Union Bonds (aka Wage and Welfare Bonds) can present a problem for agents, contractors, and bonding companies. We like to believe there is something to love. We’ll explain…
Contractors often have their first encounter with the wonderful world of surety bonding. Perhaps the contractor is only interested in light commercial work or is a subcontractor. In these cases, bid and performance bonds are not necessary. So that a new contract can be started on time, the contractor needs to find workers from the union hall. This roadblock suddenly appears: “A $50,000 surety guarantee is required.” The contractor discovers that financial statements are required, but they are not available immediately. There are also financial strength requirements that the contractor might need to meet.
You might think that bonding companies would be happy to issue bonds if they were paid their premium. They don’t. They are often the first client to request a union bond. This means that they don’t have any files, don’t know their financial situation, and aren’t confident in their ability for success. The bond is considered a “financial guaranteed” and not a performance or payment bond. A financial guarantee bond is a promise that the principal (construction company), will pay funds at a later date. Grab your crystal ball! Where will the money come from to compensate the surety if the contractor is unable to pay the union wages and benefits that result in a bond claim? These bonds are often viewed as the most problematic part of contractors’ accounts by underwriters. They also dislike receiving a bond request from a new client. They would rather have a few P&P bonds to start with.
The bond agent loves it when they can get the bond approved. Many new applicants have poor credit scores or financial statements. The bonds can only be approved with full collateral. If you are looking for a $50,000 bond, the surety will require that you HOLD $50,000 to protect against future claims. You also pay the bond premium. You also sign an indemnity agreement that may include personal indemnity and your spouse. These terms are so clear that it is not uncommon for a contractor to pay the $50,000 directly to the union instead of the bond. This means that the client will no longer want the bond after the bond has been approved by the agent. No commission. Ugh!
This is the other side. Everyone goes home happy if the bond approval is quick and painless. Even with full collateral requirements, there are still reasons to choose the bond over security held directly by union. Any claim made by the union after a bond is in place must be reviewed by the claims department of the surety. The contractor will likely be asked for information and explanations by the surety. The bonding company does not normally make money. The claim could be denied. This can protect the construction company. The union can immediately access the money of the contractor if a cash deposit was used. The wage and welfare bond could open the door to the surety. It could lead to a new performance bond. This could lead to greater revenues and profits for the contractor. The collateral requirement can be waived if the contractor has a proven track record. The contractor now has the bond without collateral. It was well worth the wait.
There you have it. Although it might seem like a PIA to have welfare and wage bonds, even if it is difficult to obtain the bond, it could be worth it in the log run.
Steve Golia has extensive experience providing bid and performance bonds to contractors. He has been solving bond problems for contractors for over 30 years and helping them succeed when others have failed.
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