Qualifying for Your First Contract Bond
As a surety bond broker, helping people establish their first bond facility can be a challenging, albeit rewarding process. Small and emerging contractor’s understanding of surety is often limited and some informal education is usually required. Whether the majority of your work is bonded or only a portion, a surety bond is an extremely important part of the puzzle. This article intends to answer the question: “What is a surety bond anyways?”
Not to be confused with securities, a bond, also known as a surety bond, guarantees the contractual obligations of the contractor to the purchaser of the construction services. In simple terms the bond company acts like a co-signer to the contractor. Like a big brother, he stands behind the contractor and will only intervene should the contractor default.
Although surety bonds are issued by insurance companies, they are very different than insurance policies. While typical insurance is purchased to recover your losses in the event of a future catastrophe, a surety bond is purchased to insure that you meet the obligations of your contract with the project owner. If the contractor fails to meet the obligations of the contract, the owner has the option to place a claim against the bond. In essence, the bond protects the project owner.
In order to determine these factors, you will be required to submit information to profile your company. A contractor’s questionnaire which outlines the ownership structure, incorporation date, the type of work your company does, the largest contracts you have completed, your insurance information, job and supplier references.
They will want the resumes of key people/shareholders and a corporate chart outlining the ownership of the group including holding companies or affiliated companies. This information helps the surety understand how the company is set up, what kind of work they do, and the people behind the organization.
With respect to the numbers, the surety will need information to evaluate your financial strength. Year end financial statements prepared by a chartered accountant are a must. You will need to provide the previous 3 years for the operating company and any affiliated companies. Aged accounts receivables and payables are also required to match the current year end date.
The surety will also require you to prepare a work in progress statement outlining your current jobs and their status. A personal financial statement for all of the shareholders is necessary along with a bank reference letter outlining your current bank arrangement.
Together, this information will help the surety assess your firm and its strength. This will help them determine the size and scope of work they are comfortable supporting. Before making an offer for a surety facility, the surety company will likely want to meet with the shareholders to further understand the contractors business, and assess the character of the owners.
Once they have made their decision, the offer for a bond facility or surety agreement will be provided. This will include include job size and scope limits for single job and total aggregate work on hand. If you want to bid outside that range it will be evaluated on a case by case basis.
It is easy to understand why a broker is needed to help you through this process. An experienced broker is essential to help you and your professionals prepare this information properly. A good surety bond broker has strong relationships with surety companies, especially important if your company is relatively new.
A good broker will also help underwriters understand your business plan and what makes you a good candidate for bonding. They can also help you navigate through tough situations such as a problematic year, or a desire to bid a large job.
At FCA surety, we work with a wide range of contractors both small and large. While larger more complex construction companies have demanding surety requirements, it is often the smaller emerging companies who pose the greatest initial challenges in terms of qualification.
Fortunately, we work with sureties who understand that financial statements are not the only part of underwriting a contractor. Many will establish a facility and then work with the broker and contractor to help improve reporting and build surety support. It is our job as a broker to access your situation and at the very least present you with goals to work towards in order to establish your first bond facility.
Establishing a surety facility can seem daunting in the early stages, however, once you have established a facility and are working with a true bond professional, the ability to obtain surety bonds will open up new avenues for work. You will be able to market yourself as being pre-qualified by a surety company, something that will differentiate you from the competition.