Need a Contract Bond – Tips for Contractor
Surety bonds are usually required of general contractors on public projects. But many subcontractors also find that they are being asked to provide bonds; and an increasing number of private project owners are requiring bonds as well.
Simply stated, a surety bond is an agreement under which one party, the surety, guarantees to another, the owner or obligee, that a third party, the contractor or principal, will perform a contract in accordance with contract documents. In the case of a subcontract, the general contractor is the obligee, and the subcontractor is the principal.
There are three types of contract surety bonds. The first, the bid bond, provides financial assurance that the bid has been submitted in good faith and that the contractor intends to enter into the contract at the price bid and provide the required performance and payment bonds.
The second, the performance bond, protects the obligee from financial loss should the contractor fail to perform the contract in accordance with the terms and conditions of the contract documents.
The third kind of contract bond is the labour & material payment bond which guarantees that the contractor will pay the primary subcontractor, labor and material bills associated with the project.
Since most companies that issue surety bonds work through insurance brokers, also called producers; your first step to take on bonded work would be to discuss your plans with a broker. You will find that brokers who specialize in surety bonding for the construction industry will likely be best qualified to assist you.
The professional surety broker will guide you through the bonding process and assist you in establishing a business relationship with a surety company.
From a general perspective, even though most surety companies are also large insurance companies, qualifying for bonds is more like obtaining bank credit than purchasing insurance. Like your bank, a surety company wants to know you well before committing its assets.
Most contractors find that it is necessary to spend a lot of time and effort establishing their first relationship with a surety company. Since the surety is guaranteeing your company's performance, it needs to gather and carefully analyze information about you and your firm before it will agree to provide bonds.
The surety underwriting process is focused on prequalifying the contractor. It takes time - sometimes weeks - to develop and present data, address questions the surety may have, and verify information.
Before issuing a bond the surety must be fully satisfied that the contractor is of good character, has the experience that matches the requirements of the projects to be undertaken, and has, or can obtain, the equipment 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 contracting firm is well-managed, profitable, keeps its promises, deals fairly, and performs its obligations in a timely manner.
It is important to realize that each surety company has its own underwriting standards and requirements. That said, there are fundamentals that are common to underwriting surety bonds, and understanding these fundamentals is helpful to a contractor seeking to set up a surety bond relationship for the first time.