treevet
Addicted to ArboristSite
Anybody tell me anything about performance surety bonds in tree work? I can see them in building contracts but they don't make much sense to me in a bid/contract for tree work.
performance surity bonds
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A performance bond is a financial guaranty that you will do the work, or pay the price. Most contracts require a 100% performance bond, so a $20,000 contract will require that you post a $20,000 bond !
Most construction companies are very familiar with this process, but it is much less prevalent with service contracts. I have never been asked to provide a performance bond for any tree work unless it was part of a seasonal grounds maintenance contract. You should be aware that a performance bond invariably eliminates the little guys, and almost guarantees that the bid will go considerably higher because the little companies are eliminated. Companies that have their bonding lined up will be counting on higher profits on any job that they are putting up a guaranty to finish.
Large contracts with 100% bonding requirements are usually met through the use of a bonding agency. This is like buying an insurance policy that guarantees that you will complete the contract, and they charge you a percentage of the contract value in order to write the bond. Most contracts that require a 100% performance bond also require a 5% bid bond when you hand in your bid, so that you don't change your mind after you hand in your proposal.
The sad twist to this plan is that the bonding company does not provide the final guarantee; they only guarantee that they will put up the money to the bondholder before they choke the life out of your business getting the money back from you. It goes without saying that the bonding company will oblige you to put up all sorts of financial documentation and business statements. In some ways, the bonding requirement assures the contracting agency that the contractor has been evaluated by a neutral third party for financial stability: the bonding company will not write a bond to a flake with poor business practices.
If you are bidding on a service contract, you should be aware that the bonding company will evaluate your gross income at the end of the contract and bill you according to the amount of actual work performed, not on just the value of the contract. Let's say you have a $100,000 contract, and the bonding company is charging you 3 1/2% bond fee. If you do $200,000 worth of work, you will owe them $7000. If you only do $10,000 worth of work, you will still owe $3500, because they will allege that they were "at risk" for the full value of the contract at all times you were working on site.
{Kansas City Parks and Recreation used to require a 100% performance bond for the value of one mowing cycle on any given mowing contract. If you mowed the property 18 times in a summer, you owed the bonding company for 18x the price of the original bond!}
You can choose to "self bond" for some contracts, especially government service contracts. For many years, I was self bonding to KC Parks and Recreation by borrowing the necessary money to meet the bond obligations, and then paying interest on the borrowed money. In this fashion, I was able to avoid the end of year audit.
I was once asked to put up a performance bond when the original proposal did not include any such requirement. The contracting agency was alleging that I could not perform the contract, so they added a bonding requirement. Naturally, this made it completely impossible for me to obtain a bond through a bonding agency. So I borrowed $140,000, put it into 12 Certificates of Deposit, and gave them to the KCATA. Each month, as I completed the contract, they gave me payment in full, as well as returning one of the CD's. Eight years later, they are still happy with our work, and no bonding was required after the first year. And yes, they paid for the interest expense when I gave them the initial bond.
At huge risk, it has turned out pretty well for me. In fact, the KCATA trash contract is the only work I have right now...tree work ain't makin' it.
Most construction companies are very familiar with this process, but it is much less prevalent with service contracts. I have never been asked to provide a performance bond for any tree work unless it was part of a seasonal grounds maintenance contract. You should be aware that a performance bond invariably eliminates the little guys, and almost guarantees that the bid will go considerably higher because the little companies are eliminated. Companies that have their bonding lined up will be counting on higher profits on any job that they are putting up a guaranty to finish.
Large contracts with 100% bonding requirements are usually met through the use of a bonding agency. This is like buying an insurance policy that guarantees that you will complete the contract, and they charge you a percentage of the contract value in order to write the bond. Most contracts that require a 100% performance bond also require a 5% bid bond when you hand in your bid, so that you don't change your mind after you hand in your proposal.
The sad twist to this plan is that the bonding company does not provide the final guarantee; they only guarantee that they will put up the money to the bondholder before they choke the life out of your business getting the money back from you. It goes without saying that the bonding company will oblige you to put up all sorts of financial documentation and business statements. In some ways, the bonding requirement assures the contracting agency that the contractor has been evaluated by a neutral third party for financial stability: the bonding company will not write a bond to a flake with poor business practices.
If you are bidding on a service contract, you should be aware that the bonding company will evaluate your gross income at the end of the contract and bill you according to the amount of actual work performed, not on just the value of the contract. Let's say you have a $100,000 contract, and the bonding company is charging you 3 1/2% bond fee. If you do $200,000 worth of work, you will owe them $7000. If you only do $10,000 worth of work, you will still owe $3500, because they will allege that they were "at risk" for the full value of the contract at all times you were working on site.
{Kansas City Parks and Recreation used to require a 100% performance bond for the value of one mowing cycle on any given mowing contract. If you mowed the property 18 times in a summer, you owed the bonding company for 18x the price of the original bond!}
You can choose to "self bond" for some contracts, especially government service contracts. For many years, I was self bonding to KC Parks and Recreation by borrowing the necessary money to meet the bond obligations, and then paying interest on the borrowed money. In this fashion, I was able to avoid the end of year audit.
I was once asked to put up a performance bond when the original proposal did not include any such requirement. The contracting agency was alleging that I could not perform the contract, so they added a bonding requirement. Naturally, this made it completely impossible for me to obtain a bond through a bonding agency. So I borrowed $140,000, put it into 12 Certificates of Deposit, and gave them to the KCATA. Each month, as I completed the contract, they gave me payment in full, as well as returning one of the CD's. Eight years later, they are still happy with our work, and no bonding was required after the first year. And yes, they paid for the interest expense when I gave them the initial bond.
At huge risk, it has turned out pretty well for me. In fact, the KCATA trash contract is the only work I have right now...tree work ain't makin' it.
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treevet
Addicted to ArboristSite
Thanks pdqdl for a very thorough and understandable description. You are very good at describing things as I am add (in my own diagnosis) and even I could get it.
Have to catch you later on the rep as it is a no go for now.
Have to catch you later on the rep as it is a no go for now.
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I have often been told that I should be a teacher. Certainly true, since they all make more money than I do, and I am still obliged to put up with childish behavior all day long (from my employees).
treevet
Addicted to ArboristSite
treevet
Addicted to ArboristSite
Like I said in the pm....my insur. agent explained a little about it but you went far and above his description. I printed your response off and will save it for future reference.
I have done lots of municipality and other govt. work but never been asked for one before now. I think you are correct in that they are trying to eliminate the small op. They end up spending more in the process but I guess they feel they are safer. I can see it in construction where an unfinished job could be a disaster but in tree work another tree service could just pick up where the last failed tree service left off with the removals in particular.
I have done lots of municipality and other govt. work but never been asked for one before now. I think you are correct in that they are trying to eliminate the small op. They end up spending more in the process but I guess they feel they are safer. I can see it in construction where an unfinished job could be a disaster but in tree work another tree service could just pick up where the last failed tree service left off with the removals in particular.
Even if another tree service can just pick up, there is a large time and expense drain on the muni/gov't side sorting out the problems, figuring out what work is/isn't done and organizing a new tendering process. Being able to blow off operators whose capability to finish the project is sketchy (problem with open bidding) by using the bonding requirement is a huge advantage to the bureaucrats who have to run the contract. Been there, done that.
clearance
Addicted to ArboristSite
I here you WetCoast. But you know it costs more, quite a bit more. The penny pinchers, time keepers, scrooges and assorted nickel and dimers that tender these things, are always looking for the most for the least. Well, it must make them sweat, knowing they could have got someone else to do it for less, but involving risk. Someone puts up the bond, it ain't free, and nor should it be.
I figure that outfits who have a record of completing jobs on time and well, shouldn't have to put up any bond, thier past should be enough. New people, well, they should be given smaller contracts so they get the chance as well.
I figure that outfits who have a record of completing jobs on time and well, shouldn't have to put up any bond, thier past should be enough. New people, well, they should be given smaller contracts so they get the chance as well.
treevet
Addicted to ArboristSite
You both make legitimate arguments in that the small guy that has a proven record of finishing similar jobs (proven by references and equipment maybe) will obviously save the public substantial money rather than this restrictive trade contract (in reality). Hell, in Hunterdon County NJ we used to get 3 or 4 companies (1 of them Bartlett) in a station wagon in the dead of winter and drive around with a govt. agent and look at tree work together. The public got mass savings doing it like this and got the work done flawlessly or the offending party was not invited the next year. If it was not finished it was just rebid and the contractor defaulted with no pay and the job was rebid with less work to bill. I used to joke to the others that after each job segment each bidder would total their bill up, state it out loud at the same time and if they were the highest.....they would have to get out of the car and walk home.
I have also had many govt. contracts where there was a cap on how much the govt. could spend and then it HAD to be put out for bid. That was bypassed by just breaking it into parts (the price quote) and billing it in sections just under the limit.
In my town I live in now just one company does all the tree work and plants all the trees. You quite often see them working at the mayor's house who lives 2 houses down from me. I wonder if he pays for that work?? I did the 2 prior mayor's tree work for 25 years before Davey slid into here with a new administration.
As for the surety performance bonding I can see where the contracting entity would have far less hassles and liability. But as usual....the public/tax payer gets shafted while the government gets to ride the couch more and isn't that really what this is all about?
I have also had many govt. contracts where there was a cap on how much the govt. could spend and then it HAD to be put out for bid. That was bypassed by just breaking it into parts (the price quote) and billing it in sections just under the limit.
In my town I live in now just one company does all the tree work and plants all the trees. You quite often see them working at the mayor's house who lives 2 houses down from me. I wonder if he pays for that work?? I did the 2 prior mayor's tree work for 25 years before Davey slid into here with a new administration.
As for the surety performance bonding I can see where the contracting entity would have far less hassles and liability. But as usual....the public/tax payer gets shafted while the government gets to ride the couch more and isn't that really what this is all about?
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Pdqdl, Very informative & well written post!! 
Wow..I was asked to provide such a bond couple years back...just went through my broker, But you have really shed light on how it works! Mine was a small bond 10k...easy to be done....but what you did at 140k would have given me ulcers & a heartattack!
thanks for that post!!!
LXT.....................
Wow..I was asked to provide such a bond couple years back...just went through my broker, But you have really shed light on how it works! Mine was a small bond 10k...easy to be done....but what you did at 140k would have given me ulcers & a heartattack!thanks for that post!!!
LXT.....................
sgreanbeans
Treeaculterologist
I too, recently was asked to submit a performance bond, Just getting home from the Marines and re-establishing my business had been difficult to say the least, I had a "in" with a city to do all their street trees during this winter, went to my bonding agent, they told me the underwriter would not give me one because of me restructuring my service (S-CORP to LLC) Because of this, they only considered me to be in the business for a couple months, would not even consider giving me a bond. I was told "next year you'll be fine". Bummed me out because I have done this contract before and did a great job for them, they sent me the bid info way before the others, but the regime above them had changed, no love from them!
sgreanbeans
Treeaculterologist
Also, noticed that my old account had gone defunct with this forum, I am Sgreanbean from many moons ago!
Glad too see the wisdom still flows.
Great site, glad to be back!
Glad too see the wisdom still flows.
Great site, glad to be back!
treevet
Addicted to ArboristSite
welcome back and semper fi
We had a performance bond required on a job we bid for an airport....about a $30,000 job. In order to get a bond we had to put up 15,000 cash to get it. We went to the airport and told them we would do the job for 10% less if we did not have to put up the bond. They agreed that it was not necessary since we are not building anything and told us to go ahead without the bond.
If you have not had a bond and it is your first time to get one....good luck and give yourself some time to get it. The insurance companies are very particular when giving out these bonds.
I am not sure what the performance bond does for a contract for tree work but that is the only time I have run into a performance bond on a contract.
If you have not had a bond and it is your first time to get one....good luck and give yourself some time to get it. The insurance companies are very particular when giving out these bonds.
I am not sure what the performance bond does for a contract for tree work but that is the only time I have run into a performance bond on a contract.
treeslayer
Addicted to ArboristSite
My experience, (considerable, I've done a lot of federal work, and worked for a bond recovery contractor on numerous Govt. projects for over a year) is that most times we do not to actually get the bond until winning the bid, and ample time is given to secure said bond before commencement of work.
as payments are let, an equal amount of $$ is released pending completion with a set amount held back until finals are granted.
It's a good thing usually, protects the owner. but for tree work, without any major material investment required, it's not really practical, I would think.
as payments are let, an equal amount of $$ is released pending completion with a set amount held back until finals are granted.
It's a good thing usually, protects the owner. but for tree work, without any major material investment required, it's not really practical, I would think.
The procedure for getting a bond is pretty simple, but it take planning. The contract you are bidding on will typically have a bonding requirement and a "bids close" date. Most have a bid bond requirement, as well.
You go to your bonding company, and you get approval for your bid bond and subsequently your performance bond if you are the successful bidder.
Done properly, you get the bid, your bond is lined up already, and the paperwork flows swiftly to completion. USUALLY, some jackleg low bidder will not line up his performance bond in advance, bid too low to make any money by submitting the bid bond with cash, then the bonding company won't write the bond until they excercise due diligence in reviewing the contractor and the bids. Since they presume that they are working with some risky jackleg contractor, the bond is usually denied. Then the goverment agency is obliged to re-issue the contract or re-bid it, months after it should have already been completed.
The key, gentlemen, is to let your bonding company issue the bid bond! When they do that, your performance bond is already approved. The bid bonds are typically done for free, since the performance bond is where the money is at, and the bonding companies need to tease you into buying from them.
Calling for a performance bond after the bid is submitted is just begging for trouble: the bonding companies DON"T LIKE TO DO IT THAT WAY !
You go to your bonding company, and you get approval for your bid bond and subsequently your performance bond if you are the successful bidder.
Done properly, you get the bid, your bond is lined up already, and the paperwork flows swiftly to completion. USUALLY, some jackleg low bidder will not line up his performance bond in advance, bid too low to make any money by submitting the bid bond with cash, then the bonding company won't write the bond until they excercise due diligence in reviewing the contractor and the bids. Since they presume that they are working with some risky jackleg contractor, the bond is usually denied. Then the goverment agency is obliged to re-issue the contract or re-bid it, months after it should have already been completed.
The key, gentlemen, is to let your bonding company issue the bid bond! When they do that, your performance bond is already approved. The bid bonds are typically done for free, since the performance bond is where the money is at, and the bonding companies need to tease you into buying from them.
Calling for a performance bond after the bid is submitted is just begging for trouble: the bonding companies DON"T LIKE TO DO IT THAT WAY !
treevet
Addicted to ArboristSite
Ugh, by then the job may be undesirable. Kinda like door knocking hacks ruining residential jobs and ultimately residential work for a vicinity entirely.
Savvy purchasing departments avoid that boondoggle by setting a ridiculously short amount of time after bid award for the successful bidder to produce the required bond. 2 days is not uncommon, but it is usually set at 3-5 business days after notice to produce a performance bond.
No bond in one week: next bidder up the list!
NOBODY can get a performance bond from a bonding company in that amount of time unless it is set up in advance of the award.
No bond in one week: next bidder up the list!
NOBODY can get a performance bond from a bonding company in that amount of time unless it is set up in advance of the award.
treeslayer
Addicted to ArboristSite
sgreanbeans
Treeaculterologist
Thanks TreeVet
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