)?
    • A general indemnity agreement is a contract between the principal and the surety. It is a legal document that guarantees that if there is a loss and the surety must pay out, the principal will make the surety whole again.
  11. What can cause cash flow issues on my financial statement?
    • Standard payment procedures
    • Payments being made to subcontractors and suppliers prior to the principal receiving payment from the owner
    • Retainage on projects
    • Purchasing assets with cash
    • Accounts receivable not being collected in a timely manner
    • Completed projects not being closed out
    • Too much inventory
  12. What are the different income recognition methods?
    • There are three accounting methods, completed contract method, accrual recognition method, and cash recognition method.  For more information on these methods, check out this income recognition article (hyperlink).
  13. Can I get a blanket bond for all my bonding needs?
    • No. Each bond is tied to a specific contract/obligation; therefore, each contract/obligation must have its own bond.
  14. Why are bonds required?
    • In 1935 the Miller Act was passed, which requires federal construction contracts over $150,000 to furnish a performance and payment bond. Surety bonds provide the government with prequalification of contractors and as well as remedy should a contractor fail to perform or pay subcontractors and suppliers of a project. After the Miller Act was passed, states throughout the country saw the benefits surety bonds and began passing “Little Miller Acts”. Each state’s Little Miller Act has different requirements however, they all closely follow the Federal Miller Act.
  15. Why are my financial statements so important?
    • Financial statements are important because they provide the surety of a sense of where the company stands financially. Financial statements are critical when a principal wants to maximize their bond program.
  16. What key items do sureties look for in a financial statement?
    • The financial statement is prepared to GAAP standards.
    • Balance sheet
    • Income statement
    • Statement of cash flows
    • Footnotes with any disclosures
    • Current work on hand details (cost to complete, over/underbilling’s, etc.)
    • Level of preparation
  17. What factors are taken into consideration when trying to obtain a bond program
    • Capital
    • Character
    • Capacity
  18. What are the different income recognition methods?
    • a. There are three accounting methods, completed contract method, accrual recognition method, and cash recognition method.
  19. What is a general indemnity agreement (GIA)
    • A general indemnity agreement is a contract between the principal and the surety. It is a legal document that guarantees that if there is a loss and the surety must pay out, the principal will make the surety whole again.
  20. What can cause cash flow issues on my financial statement?
    • Standard payment procedures
    • Payments being made to subcontractors and suppliers prior to the principal receiving payment from the owner.
    • Retainage on projects
    • Purchasing assets with cash.
    • Accounts receivable are not being collected in a timely manner.
    • Completed projects not being closed out.
    • Too much inventory
Contractor FAQ's surety bonds parrot surety services

10 Pre-Qualification Documents: Why does your Surety agent need them?

Why does your surety agent want 10 specific pre-qualification documents for a surety bond?
 
Requirements for these documents vary from surety to surety and bond to bond depending on the bond size or program you may need. Below is an outline of the documents that are asked for when we begin prequalifying you for your program. The documents help your surety agent get you the best terms that align with your business plan.
 
If you have any questions on pre-qualification documents or would like a surety professional to help manage and advise your bond program, contact any surety specialist of the Parrot Surety team today!

10 surety pre qualification documents needed by a surety agent parrot surety services

How the BLM Balances Profit and Environmental Protection on Public Lands

Public lands are an invaluable asset and managing them involves a delicate balancing act. On one hand, these lands offer lucrative opportunities for industries like oil, mining, and timber. On the other hand, they are vital ecological systems that must be preserved for future generations. Enter the Bureau of Land Management (BLM), the agency tasked with overseeing the use of these lands. One of their key tools? Surety bonds.

Turning a Profit Responsibly
The BLM is responsible for the sustainable management of public lands, and that often involves leasing portions of these lands to private entities. Whether it’s a mining company looking to extract valuable minerals, or a rancher interested in grazing livestock, these contracts can be profitable for both individuals and the government.

The Role of Surety Bonds
How does the BLM ensure that profit doesn’t come at the cost of the environment? The answer is surety bonds. These financial instruments act as a form of security, guaranteeing that companies will adhere to environmental guidelines and other requirements as outlined by the BLM. Let’s break down how surety bonds work in different scenarios:

Bonds for Oil & Gas Drilling
These bonds ensure companies follow regulatory environmental guidelines when drilling. They also guarantee that oil and gas wells are properly plugged post-drilling, ensuring long-term ecological balance when they reach the end of their useful life.

Bonds for Mining
These protect against environmental damage during the exploratory phase and ensure that companies implement responsible mining practices, from start to finish. Reclamation bonds on the BLM ensure that the mines have safe slopes for wildlife and livestock and require restoration of vegetation. 

Bonds for Livestock Grazing
These bonds aim to prevent overgrazing, which can lead to soil erosion and degradation of the land, keeping the environment in mind even as cattle roam. The lease outlines the contract and grazing allotment, and the lessee must pay grazing fees based on the number of animals by type per month. 

Bonds for Timber Harvesting
In the logging industry, these bonds ensure that companies pay for and remove the trees to be harvested and replant trees to restore the harvested area, maintaining a crucial balance between commerce and conservation.

Bonds for Roads & Pipelines
Here, bonds guarantee that BLM roads will be repaired when damaged in exchange for access by commercial mining, oil and gas, or timber harvesting vehicles. For pipelines, the financial guarantee backs the removal of the pipeline when deemed necessary.
 
Bonds for Recreation
From rafting guides to outdoor festivals, these bonds make sure that the beauty and safety of natural recreational areas are preserved for everyone to enjoy.

Bonds for Renewable Energy
These bonds help ensure that projects like solar or wind farms are carried out in an ecologically responsible manner and ensure money is available to decommission the infrastructure at the end of its useful life.

A Balanced Approach
Surety bonds are the unsung heroes that help the BLM achieve its dual mission: turning a profit while protecting our nation’s invaluable natural resources. By requiring these bonds, the BLM can lease lands to various industries and individuals, generating revenue that can be reinvested into public services. At the same time, the bonds act as a financial and ethical commitment from lessees to follow best practices and regulations that preserve the environment.

So, the next time you hear about a new drilling project, a cattle ranch, or even a renewable energy farm on public lands, remember the role of surety bonds. They’re more than just a bureaucratic formality; they’re a tool for ensuring that the beauty and integrity of our public lands are preserved for generations to come.  

Parrot Surety Services is passionate about public land preservation and is well equipped to handle any surety bond guarantee running to the BLM. Contact any of our agents for dedicated surety expertise and placement services you can ALWAYS depend on!   

How the BLM balances profit and environmental protection on public lands infographic parrot surety services surety bonds

Overbillings vs. Under billings

Contractors, or principals, are often curious if sureties prefer over billings or under billings. The answer can change depending on the surety; however, defining the two can better help you understand the underwriter’s potential concerns of both.

Under billings

  • Earned revenue that has not been billed
  • Appear on a principal’s work on hand report and ties to the balance sheet as a current asset
  • Viewed as an asset during financial analysis because the revenue should be collected soon
  • Count towards a principal’s working capital because it is determined a current asset. 

Extensive under billings could evidence unapproved change orders; the underwriter will want to see some financial capacity to withstand losses that could occur as a result.

Over billings

  • Revenue a principal has billed for even though they have not earned it
  • Appear on a principal’s work on hand report and ties to the balance sheet as a current liability “billings in excess of costs.”
  • Deemed a current liability because the principal has billed for work not yet completed
  • A tool to front load costs to help cash flow the technical ‘financing’ of the project. For example, subcontractors will bill excessive mobilization costs during the first month of the project to afford up front labor and material costs. 

Extensive over billings could be a sign of job borrowing as a result of a cash flow crunch; the underwriter will want to see the overbilled amounts represented in cash on the balance sheet.

The fact is contractors will always show some overbilling or under billing. Either of these should be avoided to the greatest extent possible. As a contractor it is important to understand that large under billings or over billings will require an explanation, especially if these billings represent a significant percentage of your current assets or current liabilities.

If you want an agent who is familiar with the surety bonding process and who can maximize your surety bond program, then look no further than one of Parrot Surety Services’ Surety Bond Specialists. Parrot is the premier surety agency in the United States for advising and managing all types of surety bonds and bond programs.

overbillings vs. underbillings infographic parrot surety services

What is Surety Bond exoneration?

Surety bonds play a pivotal role in various industries, acting as a financial safety net, ensuring that contractual obligations are met. They involve three parties: the principal (who purchases the bond), the obligee (the party requiring the bond), and the surety (the party issuing the bond and vouching for the principal). But what happens once the bond’s stipulated obligations are fulfilled? This formal process of releasing the bond is termed ‘exoneration.’

Exoneration of a surety bond takes place when the principal’s obligations to the obligee are completely satisfied. In simple terms, once the terms of the bond have been met and there are no outstanding claims, the bond is considered exonerated, freeing the surety from any further responsibility. It is a great idea for principals to mitigate financial risk by seeking formal exoneration once they know their obligations are met, especially in cases of continuous bonds, to ensure they are not held liable for any future obligations. Often, the exoneration process will require written documentation from the obligee that the project has been completed or reached substantial completion in order to release the obligations of the bond.  Always keep in mind that each bond and situation might have its unique conditions, so it’s essential to consult with experts and read the bond’s terms closely to understand the specific exoneration process.

If you want an agent who is familiar with the surety bonding process and who can maximize your surety bond program, then look no further than one of Parrot Surety Services’ Surety Bond Specialists. Parrot is the premier surety agency in the United States for advising and managing all types of surety bonds and bond programs. 

Why Contractors Need to Establish a Strong Banking Relationship and Line of Credit

In the dynamic world of construction, contractors face unique financial challenges. That’s why it’s crucial for them to build a strong banking relationship and secure a line of credit. Here are a few reasons why:

Access to Capital: Construction projects require substantial upfront investments. A line of credit provides contractors with the flexibility to access funds when needed, ensuring smooth operations and timely payments to suppliers and subcontractors.

Working Capital Management: With the time gap between expenses and payments, contractors need to manage their working capital effectively. A line of credit bridges cash flow gaps, enabling them to pay suppliers promptly and keep the project moving forward.

Competitive Advantage: Demonstrating financial stability and securing financing enhances a contractor’s credibility and competitiveness. Clients and project owners value contractors who have a solid banking relationship and line of credit when selecting their partners.

Agility and Flexibility: Construction projects can be unpredictable. A line of credit allows contractors to respond swiftly to unexpected changes, seize opportunities, and adjust strategies to meet client demands.

Equipment and Material Financing: Specialized equipment and materials are often required for construction projects. A strong banking relationship can facilitate leasing or financing options, reducing upfront costs and improving efficiency.

Long-Term Benefits: Building a strong banking relationship over time can lead to favorable terms, increased credit limits, and access to additional financial services or advice, supporting contractors’ growth and success.

Establishing a solid banking relationship and line of credit is a strategic move for contractors. It ensures financial stability, improves competitiveness, and enables them to navigate the ever-changing landscape of the construction industry.

If you have any questions on bonding or would like a surety professional to help manage and advise your bond program, contact any surety specialist of the Parrot Surety team today!

why contractors need to establish a strong banking relationship and line of credit image parrot surety services

When are Surety Bonds required?

Surety bonds are required in various situations to provide financial protection and ensure the fulfillment of certain obligations. Here are some common instances where surety bonds are required:

Construction Projects: In the construction industry, surety bonds are commonly required to ensure that contractors fulfill their contractual obligations. These bonds may include bid bonds, performance bonds, and payment bonds. Bid bonds provide assurance that the contractor will enter into the contract if awarded, while performance bonds guarantee the completion of the project as per the contract. Payment bonds ensure that subcontractors and suppliers are paid for their work or materials.

Government Contracts: When businesses bid on government contracts, they often need to obtain surety bonds. These bonds safeguard the government’s interests by guaranteeing that the contractor will fulfill the contract and meet all applicable regulations.

License and Permit Bonds: Many professionals and businesses need to obtain license and permit bonds as a condition of obtaining certain licenses or permits. These bonds protect consumers and ensure compliance with regulations. Examples include contractor license bonds, auto dealer bonds, mortgage broker bonds, and many others.

Court and Fiduciary Bonds: Surety bonds may be required by the court system for various legal proceedings. These bonds serve as a form of financial guarantee and can include probate bonds, guardianship bonds, appeal bonds, and injunction bonds.

Business Operations: Certain industries or business activities may require specific bonds to protect against potential losses or liabilities. For example, freight brokers, mortgage brokers, and private investigators may need surety bonds as part of their licensing requirements.

Environmental and Land Use Bonds: In certain industries involving environmental and land use activities, surety bonds may be required to ensure compliance with regulations and cover potential environmental risks. These bonds are often associated with activities such as reclamation, decommissioning, and right-of-way work such as in new subdivisions or developments. 

It’s important to note that the specific requirements for surety bonds can vary depending on the jurisdiction and the nature of the obligation. The entity requiring the bond will typically outline the bond type, amount, and any specific conditions that must be met.

If you are unsure whether a surety bond is required in a particular situation or if you have questions about a bond requirement, reach out to your trusted surety professionals at Parrot Surety Services to facilitate and assist in the bonding process.

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