Union bonds, also known as wage and welfare bonds, can be a problem area for contractors, agents, and surety companies. But we like to think that there is something to love. We will explain it to you …
For contractors, this is often their first taste of the wonderful and fun world of surety. Perhaps the contractor is focused on light commercial work, or is exclusively a subcontractor, so no bidding and compliance bonds were ever needed. The contractor wants to get workers from the union hall so that a new contract can start on time. Suddenly this roadblock appears: “A surety bond of $ 50,000 is required.” Unfortunately, the contractor learns that financial statements are needed, but they are not immediately available. And there are financial strength requirements, which the contractor may need to meet, so …!
In the case of surety companies, you can assume that if they pay their premium to them, they should be perfectly happy to Performance Bonds issue them. Are not. The bonding bond is often your first bond request from the new client. In other words, they do not have a record, they do not know the financial situation of the applicant, they do not trust their ability to operate successfully, and this surety is considered a “financial surety” (as opposed to a performance and payment surety). A financial surety bond guarantees that the principal (construction company) will pay the funds when due at a future date. Get out your crystal ball! If the contractor is unable to pay the required wages and union benefits that result in a bond claim, where will the money come from to refund the bond for the loss? Underwriters are quick to admit that they think these bonds are the worst part of a contractor’s account and don’t like having one as a new client’s first bond request. They’d rather have a couple of P&P bonds to their credit first.
To the surety agent, if they can get the surety approved and issued, what is there not to love? The problem is that for many new applicants with bad credit or poor financial statements, bonds are only approved with “full guarantee.” This means that if you want a $ 50,000 bond, the bond wants to KEEP $ 50,000 as a security deposit against potential future claims. In addition, he pays the bond premium. In addition, he signs a severance agreement, which will likely include personal severance, plus his spouse. So, in the face of these terms, it is not unusual for the contractor to deliver the $ 50,000 directly to the union in lieu of the bond. For the agent, this means that when the bond is approved, the client no longer wants it. No commission. Yuck!
Here’s the flip side. If the bond is painlessly approved, everyone goes home happy. But even with a full guarantee requirement, there are reasons to choose bail (rather than the guarantee held directly by the union). With a bond in place, any union claim must be reviewed and analyzed by the bond claims department. The bond will likely ask the contractor for information and an explanation. Money does not usually fly out of the surety company. The claim may be rejected. This investigative process can protect the construction company. If a cash deposit is used, the union has immediate access to the contractor’s money. Second, the salary and welfare bonus can open the door with the surety. Perhaps it will lead to a new line of compliance assurance. That could result in more revenue, more profit, more success for the contractor. Another benefit is that once a track record is established, the collateral requirement can be waived. Now the contractor has the bond without the need for collateral. The wait was worth it!