Paving the Way to Surety Bonds for Construction Projects

A construction company is about to start a significant real estate project in a revitalized community in a neighboring city. The last step the company needs to take before the official start of work is to secure a surety bond. While all signals look good, the company’s owner isn’t altogether certain the financial underwriter will deem his company a safe risk.

Sound like a familiar scenario? Probably. After all, surety bonds are commonly needed by construction companies. If a company does not fulfill its responsibilities according to the terms of the bond, a project developer can file a claim and recover all financial losses. So your chances of winning a project often hang in the balance of whether you can obtain this bond.

We’ve got the lowdown on surety bonds; the factors underwriters consider and how to increase your odds of success.

The Basics

Often confused with insurance, surety bonds work more like a form a credit. They’re a guarantee that the construction company will carry out a contract within all applicable laws and regulations. Sureties primarily provide three types of bonds in the construction industry, and each provides a different form of protection:

• A bid bond protects a project owner if a contractor backs out of a project after winning a bid or fails to secure a performance bid. It provides a guarantee that the project will be undertaken within the terms at which the contractor bid.
• A performance bond provides financial loss protection to a project owner if a contractor does not complete the project in accordance with the terms agreed upon.
• A payment bond assures a contractor has the financial capability to compensate workers and suppliers for labor and material utilized in the project.

Boost your chances of surety success.

Most construction companies understand the importance of obtaining bonding. However, the factors considered by underwriters in determining the associated risk — and therefore their willingness to bond — are often unclear. As the ability to secure bonding is dependent on risk, you want to maximize the attractiveness of the company from an underwriter’s perspective.

The following three Cs of a company are evaluated by surety specialists when determining a contractor’s risk level:

Capacity: Does the contractor have the necessary technical skills, knowledge, equipment, experience and staffing to complete the project? This question is answered by reviewing work in process (WIP) reports and previous jobs completed by contractors. WIP schedules are examined for contract prices, billings to date, costs to date and estimated costs to complete in order to determine job cost stability and profitability. Completed jobs provide historical trends of overall profitability.

Character:  What type of reputation does the contractor have within the construction industry? Character is determined by evaluating a contractor’s history and relationships; reputation for taking unusual or unnecessary risks; integrity; commitment to obligations; and past and pending litigation against the company.

Capital: Is the company financially viable? Given the financial risk associated with construction projects, it’s imperative that a company can demonstrate its ability to meet obligations, sustain adequate working capital and generate positive cash flows.

Proof of financial stability is generally illustrated in a company’s reviewed or audited financial statements. Since these documents play an important role in determining whether a surety bond will be issued, companies should work with reputable accounting firms that specialize in the accounting industry. Not only can they help assure the accuracy and compliance of your financial statements, they’ll also understand a surety underwriter’s perspective.

By gaining a clearer understanding of how surety specialists evaluate your company, you’ll be better able to make improvements and increase the likelihood of securing bonding.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.