School Bus Performance Bonds guarantee a contract to provide busing services to school districts. We often do not think much about school buses, so long as they are transporting children safely. However, contracts for school bus services are often very large and surety bonds ensure that the public’s money is protected and that bus services will operate as planned.
What is a School Bus Performance Bond?
A school bus bond is a three-party agreement between a Principal (The Bus Company), an Obligee (The School District), and a Surety (Bond Company). The bond guarantees that the contract for bus services will be fulfilled by the bus company. If the contract is not, the School District can file a claim on the surety bond. The surety bond company guarantees the Bus Company’s performance. If a claim is filed, they will investigate the claim. A valid claim requires the surety bond company to find a replacement Bus Company to complete the contract or provide money for the School District to do so. Because of this, the School District and therefor taxpayers are protected against additional costs.
Underwriting School Bus Performance Bonds
School Bus Performance Bonds can be challenging for a surety bond company. They are considered a type of service contract which you can read more about here.
Providing bus services for one or more years is very costly. Paying drivers, maintaining a fleet of reliable buses, and paying for fuel are costly. Therefore, these contracts are often very large. Surety bond companies will want to make sure that the Bus Company has the financial strength to complete the contract. A bus company will usually need to provide corporate financial statements showing strong working capital, net worth, and profitability to get these surety bonds. You can read about ways to increasing your surety bonding credit here.
Length of the Contract
Some school districts bid out bus contracts every year. Others have bid packages for multiple years such as three to five-year periods. This is an important consideration for School Bus Bonds and any service contract. A lot of things change over time. Costs could increase rapidly, or a Principal’s financial condition could deteriorate. These are things a surety bond underwriter must consider when writing these school bus bonds. One thing surety bond underwriters prefer to see in school bus contracts is that they renew by mutual agreement. For example, a school bus contractor bids a five-year contract, but the language requires mutual agreement to renew every year after the second year. This gives the Principal and the surety bond company an out if the situation changes drastically. Of course, School Districts prefer certainty and therefore usually prefer to lock in the Principal at the time of bid.
Equipment is important in qualifying for a School Bus Performance Bond. Does the Bus Company currently have a serviceable fleet, or will they purchase buses when they are awarded the contract? Does the company have sufficient resources to repair and replace buses and they wear out? What is the plan at the end of the contract? Will the company sell the buses or continue to expand? These are all important considerations for surety bond underwriters writing performance bonds for school bus companies.
As we mentioned earlier, a lot can change over multiple year periods. A surety bond underwriter will want to make sure that the School Bus Company has a good plan in place to deal with labor. Have they priced increased labor costs into their proposal? Will the company be able to get and keep enough drivers? What about turnover and recruiting costs? The larger the School Bus Contract needing the Performance Bond, the more important a labor plan will be to the surety bond company.
Fuel prices can vary widely, especially from year to year. Surety bond underwriters will want to have a good understanding how Bus Companies will handle fuel costs. Larger and more sophisticated contractors may have futures agreements in place to purchase fuel, although that is rare. Some School Bus Companies store fuel onsite, and others just put extra money in the proposal for increases. If the School District is agreeable, a best practice would be to include a clause in contract allowing adjustments for fuel prices.
Cost of School Bus Performance Bonds
The cost of school bus performance bond is like other performance bonds which you can read about here. Generally, the cost will be 1-3% of the contract amount that is due annually. There are exceptions though. Larger contracts bonded by strong Principals, can be much less than 1% of the contract amount.
Some School Districts require the Principal to provide a bid bond with their proposal. A bid bond help to prequalify the bidders. You can read more about that here. However, other districts review proposals first and only make the Bus Company provide a performance bond with the contract award. Either way, a School Bus Contractor should make sure they can get the performance bond before submitting their bid or they may be left scrambling at the end. When looking at these contracts, it may be a good idea to start working on the bid bond, even if you do not end up needing it.
Alternatives to School Bus Performance Bonds
Some districts will allow a Bus Company to post an Irrevocable Letter of Credit instead of a Performance Bond. There are some significant reasons why a Bus Contractor may not want to do this. A letter of credit often ties up significant assets that could be used in the business. Performance bonds are mostly unsecured unless there is a claim. Additionally, a surety bond must investigate in a claim situation to make sure the claim is valid. No such protection exists under an Irrevocable Letter of Credit and it may be used as leverage against the Bus Company. You can compare these two products here.
Indemnity is Required
Like all surety bonds, School Bus Performance Bonds require indemnity. That means that if the surety bond company must pay out on a valid claim, they will seek reimbursement from the Principal and any other indemnitors. This is normally spelled out in the General Indemnity Agreement that is signed before any performance bonds are issued. We encourage Bus Contractors to read this document carefully before signing it. You can read more about indemnity here.
Performance Bond Company Requirements
There are many surety bond companies that will write performance bonds for School Bus Contractors. However, it is important to make sure the surety bond company meets the contract requirements. Most School District contracts require the surety bond company to be listed on the Department of Treasury’s 570 Circular. You can check that here. Also, there is normally a requirement that the surety bond company have a certain financial rating by A.M. Best or similar company. In addition, Principals and Obligees should always verify that the performance bond is valid by checking with the surety bond company. You can read more about verifying a bond here.
School Bus Performance Bonds are a great tool to protect School Districts and make sure bus services keep going. Most bus companies can qualify, and we are happy to help and answer any questions. Contact MG Surety Bonds anytime or visit our Performance Bond Frequently Asked Questions Page. You can also check out this video to get a quick overview of performance bonds.