4 Tips For Obtaining Surety Bonds In The Construction Industry

The ability to obtain surety bonding is a necessity in the commercial construction industry. Public entities typically require bid bonds along with performance and payment bonds for their projects. General contractors often require surety bonds from their subcontractors and more and more private entities are requiring bonds to protect themselves again contractor default. Establishing and maintaining a surety line can be challenging for a construction company. We’ve put together the following tips to aid you in securing or increasing your bonding capacity:

Select a reputable bond broker and surety company. When selecting a surety bond broker or producer you want to make sure they specialize in contract surety bonding and are familiar with construction contracts in the states you will need bonding. A good place to start is with the National Association of Surety Bond Producers (NASBP). Your broker will be able to match your company with a surety provider that best meets bonding needs.

Make sure your broker only works with reputable surety companies. Your surety company should be certified with the U.S Department of Treasury to write surety bonds for federal governmental projects and have an A-rating or higher from A.M. Best or an equivalent rating from a respected rating organization such as Dun & Bradstreet or Fitch Ratings. The surety company your broker selects needs to be able to meet your bonding needs including the ability to bond you in the states your work and has the capacity for your workloads.

Get prequalified. Before you do anything that’s going to require a surety bond, whether it’s a contractor license bond, bid bond or performance and payment bond, you will have to go through a prequalification process to ensure you are bondable along determining with your bonding capacity.

The surety company will want to review the financial statements of your company along with the personal financial statements of all owners. Other information the surety company will want to review includes an organizational chart, business plan, management and continuity plans, resumes of key personnel, history of work completed, references and line of credit.

Build a relationship with your broker. Your broker should be your ally and advocate. Open communication is the key to building a good relationship with your broker and surety company. You need to notify them at the first sign of problems with a construction project. Keep your broker updated on any changes to your company, such as ownership changes or plans on expansion into new markets or larger projects. Your surety company is more likely to increase your bonding capacity if you’ve established a pattern of trust and reliability.

Maintain a healthy business. In order to maintain and grow your bonding capacity you need to maintain a healthy business, and a healthy business is a profitable one. This means being able to successfully manage cash flow and completing projects on time and within budget. You should also work within your capacity and don’t overextend beyond your capabilities. This may mean not taking on new projects if you don’t have the working capital, equipment and personnel to successfully complete the project.

This article was originally published in the Summer 2015 Issue of Construction Data Quarterly.

4 Responses to “4 Tips For Obtaining Surety Bonds In The Construction Industry”

  1. Lamon Warnock July 22, 2015 at 9:27 AM #

    Great article Kendall. We work with contractors and have learned that many newer contractors are unaware how important a good surety relationship is. Surety companies underwrite on the four C’s. The first C refers to Capital. The surety analyzes the company’s financial statements. Surety companies like CPA prepared statements, not in-house statements. There needs to be cash in the bank and a line of credit that is not heavily used.
    The second C is Capacity. The surety needs to know a company’s ability to perform the bonded project. The surety looks at non-financial information such as resumes of key employees, current work on hand, project history and project references, and continuity plans. The contractor should not have too many open jobs at one time.
    The third C is Credit History. The surety reviews the personal credit reports of the company’s owners and spouses, as well as a company’s credit report.
    The fourth C is Character. Surety companies like to meet with clients face-to-face. A company’s reputation and the references of its clients and suppliers are key items in determining Character. Sorry for the long response. Feel free to contact me with any questions. lamon@warnockagency.com 678-971-4195.

    • Kendall Jones July 22, 2015 at 9:33 AM #

      Thanks for the comment, Lamon. Great additional info, no need to apologize.

  2. Jenna Sparks July 27, 2015 at 8:25 PM #

    Very helpful tips, surety bonds are very important, especially in construction industries. Having these tips will help a lot of contractors/company in this industry. Must share!

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