Federal Contractors May Not Have the Surety Capacity Needed to Bid on Yearend Contracts

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Important questions contractors should ask their bonding companies and agents as they approach the government yearend, September 30th.

Federal contractors are all too aware of the date September 30th. Some may even say it’s Christmas time for government contractors as the federal government fiscal yearend brings a flurry of spending and contract awards. But the wide selection of projects and the corresponding preparation of bid proposals can be a real challenge—especially when a company is managing its surety program.

Brook Smith, President of Smith Manus which specializes in surety bonds (http://www.smithmanus.com), recently outlined valuable questions that contractors should ask of their bonding company as the federal yearend approaches. He warns, “The bidding process can be fraught with hazards depending on surety relationships.”

Smith recommends asking the following questions of a bonding company so contractors can make certain their surety bonding company can support the yearend spike:

  • Does the surety company understand the phenomenon of September 30th? Smith states, “Do they understand that history tells us that a firm will be awarded only somewhere between 5-10% of the contracts they pursue?”
  • Does the bonding company take the bid/award ratio into consideration when underwriting the spike in bid requests that may result in open bids well in excess of a company’s surety limits?
  • Is the surety company willing to commit to providing temporary flexibility to bid on enough projects so a company can win its share of the yearend glut?

Even before asking these questions, Smith urges contractors to make sure both their surety company and their agent/broker are accustomed to working with federal contractors. He says a contractor can gain insight into the capability of their surety company and agent by “challenging them on their knowledge of the multitude of federal contracts and contracting mechanisms.” They should also request the names of other federal contractors they bond.

Smith understands why companies focus on the federal arena. “The reality is that in today’s world, there are two distinct construction industry economies – the federal economy where the funding is robust and the state and local economy where funding is limited or non-existent.” He also explained that federal contractors are often bidding only against a limited number of other federal contractors depending on the contacting mechanism. While on state and local projects, he says the bid list is open to all bidders and “consequently those contracts are being won at sale prices.”

On the other hand, Smith points out those local contractors who venture into the federal arena face another challenge. “Most federal contractors are used to working on a regional, national, and even international territory.” He also acknowledges “when state and local contractors work outside their states and cities, surety history dictates very clearly that the risk increases exponentially. This distinction between the two has never been greater.”

He explains that’s why surety companies have to be careful, but also why contractors “need to make sure the surety companies know how to balance their underwriting exposure against the reality of federal contracting.”

To avoid being an underwriting fatality, Smith advises contractors to make sure their surety company and their bonding agent/broker understand federal contracting well enough to assure they can get the bonding capacity needed to support the flurry of yearend requests. He concludes, “If they are not accustomed to the federal contracting environment, a contractor may be underwritten based on the dismal climate of state and local contracting and fall victim to the phenomenon of the federal yearend.”

Smith Manus is one the largest, independent bond agencies in the U.S. and specializes in developing aggressive and innovative surety bond programs. Smith Manus’ relationships with independent and specialty bonding companies allows it to create customized surety bond solutions and deliver bonding capacity to clients. (http://www.smithmanus.com )

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Brook Smith
Smith Manus
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