Surety Bonds – A Summary of the Process
For many construction companies, one of the key concerns in getting bigger and better business is the ability to get a surety bond and, when possible, to increase their business bonding capacity. An increase in a business’s bonding capacity allows it to bid on, and get, more high-quality and profitable jobs. Many times, these jobs are the difference between a profitable business and one that struggles.
What is a surety bond?
This is a generic term that stands for a guarantee by a third party. These types of bonds are common in the construction industry, but are used in many other industries as well and include such things as notary bonds, fidelity bonds, performance type bonds, etc.
In the construction industry, an insurance company guarantees the performance of a contractor. The owner of the project requires a bond by the contractor. Then the contractor has to go to a surety bonding company (usually a large insurance company) and convince them to write the bond. The surety company doesn’t want to take on much risk, so they underwrite bonds so that they believe that, in the event of a claim, they won’t have to pay anything.
Why does the Owner require a bond?
The owner of the project does not want any delay if there is a dispute with regard to the surety bond. On federal projects a this is required due to the Miller Act. States have passed similar legislation called Little Miller Acts.
How does a contractor get one?
For small contracts (those $350,000 and under), many contractors can get a bond if they have good credit. A simple application is required (usually only a couple of pages) along with an indemnity agreement. Then, if the credit of the business and the owner are of sufficient quality, the bond is approved.
For medium contracts (those $350,000-$700,000), usually a bit more is required. This includes some information about the business and three years of current financials. The financial statements do not have to be audited statements.
For larger contracts (those $700,000 and greater), the amount of information is generally quite a bit more. The guarantor likes to have their application and indemnity agreement, along with three years of financial statements. In general, if the contract is going to be more than $1 Million, then audited financials are required. Also, work-in-process needs to be detailed for the contractor. A lot of consideration is also given to the owners’ personal financial statement.
The goal in looking at a contractor when it comes to these large projects is their cash flow and the amount of work that they have in process. Over time, sureties have come to realize that their largest amount of claims are due to companies that are growing TOO fast. The reason behind this is that the cash flows of these companies are not enough to meet the cash demands of the growth. Thus, the work-in-process becomes critical as that shows how much cash is truly needed.
Conclusion
For small contracts, these bonds are fairly easy to get as it only takes a couple of pages plus good credit. However, for large contracts, surety companies take the time and effort to review a company’s financials and work-in-process to determine their bonding capacity.
For many construction companies, one of the key concerns in getting bigger and better business is the ability to get a surety bond and, when possible, to increase their business bonding capacity. An increase in a business’s bonding capacity allows it to bid on, and get, more high-quality and profitable jobs. Many times, these jobs are the difference between a profitable business and one that struggles.
What is a surety bond?
This is a generic term that stands for a guarantee by a third party. These types of bonds are common in the construction industry, but are used in many other industries as well and include such things as notary bonds, fidelity bonds, performance type bonds, etc.
In the construction industry, an insurance company guarantees the performance of a contractor. The owner of the project requires a bond by the contractor. Then the contractor has to go to a surety bonding company (usually a large insurance company) and convince them to write the bond. The surety company doesn’t want to take on much risk, so they underwrite bonds so that they believe that, in the event of a claim, they won’t have to pay anything.
Why does the Owner require a bond?
The owner of the project does not want any delay if there is a dispute with regard to the surety bond. On federal projects a this is required due to the Miller Act. States have passed similar legislation called Little Miller Acts.
How does a contractor get one?
For small contracts (those $350,000 and under), many contractors can get a bond if they have good credit. A simple application is required (usually only a couple of pages) along with an indemnity agreement. Then, if the credit of the business and the owner are of sufficient quality, the bond is approved.
For medium contracts (those $350,000-$700,000), usually a bit more is required. This includes some information about the business and three years of current financials. The financial statements do not have to be audited statements.
For larger contracts (those $700,000 and greater), the amount of information is generally quite a bit more. The guarantor likes to have their application and indemnity agreement, along with three years of financial statements. In general, if the contract is going to be more than $1 Million, then audited financials are required. Also, work-in-process needs to be detailed for the contractor. A lot of consideration is also given to the owners’ personal financial statement.
The goal in looking at a contractor when it comes to these large projects is their cash flow and the amount of work that they have in process. Over time, sureties have come to realize that their largest amount of claims are due to companies that are growing TOO fast. The reason behind this is that the cash flows of these companies are not enough to meet the cash demands of the growth. Thus, the work-in-process becomes critical as that shows how much cash is truly needed.
Conclusion
For small contracts, these bonds are fairly easy to get as it only takes a couple of pages plus good credit. However, for large contracts, surety companies take the time and effort to review a company’s financials and work-in-process to determine their bonding capacity.