Construction companies that need their first bond have either been planning for a while to take the leap into bonded work, or have an opportunity on a project with a bond requirement and it’s the first time they’ve ever heard of a surety bond. In both circumstances, there’s a learning curve to understanding what is a surety bond as well as what is required to obtain one .

In Ontario, and most of North America for that matter, surety bonds are issued by insurance companies. These insurance companies work with licensed insurance brokers who act as an intermediary between the construction company and the bond company. You will need to find a surety broker and set up a meeting to get things started.

 

First Meeting: What to Expect?

The goal of the first meeting is to make personal introductions with your broker and discuss your business and bonding requirements in greater detail. For your broker, it is an opportunity to learn about your business and start to put together the information that will be required to make a formal submission to the bond company. From your perspective, it’s a chance to get educated on bonding, learn about the brokerage and understand the process of getting bonded from start to finish. In this meeting you will be able to determine whether there is a “good fit” between you and the broker. You are putting a lot of trust in your broker as bonding is a very critical component to your business. There are several distinct steps in the process and it’s important that these are clearly defined so you know what to expect and there aren’t any surprises.

In advance of your meeting, a competent surety broker will send you an email outlining the documents required to make a formal submission. We recommend you begin preparing these documents in order to get the most out of the first meeting.

 

The following is a checklist of documents that are required:

  • Most recent year-end financial statement with aged payables and receivables listing
  • Financial statements of any holding or affiliated companies
  • If available, current interim financial statement with aged receivables and payables listing
  • Copies of any bank loan agreements, including lines of credit
  • Personal net worth statements for each of the shareholders
  • Statement of work in progress
  • Certificate(s) of insurance
  • A contractor’s questionnaire or a CCDC 11 prequalification document
  • Resumes of owners/key employees

There may be additional documents required depending on your situation. In preparation for the first meeting, at minimum you should bring the contractor’s questionnaire and financial statements.

 

Gathering of Information

There are two categories of information that a broker must gather in order to make a proper submission. The first category deals with the company’s operations. In your first meeting you should expect your prospective broker to ask numerous questions about your company’s history and experience, the shareholder’s professional background as well as the focus of the company, how operations are structured and what your goals are for the short and long term.

The second category is financial information. In your first meeting you can expect questions about the company’s financial statements, typical profit margins, how your payment terms are structured and what type of assets you own both corporately and personally.

Although this information is private and highly sensitive, it is very important that you don’t hold anything back. You need to relay all of these details, because your broker will be your advocate to the bond company. They will be preparing a formal submission to the bond company, so it’s critical they understand your business so that they can present your business as a top tier, professional organisation.

 

Choosing the Right Broker

The first meeting is your opportunity to interview your prospective broker. You should have questions prepared in order to ensure they are experienced and qualified to manage your surety bond program. While most insurance brokers are legally permitted to handle surety, relatively few agents have the training and experience necessary to fully serve a contractor’s surety needs.

Your broker should be able to analyze financial statements, understand construction-specific accounting and work-on-hand schedules as these all affect your bonding limits. They should have experience working in the surety industry and work with the various insurance companies that specialize in surety bonds. The following is a list of questions you should consider when choosing a broker:

  • Is he/she apart of any national associations such as the Surety Association of Canada or the National Association of Surety Bond Producers?
  • Can he/she provide references from surety clients who are similar to your business?
  • What percentage of his/her overall business are construction clients? Do they specialize in construction?
  • Has the broker developed solid relationships with a variety of surety underwriters? Ask them to name the companies they work with and explain which markets are a good fit for your surety needs.
  • Does he/she have an understanding of the construction management process, including estimating, bidding, building and cost control systems?
  • Does he/she possess a solid understanding of construction contracts and contract law?
  • Do they understand accounting? Can they answer basic accounting questions?
  • Do they have a clearly defined process that makes sense and that they can demonstrate clearly?
  • Have they discussed all aspects of surety including bid bonds, performance bonds, indemnity agreements, bond facility terms and conditions, costs associated and their service standards?

Most contractors will be able to tell if a broker is exaggerating their experience based on answers to these questions. If they don’t have the answers, or their answers don’t make sense, use your intuition to make your decision. It’s important not to rush your decision when choosing a broker, because the wrong broker can lead to frustration and potential financial losses if things are done incorrectly. After the screening in your first meeting, you may wish to have your financial officer, CPA and/or attorney interview the agent for further evaluation of their knowledge of contracts, finance and credit.

Remember, the first meeting is the beginning step in your journey to getting a bond facility. It is important to be patient, and work with your broker towards the goal of putting bonding in place. You may be an established company that has all of the required documents and find the process simple, or you may be starting out and need to work with your professionals to get financials, job records and other aspects of your business in order. Regardless of your situation, if you have a plan and work towards your goals, you will be able to get bonded and properly grow your business.

Contact FCA Surety

Please do hesitate to reach out with questions or for a free second opinion.

1867 Yonge St., Suite 300, Toronto, ON, M4S 1Y5

 

M-F: 8am-5pm, S-S: Closed

 

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