Construction is a risky business. Research shows that over 27% of contractors fail to survive. Most companies perform more than one job at a time. It is not uncommon that the loss that causes the collapse of a company is not the bonded job being performed for a public entity, but rather one of its other projects. Surety bonds protect not only governments, taxpayers and workers, but also private owners and lenders from unforeseen issues that arise during construction.
Over the last 15 years, surety companies paid nearly $12 billion to complete construction contracts and pay subcontractors and suppliers what they were owed. These figures do not include the significant amount of money sureties spent to finance troubled contractors so they could complete contracts and avoid the trouble caused to owners and subcontractors by a default.
With bonding being integral to public and commercial construction projects, the ability to obtain bonds is the lifeblood of many construction firms. Establishing and maintaining a bonding relationship requires a significant investment of time and resources. This is driven by the surety’s need to thoroughly underwrite a contractor’s qualifications before extending surety credit. After all, the surety is generally an unsecured creditor, holding only a signed promise from the construction firm and its owners personally, to protect it from loss in the event of a contract default. The ability to obtain bonds dramatically increases the potential of a contractor to grow and earn higher profit margins on construction projects by weeding out unqualified competitors that might otherwise land contracts at unreasonably low prices. In performing this valuable screening function, sureties serve as an ally for well-run, well financed construction companies that qualify for bonding support. Once approved for bonding, a contractor enhances its negotiating position by demonstrating to prospective project owners that it is stable and has been thoroughly pre-qualified, carrying the surety’s seal of approval.
The key to successfully navigating the bonding process is to first partner with a professional surety bond producer who is in tune with the local surety and construction market and a well-respected construction CPA whom the surety relies upon to produce reliable financial guidance.
The primary objective of the professional surety bond agent is to help the contractor build and maintain a profitable business. The bond agent will begin by assisting the contractor in assembling underwriting information, including organizational charts, resumes of the owners and key personnel, business and continuity plans, financial statements prepared by the construction CPA, including schedules of completed and in-process contracts, and documentation of established lines of credit. Based on the findings of this review, the agent will determine which surety company is best suited to meet the needs of the contractor and prepare a formal submission to the surety.
The agent will work with the surety company underwriter to establish single project and aggregate work program limits, which provide a responsible framework for the contractor to operate within.
Contractors should keep in mind that it is not always in their best interest for the bonding company to approve a contract for bonding. One of the most important services that can be provided to a contractor is to push back, ask questions and even decline bonding in cases where the bonding company perceives an unusual high level of risk, such as onerous contract provisions, or a poor fit between the contractor’s experience or resources and the project for which bonding is being requested. Bond agents and bond underwriters can provide an independent perspective, helping mitigate risk, avoid potential pitfalls and ensure the long-term viability of the contractor.
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