Ideal Tools

On unbonded remodel projects, it is not uncommon for high dollar vendors to ask for the protection of a bond. When this request is presented to surety underwriters, they quickly recognize that the purchase order that is the subject of the bond guarantee, not the remodel contract. This presents a very different situation from the normal one on remodel contracts.

When a Performance and Payment Bond (P&P bond) is written on a project, the principal is being paid to perform the work. If the client fails and the surety is contacted to complete the job, the unpaid balance of the contract price is a financial resource that remains available. Even if the surety's applicant, the principal, has no financial capabilities, the surety still has a source of money that may suffice to complete the obligation without having to add funds.

Now let's go back to the vendor situation. We are assuming there is no P&P bond on the project. When the vendor demands the protection of a payment bond, it will be a guarantee of the purchase order not the remodel contract. It is purely a guarantee that the principal will pay the vendor. It is not a promise that incoming contract funds will be used appropriately to pay bills. Big difference!

The point is that in the vendor example, it is considered a financial guarantee - a promise that the principal will pay money when appropriate. The reason these obligations are harder for the surety may be obvious. If the customer is unable to pay the vendor because they're out of money, then only the surety remains to pay the bill. Solving the bond need of the vendor by issuing a financial guarantee bond on the purchase order is the hard way to solve this problem.

If a 100 % performance and payment bond had been required on the contract, it would have guaranteed (among other things) the payment of all bills for labor and material, including the vendor in question. Even if the project owner did not stipulate a P&P bond, that does not mean one can not be used to solve this problem. The easy solution, the alternative we always suggest, is to order a traditional 100 % P&P bond then simply file a copy of the payment bond with the vendor in question. It does not name the vendor as obligee the way a financial guarantee bond would. However, it is issued literally for the protection of such vendors and solves the need perfectly, and with less underwriting stress and probably a lower premium.

Regardless, this stall sets up one of the most frustrating parts of sales - the chase. Think of it: the amount of times have you sent off your information and, when you've been fortunate enough to "catch" the prospect again, you've heard: "I haven't looked at it" or "We're not interested at this time"? Probably a lot, right?