What are Bid Bonds?

Bid bonds are generally used in competitive bid situations, such as a Request for Proposal matters.  When a governmental entity has an RFP, they generally require a bid bond from the contractors.

A bid bond is a type of surety bond that requires a contractor accept the contract if they are awarded the contract.  Given that the contractor must accept the work, this requires a surety company to underwrite the entire contract before they issue the bid bond.

The rationale for this is that once the contractor is awarded the contract, they will then have to work on the deal pursuant to the terms set forth in the Request for Proposal.  Given that they are going to be on the hook for the entire contract, they surety company is going to underwrite the contractor for the entire agreement.  So, although it seems like a bid bond would be easy to get, they can sometimes be a bit more difficult than a typical credit-based bond.  Instead of just underwriting the contract based on the size of the bid bond (usually just 10% of the total of the entire agreement), the surety is really writing the bond based on the entire contract and will therefore require all of the documents that are generally required, such as financial statements, the agreement itself, a personal financial statement, etc.

So, go ahead and get a bid bond, but please realize that it can take a bit more work than you would originally think.

Good luck with everything.

Position Fidelity Bonds – Risks

How should you determine risk when developing your fidelity bond strategy?

Companies seem to have a wide variety of strategies in determining how to get a surety bond for their company.  Because of this, it is good to take a step back and look at those strategies on how a position fidelity bond is written and what the company is actually trying to protect.

position bond

Evaluate the Company

In addition, the actual underwriters from the surety company have a corresponding variety of criteria that they use in determining how to evaluate the fidelity bond.  Their evaluation can take a variety of forms in order to assess and accurately capture the risks involved with the position being written.  Many of the more conservative underwriters like to issue their policies based upon a strict view of the company.  That is, they first determine that the employer itself has good management and a good reputation within the community.  This would include a strong internal process of internal auditing, quality management practices and an internal staff that is stable.  Employers that churn their employees are not seen as higher-tier when it comes to underwriting.

Evaluate the Position

The next step in the evaluation goes over the actual staff positions that are being written.  Those positions should be bonded on a relatively consistent basis.  That is, each year the company is willing to get a fidelity position bond as they are trying to reduce overall risk.  Thus, they don’t get a bond one year and not the next, which can be an indication of systemic risk that is unseen by the underwriter.  Then, the positions that are being written should be those that have quality supervision, which many times will disqualify sales persons as they are often times outside of the company’s normal auditing procedures.

fidelity bond

Investigations on Positions

In the old days, a fidelity bond would be given only upon a thorough investigation on the person being guaranteed.  Thus, any person that would need a bond would understand that their personal life would then become fully open to the underwriter, which would very personal questions about their marriage, spending habits, vices, etc.

TransUnion

 

As we have progressed in this country, these types of questions have given way to more sophisticated, and seemingly less intrusive, methods to determine trustworthiness.  Credit scores and other personal information gathered from public sources (like Lexis Nexis) are all the rage in determining whether a person should be granted a bond upon their person.

LexisNexis

Further, investigations that center around a position and not just a person, can also use this data to determine the proper amount of risk that is to be taken by the bonding company.  This would include a more sophisticated type of inquiry (or more general type of inquiry, depending on how you look at it), which would develop a standardized score that would be applied generically across each person in the position.  So, instead of actually reviewing 5-10 persons individually, a bonding firm would instead develop a score to be used for the position.  These scores are surprisingly accurate in determining the proper rating.

Conclusion

The risk that is undertaken by a surety when developing a fidelity position bond has evolved over the years, along with society.  As companies have learned how to get a bond, so have sureties learned how to evaluate the companies themselves.  The more conservative underwriters now use a variety of tools to evaluate the risk, instead of spending time trying to underwrite individuals on a person-by-person basis.  These new tools are very accurate and can help provide a great way to evaluate the risk of that position.