Floyd Arthur PDF Increase your credibility with a surety bond

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Increase Your Credibility with a Surety Bond By Floyd Arthur

As a contractor, you know that your reputation is your most important asset, so you

strive to complete all of your projects on budget and on time. Nonetheless, when you are

working on large projects with many moving parts, you know that something is certain

to go wrong. In most cases, these problems are minor and easily remedied, causing

nothing more than slight cost overruns or short-term delays. Occasionally, however,

their effects can be devastating—even preventing you from completing a project at all.

It’s for these rare occasions that surety bonds were designed.

Increase Your Credibility with a Surety Bond

What Is a Surety Bond?

In general terms, a surety bond is a contract between three parties:

The principal: The construction professional who contracts to perform work.

The obligee: The agency or client for whom the work is being performed

The surety: The company that issues the bond and guarantees the contractor’s

obligations under the contract.

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If the contractor fails to fulfill the terms of its contract with the obligee, the surety fulfills

the contract (for example, by hiring a new contractor) or pays the obligee for any

damages incurred. Unlike an insurance policy, however, the contractor is required to

reimburse the surety for its loss.

Either the principal, the surety or both can be sued for the bond, and both can be held

liable for the entire amount guaranteed.

In the construction industry, there are four types of surety bonds:

Bid bonds, which ensure that the firm that bids on a contract will enter into the

contract if it wins the bid

Payment bonds, which ensure that the contractor pays subcontractors and

suppliers for their work

Performance bonds, which ensures that the contractor performs the work in

accordance with the terms of the contract

Ancillary bonds, which ensure non-performance related requirements

When Are Surety Bonds Required?

Surety bonds are required for any federal construction contract valued at $150,000 or

more,and many state and local governments require them as well. Additionally, many

private entities require bonding for large commercial projects.

How Do Contractors Qualify for Surety Bonds?

A bond is a guarantee of reliable performance, so sureties screen all applicants carefully

before underwriting their work. Although each company has different criteria, the

evaluation typically includes four components. These include:




Financial stability:The surety evaluates the company’s financial stability based on a

review of its business operations, financial statements and credit score. Financial

statements should be well-organized and, if possible, prepared and maintained by a

CPA. The business also needs good cash flow, a history of timely payments to

subcontractors and vendors, and a good relationship with a bank.

Integrity: To evaluate the integrity of a business, the surety looks at every level of the

company’s operations, including accounting practices, record keeping and human

resource management. It may also require letters of recommendation from business

contacts, such as customers, suppliers and employees.

Longevity: Longevity refers not just to the length of time a company has been in

business, but also to the way the business is run. The surety reviews the company’s

business plan and the plan for continuing operations when the owner leaves. It also

looks at employee turnover, and whether supervisors and managers have sufficient

experience to manage the project it is being asked to guarantee.

Capacity: This is an evaluation of the resources the company has at its disposal. If the

surety determines that a company has “too much on its plate” or is overextended

financially, it may decline the bond even if all other factors are in place.

Getting qualified for a surety bond may seem like a daunting process, but it is easier if

you have an experienced agent to help you prepare. Our construction insurance experts

have a great deal of experience in the bonding process, and can assist you in finding the

resources you need. We are available Monday through Friday from 9 a.m. to 6 p.m., so

call 516-292-3780 to schedule your appointment today. Or, if you prefer, request a

free consultation online now and we will get back to you within one business day.

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