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. I say big brother because before the surety will stand behind you, they must have an intimate understanding of your company and its capabilities.
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 the owner of the project that you will fulfill your obligations as set out by the contract you have entered into. Whether or not they will issue these bonds depends largely on your financial condition and past experience.
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 3-4 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 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 discuss things further, and assess your character as this is an important factor in their decision.
Once they have made their decision, the offer for a bond facility will 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 can 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 reporting might not be where it needs to be in the beginning but are sometimes willing to start small and work towards stronger more reliable reporting and ultimately an increased bond capacity. It is our job to assess your situation and at the very least present you with goals to work towards in order to establish your first bond facility.
Surety 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 yourself from the competition.