Your first bond
Today's construction industry is more competitive than ever, and more contractors are interested in projects that require them to provide surety bonds guaranteeing their performance of the contract.
Surety bonds are usually required of general contractors on public projects let by federal, state or local government agencies. Many subcontractors also find that they are being asked to provide bonds. Also, an increasing number of private project owners are requiring bonds as well.
What is a surety bond?
Simply stated, a surety bond is an agreement under which one party, the surety, guarantees to another party, 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 the bid has been submitted in good faith and 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 payment bond which guarantees the contractor will pay certain subcontractor, labor and material bills associated with the project. Get Started
Prequalification
The surety underwriting process is focused on prequalifying the contractor. It takes time--sometimes a lot of time--to develop and present data, answer 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 and has the experience that matches the requirements of the projects to be undertaken.
The surety wants to make sure the contractor has the financial strength to support the desired work program. It will want to see that the contractor is in good standing with a bank.
If you understand what's involved in getting bonds, you can weigh the time and expense of obtaining surety bonds against the benefits of being able to take bonded projects.
Here's what you need
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- Surety Survey
- Personal Financial Statement
- Line of Credit
- Resumes of Key Personnel
- Letters of Recommendations
- Year-end Statement Prepared by CPA
- Interim In-house Statements
Financial statements
Financial statements are vital to any business that grants credit, and sureties are no exception. Your financial statements should include the following:
- The Accountant's Opinion Page
- Balance Sheet
- Income Statement
- Statement of Cash Flow
- Schedule of Contracts in Progress and Contracts Completed
- Schedule of General and Administrative Expenses
- Explanatory Notes
The surety may also require aging schedules and accounts receivables and payables as well as schedules for any other items of statements that might need such support.
Quality of financial statements
Financial statements can be prepared be accountants on three levels, referred to as audit, review and compilation.
The agency should be able to help you decide which way is best for your companies needs.
Submitting your case to the surety
Once your file is completed by your surety producer, it will be submitted to a surety company for review.
Surety companies, usually like to have some ideas as to the single job size and aggregate work load. This includes all work bonded or not that you want to undertake
Once the basic arrangements are completed, the surety will be in a position to consider specific bond requests.
Indemnification
Since surety bonds guarantee a firm's performance and payment of bills, the surety fully expects that the contractor will live up to those obligations.
Therefore, you will be asked by the underwriter to sign an indemnity agreement. This indemnity will be required of the contracting firm, and may also be required of the firm's owners and their spouses.
The indemnity agreement obligates the named indemnitors to protect the surety from any loss or expense, thus assuming that 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.
In conclusion
We have discussed generally the type of information surety companies may require for a first bond. Again, keep in mind, that each surety has its own underwriting standards and may require additional information.
Even then, there is no guarantee that submitting all of the requested information will result in an approval.
You may be wondering about the cost of surety bonds. Surety rates vary from one surety to another, but range from one to five percent of the contract price.