Today's construction industry is more competitive than ever and more contractors are interested in public works projects requiring surety bonds guaranteeing their performance of the contract. Many subcontractors also find they are being asked to provide bonds. There is also an increasing number of private projects where owners are requiring bonds. As a result, knowledge of the Bond Process is imperative for a contractor's success.
How to get a surety bond
The first step to qualify for a surety bond program is to discuss your surety needs with your surety agent or broker. The surety underwriting process is focused on prequalifying the contractor. It takes time – sometimes a lot of time – to develop and present data, verify information, and address questions the surety may have. A professional surety insurance agent or broker will provide guidance to the contractor during this process.
Before issuing a bond, the surety must be fully satisfied that the contractor is of good character, has experience matching the requirements of the projects to be undertaken, and has, or can obtain, the equipment and manpower necessary to perform the work.
The surety also wants to make sure the contractor has the financial strength to support the desired work program, and has a history of paying subcontractors and suppliers promptly. It will want to see that the contractor is in good standing with a bank and has established a line of credit.
In short, the surety wants to be satisfied that the contractor is a well-capitalized, well managed, profitable enterprise which keeps promises, deals fairly and performs obligations in a timely manner.
What you'll need
Business Financial statements
You will need to provide quality fiscal year-end financial statements for each of the last three years. If the business has been in existence fewer than three years, statements for each fiscal year-end since inception should be provided. Ideally, your financial statements are prepared by a CPA in accordance with Generally Accepted Accounting Principles.
There are three levels of quality for financial statement reporting: Audit, Review and Compilation. An Audited financial statement provides the highest level of assurance to the surety, while Review and Compilation financial statements provide a lower degree of assurance to the surety. The level of CPA prepared financial statement required depends on the size of the requested surety program.
The typical privately owned contract surety account provides their surety with a CPA prepared, percentage of completion, review quality financial statement including:
After a surety program has been established with the contractor, the overall performance and financial position of the contractor will be continuously re-evaluated. Positive results may serve as the basis for an increase in the amount of available surety credit.
Completed & Work-in-Progress schedules
Annual Accounts receivables/Accounts payables aging schedules
Interim statement indicating how current year is progressing, semi-annual basis
Because surety bonds guarantee a firm's performance and payment of bills, it is expected that the contractor honors those obligations. Therefore, you will be asked by the surety to sign a general indemnity agreement which includes corporate, cross-corporate, personal, spousal and family trust indemnity.
The indemnity agreement obligates the named indemnitors to protect the surety from any loss or expense, thus assuring they will stand fast in the face of problems and use their talents and financial resources to resolve any difficulties that may arise in the performance of the bonded work.
Submitting your case
Once your surety agent or broker has completed the contractors' required submittal information, it is then submitted to the surety for review. A surety underwriter may ask to meet with you and your key people to discuss all aspects of your company's current operations and future plans.
Once the basic arrangements are completed, specific bond requests will be considered and a surety program may be established. The underwriter may examine each specific bond request and review the terms and conditions of the contract documents and bond forms. An essential key to having a successful outcome is providing sufficient time and detail for your surety to become comfortable with the risk associated with the support of your organization’s surety bond needs