Beginner question ...

[erik55444]

I own a picture framing company that is ramping up for a huge increase in orders from a single customer. In exchange for him paying half down on an order, he wants a ' performance bond'. I'm not sure that's the correct term. He wants a % off the entire order if all units aren't shipped by a certain date, and the penalty escalates as time goes on.

Is this normal practice? We've been involved with large volume framing orders before (never as the owners, though), and we've never heard of it. Neither have our suppliers, and they won't put similar guarantees in place for materials shipments to us.

Is this something you can help us with?

[Surety Guy]

This would be a type of financial guarantee, a product our bonding companies no longer offer. I am not sure who would write such a guarantee in today's conservative bond market.

I wouldn't necessarily jump to the conclusion that it is a financial guaranty. If there is a specific contract and they are requiring a performance bond, just because there are penalty provisions inthe contract does not make it a financial guaranty.

That being said, this may be a financial guaranty if it is only to be guarantying the penalties and since you said that there may be a large increase in orders.

A couple of points:
I don't believe I have ever seen a performance bond request for a framing company; so, it may very well be a financial guaranty that is required.

Next, if you can't get firm commitments out of your suppliers, why would enter into a contract with penalty provisions on terms that may be out of your control? (eg. the receipt of materials from a supplier)

Finally, if they are looking for a guaranty for delivery time and a guaranty of the payment of the penalties, an ILOC (Irrevocable Letter of Credit - contact your bank on this) may be a better solution than a bond.

[Admin]

I am going to have to agree with 'Surety Guy'. When you hear enough bonding scenarios you get an ear for what can be written and what can not with very little information.

This seems to be a financial guarantee, and it is a private job. This will be extremely difficult to place in today's market. An ILOC is probably your best alternative.

Good Luck!

I agree too, but I just wanted to point out that it was not automatically a financial guaranty.

I also agree that for someone with the expertise that you probably have, it is somewhat easy to tell what can be written and what can't; however, the person asking the question has a situation and is looking for advise. Just saying "sorry, financial guaranty, no one is writing" doesn't give him much help. This is why I answered the way I did... hopefully giving them an alternative (ILOC) or bringing some things up so that they can perhaps ask a different quesiton to help them out.

I also feel that we should point out other pitfalls or problems if we think they exist. We may see penalty provisions all day long, but this may be the first time the original poster has seen a penalty provision. I felt the need to bring up the potential pitfalls in this if he/she couldn't pass the penalties on to the suppliers on the project.

In my opinion, the quick answer, while probably correct, didn't do much to stimulate conversation that may help the poster. This board has been dead so I thought some stimulation would be a positive thing.

[Surety Guy]

Originally Posted by Unregistered

This is why I answered the way I did... hopefully giving them an alternative (ILOC) or bringing some things up so that they can perhaps ask a different quesiton to help them out.

It was a good idea to offer alternatives, there is no need to defend your answer. I normally make sure to offer alternatives, but I simply forgot to today! However, I do agree with you and 'Admin' that the ILOC is a good alternative.

Originally Posted by Unregistered

In my opinion, the quick answer, while probably correct, didn't do much to stimulate conversation that may help the poster. This board has been dead so I thought some stimulation would be a positive thing.

Conversation is always encouraged on our forums, it is what makes the Surety Bond Forums great!

Forum posts certainly have slowed down recently, something we attribute to the amount of information on the forums. The forums receive hundreds of visitors everyday, with anywhere from 5-15 visitors online at any given time. It seems that the information available is answering most users questions. However, our theory is more information the better, so we encourage posts.

Feel free to start a new thread if there is anything you would ike to discuss in particular.

One last thing --- just curious --- Why does it matter that it is a private job?

"This seems to be a financial guarantee, and it is a private job. This will be extremely difficult to place in today's market."

[Admin]

In general, private jobs are not written as often as public jobs after approved. Often, the private obligee will just make certain that the principal qualifies for bonding, but never require the actual bond. In other words the surety approval process is used as a screening process. This will make it more difficult to find an agent willing to spend the time to obtain an approval.

We had a dispute with a builder who threatens to file a lien on our property. Our attorney suggested obtaining a surety bond to replace the lien on the house so we are able to refinance when completed. Is that available?

Bonds are required on public jobs more than private jobs because statute and law dictates that public jobs over a certain $ amount be bonded. It is certainly not unusual to bond jobs to private owners.

The NASBP and the SIO make a continual effort to the private marketplace outlining the value of the product (surety bond) and trying to get more and more private owners to require bonds. I think they would be quite surprised if they found out surety agents didn't want to work on those bonds.