How to Avoid the Dreaded ‘No’ from a Surety
Author: Mathew Manol
As we head towards 2021, there remains a high degree of economic uncertainty due to the ongoing COVID-19 pandemic. This uncertainty most definitely extends itself to the construction industry. During the pandemic, we have seen various levels of government reach deep into their pockets to spend record amounts on COVID 19 prevention, treatment and economic support. It seems almost certain that more spending will be required as we continue to work through this challenging time.
This has left many in our industry wondering how much money is left for badly needed infrastructure spending. While all of the budget announcements have been positive of late, we are keenly waiting to see how quickly these budgets will turn into shovel ready projects.
With these uncertain times, we are beginning to see some of the major surety companies taking a more conservative approach to underwriting than we have seen in the past decade. This coupled with some large surety claims has the industry concerned that we will see an erosion in the bond companies appetite to support their contractors.
The most common reasons we counter for a surety to decline support would be concerns over a contractor’s financial health, concerns over the scope of work or concerns that the size of a contractor’s current backlog is too large relative to their financial strength.
As an example, a surety may decline to issue bid bonds for a company on a $10M new school project if they have only completed a $3M school renovation in the past. A surety may also decline to support a surety bond for this school builder if they decide to bid on a bridge rehab project due to concerns about the company’s capabilities around this new scope of work. A surety could also decline to support bids on new projects if they have any concerns about the ongoing works.
The best way to avoid these dreaded declines is through building a strong relationship with your surety broker and your surety provider. The foundation of a strong surety bonding relationship is trust, communication and transparency. Building this foundation takes work from all parties but ultimately can lead to a fruitful relationship for all parties.
In our experience, we find that It also helps for contractors to understand the perspective and goals of the surety company. A surety wants to support their contractors but they also require valid reasons for doing so. This starts with presenting regular, accurate and reliable financial reporting.
A good broker will know exactly what the surety company looks for and will have the expertise and the network to help you develop the necessary reporting to satisfy these requirements. The more current a surety is with respect to financial reporting the better positioned they will be in to support the larger bond request that comes in the door.
Transparency is also paramount. Surety companies like any other business partner don’t like to be surprised. If you encounter a business issue such as escalating costs due to COVID 19, have a project loss or have a dispute, your broker and your surety can often assist if involved early on. When these items are not shared up front, it can lead to questions, concerns and ultimately the possible end of your surety support.
It is equally as important to share all of the positives with your surety. You should be sharing any great reference letters you receive from project owners or consultants with your surety. Let them know if you have added in some new key personnel and when a project comes in under budget and on time.
These pieces all add to the narrative of being a successful and professional contractor.
We also strongly encourage you to develop a solid business plan so you can professionally communicate the vision for your business to your broker and surety. This will ensure they understand your long term vision and your preparedness for the future. The surety will then better understand where your business is heading so they are prepared and ready to support that next big job.
Have you been declined support by a surety? If so, call FCA today to speak with one of our surety experts for a second opinion.