Bonding company

From CEOpedia | Management online

The bonding company is a financial entities such as a bank or insurance agency, which assumes the risk of a surety bond obligee by guaranteeing payment on the bond in the event of default. It also provides other types of bonds on behalf of the obligor to the obligee. Usually, the bonding company will make a detailed review of the future budget, main contracts and producer's achievements. Director have to complete projects according to the budget and everything have to be done on time. The head of the bonding company may ask for growth in the budget if the projected cost for the project is too high[1].

Completion bond

The bonding company offer insurance, which is called a completion bond or a completion guarantee for free, usually a certain percentage of the budget. To produce various large projects like for example a film, producers needs enormous amount of money. When such project is made outside of the establishment mainstream studio, its financiers need a form of insurance, which guarantees that the project will be completed and delivered to the producer on time. When applying for such insurance, it is necessary to provide the following materials:

  • the budget
  • the script
  • the schedule
  • cash flow
  • detailed information about investors
  • financial commitment to the project.

Bonding company evaluate the most risky factors associated with the proposed scenario. A minimal production risk occurs when the producer has already finish the project and fulfill his duties. This is the most desirable situation. The most important part of producer's work is to deliver shows on time and on schedule. If he did not complete the responsibilities, the risk of project failure is much higher. When the packet is approved for consideration, the bonding company make an appointment with the directors of production in order to further evaluate the project's viability. After the initial assessment has been made, it is certain that the binding company demands adjustments to the budget and schedule[2].

Positive and negative impact

Completion bonds may have positive and negative impact to justify the bonding company's seizing control of the project. If the project is over budget or few days late, then the bond may allow the bonding company to take over the project. If the project protected by bond made a success, then after finishing, the amount agreed in the presale of rights comes due and is used to pay off initial lender and the bond is never existed[3].

Bonding companies requirements

Bonding companies review a subcontractor's finances prior to providing a bond very thoroughly. If a partner is unable to provide a sufficient bond for project, this is very important information that this company may have financial difficulties. It means that the bonding company does not believe that the subcontractor is in a stable financial position and finish the project on time. A main management tool are bonds. It must be purchased immediately after a subcontract is signed and the general contractor must follow up to check whether the bond was quickly obtained[4].

In many bonding companies it is required[5]:

  • to update both company and project status information on a regular basis by the principal
  • conduct its own investigation
  • updating this investigation at any time.

Examples of Bonding company

  • AIG: AIG is a global insurance company that provides surety bonds for a variety of industries, including construction, energy and manufacturing. AIG is one of the leading providers of surety bond solutions in the United States and has a network of agents and brokers throughout the country that offer surety bonds for businesses of all sizes.
  • Liberty Mutual: Liberty Mutual is a global insurance provider that offers surety bonds and other financial protection products. Liberty Mutual specializes in providing surety bonds for small businesses, including contractors, subcontractors, and suppliers.
  • CNA Surety: CNA Surety is a leading provider of surety bond solutions for businesses of all sizes. CNA Surety has a network of agents and brokers nationwide that offer surety bonds for construction, energy, and manufacturing projects.
  • Zurich Insurance Group: Zurich Insurance Group is a global provider of surety bond solutions and other financial protection products. Zurich specializes in offering surety bonds for large and complex projects, including infrastructure and engineering projects.

Advantages of Bonding company

An advantage of using a bonding company is that it provides financial security and guarantees payment on the bond in the event of a default. Bonding companies also provide assurance to the obligee that the obligor will fulfill their contractual obligations. Additionally, bonding companies can provide a review of the future budget, contracts, and producers achievements, ensuring everything is done on time and according to budget. Moreover, they can provide additional resources if the projected cost for the project is too high. Other advantages of working with a bonding company include access to additional resources, risk management advice, and peace of mind.

Limitations of Bonding company

  • The bonding company may have limited resources, which may impact its ability to guarantee payment on the bond in the event of default.
  • The bonding company may not have the necessary expertise to assess the specific financial and business risks associated with a particular project.
  • The bonding company may be subject to certain restrictions imposed by government regulations, which may limit its ability to provide certain services or issue certain types of bonds.
  • The bonding company may not be familiar with the legal and regulatory requirements applicable to a specific project, which could lead to costly delays or other issues.
  • The bonding company may not have the necessary information or resources to monitor the progress of a project and ensure compliance with the terms of the bond.
  • The bonding company may not be able to provide the necessary level of customer service to ensure the timely completion of a project.

Other approaches related to Bonding company

A bonding company can take a variety of approaches in order to guarantee payment on a surety bond. These approaches include:

  • Obtaining an assurance from the obligor that they will fulfill their obligations. The bonding company will evaluate the obligor's financial strength, creditworthiness and assets, as well as their ability to meet the terms of the bond.
  • Establishing a financial reserve to cover any potential losses. This reserve is typically in the form of cash or other assets that can be used to fulfill the bond's obligations.
  • Taking out insurance policies to cover potential losses. In this case, the bonding company will pay the premiums for the policies and receive the proceeds in the event of a claim.
  • Requiring collateral from the obligor. This may include real estate or other tangible assets that the bonding company can use to cover potential losses.

In conclusion, the bonding company may take a variety of approaches in order to guarantee payment on a surety bond, such as obtaining an assurance from the obligor, establishing a financial reserve, taking out insurance policies, or requiring collateral from the obligor.

Footnotes

  1. ↑ Scott M.D. 2019
  2. ↑ Winder C., Dowlatabadi Z. 2011
  3. ↑ Scott M.D. 2019
  4. ↑ Smith J.G., Hinze J. 2010
  5. ↑ Schwartzkopf W.


Bonding company — recommended articles
Corporate guarantee — Tri party agreement — Contract guarantee — Indemnity bond — Counter guarantee — Bridge Bank — Advance funding — Sovereign guarantee — Outsourcing - agreement dissolvement

References

Author: Weronika Wielochowska

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