Janitorial Bonds are often needed to guarantee the cleaning services of large government buildings, educational facilities and even private properties. COVID-19 is taking a dire toll on the world economy and putting a major strain on most businesses. One industry that has seen demand spike, however is the commercial cleaning industry. In fact, one report shows that demand in this industry is up 75% and this may continue to rise. Many businesses, schools and government facilities are looking for ways to disinfect their spaces and keep employees healthy. This may be an opportunity for commercial cleaning and janitorial companies. Under normal circumstances, these larger cleaning contracts may require surety bonds under The Miller Act and these obligations are referred to as Janitorial Bonds.
What is a Janitorial Bond?
A Janitorial Bond is a type of surety bond that guarantees a certain amount of cleaning services for a set period of time at a set amount. These are referred to as Service Contracts. The contract can usually either guarantee a set price for each time a service is performed or it may be a fixed price for regularly scheduled services such as every day for one year. Janitorial bonds are usually a type of performance bond.
Janitorial Bond Underwriting Considerations:
Length of the Contract
Like most surety bonds, the longer the contract, the more risk involved in a janitorial bond. We are seeing that things can change very quickly in the economic landscape. Usually if the contract is a year or less, janitorial bonds are freely written. Most surety bonds companies are also comfortable at 2 years but anything longer can present more of a challenge. Typically, after 2 years, surety bond companies will want to see wording in the contract and on the bond form that gives all parties the ability to decide whether or not to renew for another period. An even better contract would include price escalations after the initial period to cover inflation and cost increases. An example of this would be a 2 year contract with 3 annual renewals at the mutual agreement of all parties.
A large underwriting factor in these contracts is labor. How does your company get labor? Do you have a force of long time employees or will you have to keep hiring? This is usually an industry with high employee turnover and the surety bond company will want to make sure you can maintain enough people to meet your contract obligation. They also want to make sure that you have enough money built into the project in the event that labor costs increase.
For small projects under $400,000, most janitorial contractors can easily obtain a surety bond if they have good credit. For a larger project, expect to provide financial statements on both the janitorial company and the owners personally. The larger the project, the more financial strength the company will need to qualify. Additionally, a bank line of credit always helps surety bond underwriters get more comfortable because it gives the company additional financial cushion if they need it.
For janitorial contractors that do not have great credit or that may not have significant financial strength, the SBA Bond Guarantee Program is a valuable option. With this program, an available bank line of credit is very helpful. The unused portion can be counted as working capital and will usually help the contractor secure the performance bond.
Janitorial Bond Costs
Like other surety bonds, the cost of Janitorial Bonds depends on the qualifications of the company and the owners. 1%-3% is a fair range for most janitorial contractors. Keep in mind that unlike some contract bonds, this premium will renew every year of the contract. Contractors will want to keep this in mind for their project estimates. Janitorial bonds are often written as a performance bond and you can read more about how these are priced here.
Janitorial Bonds are not insurance. Like all surety bonds, they are a product of indemnity and the contractor and indemnitors will have to reimburse the surety bond company if a loss occurs. You can read more about indemnity here. You can also read more about performance bond claims here.
We hope this pandemic ends quickly and the World can get back to normal. Cleaning and sanitizing our facilities is going to be an important part of getting everyone comfortable with returning to their daily lives. Janitorial services should expect to remain busy for the foreseeable future and contractors can get themselves ready by preparing for surety bond requirements now.