Essential Guide For Contractors Applying For Construction Bonds

The “How To Guide” For Contractors Applying For Performance Bonds, Bid Bonds And Payment Bonds

 This “How to Guide” is meant specifically for contractors considering projects that require Bid Bonds, Performance Bonds and Payment Bonds. We have done our best to provide comprehensive application tips to improve your chances of being approved for a performance bonding facility.

Today’s construction marketplace is more competitive than ever, and more and more contractors are becoming interested in projects that require Surety Bonds, guaranteeing performance of the contract.

surety bonds, construction bonds, performance bonds, bid bonds, payment bonds

Guide  For Contractors Applying For Surety Bonds

NOTE

If you are looking for a bond for a project that is less than $300,000 and will not have ongoing bonding requirements, this guide is not for you. Visit: www.Bondsurety.ca/quickconstrucitonBond or read the Quick Bonds post!

TABLE OF CONTENTS

  • Who is Required to Get a Surety Bond?
  • What are Surety Bonds?
  • Where to Get Bonds
  • Qualifying for Surety Bonds
  • How to Apply for Construction Bonds?
  • Requirements for Financial Statements
  • Additional Financial Documentation Required
  • Work in Progress Schedule
  • Personal Net Worth Statement and Indemnity
  • Submitting Your Application
  • How Long Will it Take?
  • Last Words

 Who Is Required To Get A Surety Bond?

Surety Bonds are often required of general contractors on public projects. Many subcontractors are also finding that they are being asked to provide bonds. In addition, an increasing number of private project owners are requiring bonds.

 What Are Surety Bonds?

A Surety Bond is an agreement under which one party – the Surety, guarantees to another – the project owner or obligee, that a third party – the contractor or principal will perform a contract in accordance with contract terms and condition. In the case of a subcontract, the general contractor is the project owner or obligee, and the subcontractor is the principal.

There are three types of contract Surety Bonds: Bid Bonds, Performance Bonds and Payment Bonds. First, a Bid Bond provides a financial guarantee that the bid has been submitted in good faith and that the contractor intends to enter into the contract at the price bid and provide the required Performance and Payment Bonds.

Second, a Performance Bond, protects the obligee from financial loss should the contractor fail to perform the contract in accordance with the terms and conditions of the contract.

 Last, a Labour & Material Bond guarantees that the contractor will pay the subcontractor for the labour performed and for the materials used for the project.

 Where To Get Surety Bonds?

Surety companies issue Surety Bonds work through licensed insurance brokerages and agencies, therefore, the first step is to speak to a broker or agent. You will find that a broker or agent who specializes in Surety Bonding in the construction industry will likely be best qualified to assist you. Remember, Surety is purely a financial product and qualifying for performance bonds is more like obtaining bank credit than purchasing insurance. Like your bank, a Surety company will do a full underwriting analysis on your account, prior to guaranteeing contracts that you will perform. Contractors will find it necessary to spend a lot of time and effort establishing their first relationship with a Surety company.

Qualifying For Surety Bonds

The underwriting process is essentially the Surety agreeing to bond the contractor for a certain size job or limit. Many times a contractor has a project in mind that they will present to the Surety. Other times contractors will like to be pre-approved to give them an idea of the size of jobs that they can bid for. It takes a considerable amount of time to present the data, address questions the Surety may have, and to verify information.

Before issuing a Surety Bond the Surety must be fully satisfied that the contractor is of good character, and has the experience that matches the requirements of the projects to be undertaken.

The Surety also wants to know the capacity or the financial strength of the contractor to support the desired work program. They also want to verify the history of paying subcontractors and suppliers promptly.

Additionally, they will inquire about the contractor’s working capital and standing with the bank. They prefer to see an established but underutilized line of credit, in case cash flow issues arise.

The Surety wants to satisfy itself that the contractor is a well-managed, profitable business who keeps its promises and performs their obligations in a timely manner.

Each Surety company has its own underwriting standards and requirements, but there are fundamentals that are common to underwriting Surety Bonds. Understanding these fundamentals is helpful to a contractor seeking Surety Bonds, especially for the first time.

After reading this guide, you understand what is involved in securing a performance bonding facility, this will allow you to weigh the time and expense of obtaining Surety Bonds against the benefits of being able to bid on bonded projects. Because of the investment, your decision to get bonded should be based on long-term growth considerations.

How To Apply For Construction Bonds

Here is the information you will need to provide to your Surety broker/agent in order for your submission to be well received:

  • An organizational chart, noting your key employees and their responsibilities; including detailed resumes of yourself and your key people;
  • A business overview outlining the type of work you do, who you do it for, the geographic area in which you operate, and your growth and profit margin objectives;
  • A list of your largest completed jobs, in order of date completed, including the name and address of the owner, description of job, the contract price, and the gross profit earned;
  • Subcontractor and supplier references including names, addresses and telephone numbers of the contacts;
  • Line of Credit term sheet, including the security taken, rate and conditions
  • Letters of recommendation from owners, architects and engineers.

Also Very Helpful

  • A plan outlining how the business will continue in the event of your demise, and/or a continuity plan on other key employees. Your Surety broker/agent may suggest obtaining life insurance and/or key man insurance
  • A plan outlining how your firm would survive should a large supplier/debtor default on payment of monies owed to you. Your Surety broker/agent may recommend credit insurance solutions.

Financial Statements

Financial statements are vital piece in determining if the Surety will extend a bonding facility and for what limit. Depending on how long your firm has been in business, the Surety requires account-prepared, fiscal year-end, financial statements for the last three to five years. If the statements are older than 6 months, they Surety will also require internally prepared financials or accountant prepared interims.

Financial Statement Types

Financial statements are prepared by accountants on these three levels:

  1. Audited
  2. Review Engaged
  3. Notice to Reader

Surety companies strongly prefer Audited or Reviewed Engaged financial statements; they will however accept statements prepared on a Notice to Reader basis, BUT only in the first year of setting up the Surety facility.

Accurate cost recording and accounting systems are important to Surety companies, as without these systems, the contractor will not be able to provide the Surety with the financial updates throughout the year, necessary to approve the issuance of further bid and performance bonds. Depending on the time elapsed since the last fiscal year-end statement, the Surety may ask for an interim financial statement to see how the current year is fairing. While the requirement for internal and interim statements varies, a six-month statement is usually a minimum requirement.

Your financial statements should include the following:

  • Accountant’s Opinion Page disclosing whether the statements are Audited, Review Engaged or prepared on a on a Notice to Reader basis.
  • Balance Sheet outlining the assets, liabilities and net worth of your business as of the date of the statement. The balance sheet helps the Surety Company assess the working capital and overall financial condition of your company.
  • Income Statement, measuring how well the business performed. The Surety will assess each of the items, including gross profit on contracts, operating profit and net profit before and after tax provisions.
  • Statement of Cash Flow highlighting the cash flow movements from operations, investing and financing activities.
  • Schedules of Contracts in Progress and Contracts Completed detailing the financial performance of each contract and the potential for future earnings from the contracts in progress.
  • Schedule of General and Administrative Expenses which reveal how overhead expenses are being controlled and managed.
  • All notes that the accountant may have included at end the statements.
  • Aged schedules of accounts receivable and payables.

Other Documents Required by the Surety Company

Work In Progress Schedule

A schedule of work in progress will be requested in advance and likely quarterly, thereafter. The schedule to include a list of each job, and indicate the total contract price, including:

  • Change orders
  • Amount billed, to date
  • Cost incurred, to date
  • Revised estimate of the cost to complete
  • Estimated gross profit and
  • Anticipated completion date

Ask your Surety broker or agent for their preferred Work in Progress form.

Personal Net Worth Statement And Indemnity

A personal net worth statement is a listing of the owners’ personal assets and liabilities. The Surety will require a personal net worth statement(s) from the owner(s) of most construction companies and contractors to determine the combined equity/net worth.

Conversely, the owner and often the owner’s spouse will be required by the underwriter to sign a personal indemnity agreement. This indemnity agreement obligates the indemnitors to protect the Surety from any loss or expense that may come about in the course of performing the bonded work.

Ask your Surety broker or agent for their preferred Personal Net Worth Statement format.

Submitting Your Case To The Surety

Once your file is complete, the submission will be sent either to one Surety company, or several, depending on whether or not you have chosen an independent Surety broker who has access to numerous markets or a captive insurance company agent.

If you are utilizing a specialty Surety broker, they will normally provide “non-Surety company branded forms” (the forms will still indicate the name/logo of the brokerage). These non-branded forms will allow the Surety brokerage to discretely distribute your application to all of the Surety markets that the brokerage has access to. The markets will be then compete for your business via the limit, pricing and terms and conditions of the Surety facility.

NOTE

It is a good idea to retain a copy of your submission and to ask for a list of the Surety companies that the brokerage has sent your submission out to in the unfortunate case that you are turned down and have to solicit the services of another Surety broker.

If you have chosen to use a captive agent, they will only have access to the one Surety market that they work for, thus, none of the above will apply.

If the Surety company’s underwriter is interested in the submission, they may ask to meet with you and your key personnel. Be prepared to discuss all aspects of your company’s current operations and future project plans. Surety companies like to have an idea as to the single job size and aggregate workload-including all projects, bonded or non-bonded that you want to undertake.

Once the application and facility have been approved, the Surety will be in a position to consider specific Surety Bond requests. The underwriter will review each of the terms & conditions and contract documents and the bond forms. If the project and bonded jobs outstanding are in the general limit established, and other approval criteria is met, the bid bonds and the corresponding performance bonds will be issued in short order. The Surety reserves the right to decline any bid bond request for any reason.

Allow Sufficient Time

It is important to allow for sufficient lead time when seeking a Surety Bond facility-especially for those who aiming to become first-time bonded and for those who may not be a standard credit risk for the size of bond they require, as more information may be required.

We recommend allowing for no less than two weeks time (from the time that a complete submission is provided). Doing so lends itself to the firm’s character of being a financially prudent business, further, it allows for the most competitive terms to be sought from all Surety markets. It is difficult to predict how busy or what other internal matters a Surety may be undergoing, at any given time, so leave as much time as humanly possible.

Ongoing Relations

After a performance bond is issued, it is important to communicate with your Surety broker or agent on a regular basis on how the job is progressing. It’s best to identify problems at an early stage.

Change orders should be provided to the broker as they arise and all increased limits agreed to in advance. At the conclusion of the job, the Surety company will speak with the owner of the project for final sign-off, so it’s important to have a satisfied client, or if they were particularly difficult, to have this fact noted early on.

The Surety will also re-evaluate the overall performance and financial position of the contractor, dependant on how often bonds are requested. Adverse changes in financial position may cause the Surety to reduce the limit or terminate the bonding program. Positive financial results may serve as the basis for an increase in the available Surety Bonding capacity.

Conclusion

Approval for a bonding facility is far from guaranteed. Appetite for a contractor’s size, profile and industry will vary amongst the sureties. Each Surety company has its own underwriting standards and requirements and you may be required to provide additional information, dependant on a number of factors. The bonding facility will only be approved if the Surety believes the contractor is sufficiently qualified to successfully perform the contract and is able to weather any unforeseen storms. Remember, alternative options do exist -speak to a Surety specialist. You can call Ai Surety Bonding Experts at 1- 877-213-4545 or email us surety@bondsurety.ca.

Interested In This Article?

You may also be want to real  Making a Claim Under Performance Bonds or A Tale of Surety Bonds.

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