Construction Contract Bond Programs
Construction Contract Surety Bonds provide financial security and construction assurance on building and construction projects by assuring the project owner (obligee) that the contractor (principal) will perform the work and pay certain subcontractors, laborers, and material suppliers.
Contract surety bonds include:
Bid bonds, which provide financial assurance 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.
Performance bonds, which protect the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions.
Payment bonds, which guarantee that the contractor will pay certain subcontractors, laborers, and material suppliers associated with the project.
Maintenance bonds, which normally guarantee against defective workmanship or materials for a specified period.
Subdivision bonds, which guarantee to a city, county, or state that the principal will finance and construct certain improvements such as street, sidewalks, curbs, gutters, sewer, and drainage systems.
Construction Surety is Relationship Driven
Most surety companies issue surety bonds through surety bond producers. The first step toward establishing surety credit is to contact a professional surety bond producer who:
* Understands the intricate process of surety bonding and the unique underwriting standards and practices of individual surety companies;
* Matches the needs of the contractor with the surety company that is best suited to service those needs;
* Guides the contractor through the bonding process and assists in managing the contractor’s surety capacity;
* Creates and nurtures a successful relationship between the contractor and the surety company;
* Provides introduction to qualified accountants, bankers, and lawyers who understand the construction business;
* Is knowledgeable about the construction industry, accounting and finance procedures, and strategic planning and management practices; and
* Offers sound business advice, management consulting, and technical expertise to help the contractor maintain growth and profitability.
Before a contractor can obtain a bond, he or she undergoes an extensive prequalification process called underwriting to enable the surety to capture a clear picture of the company.
A surety company must be satisfied that the contractor runs a well-managed, profitable enterprise, keeps promises, deals fairly, and performs obligations in a timely manner. Underwriters use financial statements and business plans, among other factors, to help determine a contractor’s surety capacity. Other criteria include:
* Good references and reputation;
* The ability to meet current and future obligations;
* Experience that matches the contract requirements;
* The necessary equipment and personnel to do the work or the ability to obtain it; and
* The financial strength to support the desired work program.
While there are a number of surety programs that now provide an easier qualification process for smaller contract bond needs (see below), to establish a standard contract program the qualifying requirements have not changed much in more than a century.
Standard Surety Companies are looking to support contract firms that have a well established history of successfully completeing the size and scope of work they are being asked to bond. To determine the amount of surety support (single bond size and aggregate cost to complete limits) the surety will analyse the presented financial information.
All Standard Surety Markets are going to require CPA prepared business financial statements. The size of the business as well as the size of the jobs that will need performance and payment bond support will determine the level of presentation required by the surety.
For contractors looking to do bonded work under $500k with around $1.5 to $2 mil. in outstanding aggregate, many surety companies will accept fully scheduled compilation statements. All sureties prefer that the revenue be recognized on a percentage completion basis.
For contractors doing larger jobs, with annual revenues up to $10 mil. to $15 mil. most surety markets are going to require that the CPA prepare the financial statements on a reviewed basis. When you get much larger, the surety underwriters may require audited statements.
To help understand the form and format the surety underwriters would prefer to see the CPA prepare the contractors financial statements, we have an example available here:
Example of CPA reviewed financial statement
Performance / Payment Bonds
South Coast Surety provides contract bonds:
bid, performance, labor and material payment, and maintenance for all size contractors.
Contract Surety Bonds for:
Construction Contractors, Construction Subcontractors, Supply Contracts
and Service Contractors
For the Contractor Experienced in using contract bond support, South Coast Surety can review your current support levels and rates.
Our review will confirm that you presently have the best program available
or that we can improve on your surety bond support.
REQUEST CONTRACT BOND LINE REVIEW
For the Contractor just looking for construction bond support, South Coast Surety will provide you the tools and information needed to attain a surety bond line of credit.
We will assist and guide you in qualifying for the most support at the least rate
STANDARD PROGRAM REQUIRED INFORMATION PAGE
Get more information about Construction Contract Surety Bonding
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