With bonding being integral to public and commercial construction projects, the ability to obtain bonds is the lifeblood of many construction firms. Yet, when they hear the word “bond,” contractors may grimace or, worse, elect to pass on an otherwise attractive revenue opportunity by avoiding projects that require bonding. They have heard rumors of, or may have experienced firsthand, an underwriting process that can seem arduous and intrusive.
The fact is, establishing and maintaining a bonding relationship requires a significant investment of time and resources. This is driven by the surety’s need to thoroughly vet a contractor’s qualifications before extending surety credit. After all, the surety is generally an unsecured creditor, holding only a signed promise from the construction firm and, often, its owners personally, to protect it from loss in the event of a contract default. And bond premiums average only a fraction of bonded liability, leaving little room to pay claims before a surety finds itself unprofitable.
The flipside of that coin is that the ability to obtain bonds dramatically increases the potential of a contractor to grow and earn higher profit margins on construction projects by weeding out unqualified competitors that might otherwise land contracts at unreasonably low prices. In performing this valuable screening function, sureties serve as an ally for well-run, well-financed construction companies that qualify for bonding support.
Further, once approved for bonding, a contractor enhances its negotiating position by demonstrating to prospective project owners and others that it is stable and has been thoroughly prequalified, carrying the surety’s seal of approval.
The key to successfully navigating the bonding process is to first partner with a professional surety bond producer who is in tune with the local surety and construction market. Much like a CPA, attorney and banker, the bond producer should be considered a vital member of the contractor’s advisory group. They should invest the time to learn about the contractor’s operation, business plan and goals, and help design a roadmap that will enable the contractor to attain those goals. A good resource for contractors to locate a qualified surety bond producer is the National Association of Surety Bond Producers.
The primary objective of the professional surety bond agent is to help the contractor build and maintain a profitable business.
He or she will begin by assisting the contractor in assembling and reviewing underwriting information, including organizational charts, résumés of the owners and key personnel, business and continuity plans, financial statements, schedules of contracts in progress and recently completed, and documentation on established lines of credit.
Based on the findings of this review, the agent will determine which surety company is best suited to meet the needs of the contractor and prepare a formal submission to the surety.
The agent will work with the surety company underwriter to establish single project and aggregate work program limits, which provide a responsible framework for the contractor to operate within based on experience and other factors, including financial and human resources as well as available equipment.
INCREASING THE CHANCES OF SUCCESS
While helping establish and maintain a bonding facility is the first step in the bonding process, it is by no means the only service provided by the professional surety bond agent or the surety underwriter. This surety team is well-equipped to serve as an invaluable resource and business partner for the contractor, providing referrals to accountants, attorneys and bankers who specialize in construction accounting, law and lending. Working together, this advisory group can greatly increase the contractor’s chance of success in business, while identifying and addressing potential threats and weaknesses that could negatively impact the operation.
Contractors should keep in mind that it is not always in their best interest for the surety agent or underwriter to approve a request for bonding. One of the most important services they can provide to a contractor is to push back, ask questions and even decline bonding in cases where they perceive an unusually high level of risk (such as onerous contract provisions) or a poor fit between the contractor’s experience or resources and the project for which bonding is being requested. Agents and underwriters can provide an independent perspective, helping mitigate risk, avoid potential pitfalls and ensure the long-term viability of the contractor.
In the case of a mature construction firm, owners often struggle to identify an exit strategy that will enable them to transition ownership of the business while protecting their legacy and ensuring the livelihood of the valued employees who helped build the company. Surety agents and underwriters can work with the owners of the business and their trusted team of advisors to establish a business succession plan that serves the interests of all parties without jeopardizing the company’s bonding capacity.
In summary, there is no question that establishing and maintaining a surety program requires a substantial commitment of time and resources. However, by embracing the bonding process—rather than avoiding or agonizing through it—contractors will be rewarded with a business that is robust, and they will come to recognize their surety agent and underwriter as vital members of their advisory team.
Original Article: https://www.constructionexec.com/article/embrace-the-bonding-process-and-your-business-will-thrive
