Nine top surety executives share insights that can give contractors and subcontractors an advantage when obtaining bonding.
How can contractors leverage surety bonding when competing for private projects?
Chief Underwriting Officer
Liberty Mutual Surety
Most private owners have neither the time nor the experience to assess a contractor’s qualifications when being considered for a project. That’s why a contractor that has already gone through the surety underwriting process is extremely valuable to private owners.
Before committing to back a contractor’s ability to complete contracted work, the surety investigates past work and determines the contractor’s reputation and project management capabilities. Any private owner wants to know the contractor has demonstrated integrity in its operations.
Bonded work shows the owner that the contractor can complete bonded projects. They can be confident knowing the surety has committed its resources to back the contractor.
A review of a contractor’s financial capacity is a cornerstone of the surety underwriting process and difficult for most individual owners to duplicate. Every surety company has many accounts with which to compare and make a determination regarding the contractor’s financial condition as it relates to the type and amount of work program needed.
Vice President, Contract Underwriting
Merchants Bonding Company
Private developers that require surety bonds will have the investment protection a surety offers, especially when dealing in areas where contractor defaults have continued due to the sluggish recovery in construction. Private developers should be aware that a bonded contractor has passed through a surety’s extensive prequalification process.
Profitable contractors that are not bidding jobs outside their areas of experience and size should be able secure bonding and pursue public or private work.
The past several years have seen stiff competition and razor thin margins for construction companies. In extreme cases, contractors have found themselves either going into bankruptcy or voluntarily closing their doors—leaving private owners that do not have the protection of a surety bond without recourse to finish the job. Not only does surety bonding offer the owner the protection of the bond, but a professional surety agent and underwriter are invaluable resources for helping contractors manage their business in ways that mitigate risk.
MICHAEL J. MITCHELL
The Graham Company
Providing a bond is a valuable qualifier of the contractor’s financial capacity and strength, and it assures the project owner that the work will be completed according to the project specifications and within the agreed-upon time frame. The owner certainly will evaluate other factors, but the surety bond speaks volumes about the contractor and it proves one indisputable fact: The project is guaranteed to be completed even in the event of contractor default.
Having an A-rated surety company with significant Federal Treasury Limit is an absolute ace in the hole for the contractor. If Contractor A produces an A-rated bond and Contractor B cannot produce one of equal or greater value,then Contractor A is at an advantage. In some cases, Contractor A may be competing against Contractor C, which has no surety bonding but instead offers subcontractor default insurance. In that scenario, Contractor C is selling itself through a smoke screen because it cannot be bonded. That should be a major red flag to the project owner and should motivate it to select Contractor A.
What major factors should a contractor evaluate when selecting a surety?
Head of Surety
Zurich North America
Well-managed firms have numerous surety options,but it is important to select a provider that aligns with your business strategy.
The surety’s financial strength, including its U.S. Treasury capacity and AM Best and Standard and Poors ratings, is vital. The surety’s underwriting capabilities need to match a contractor’s business plan. Capacity and the surety’s approach to the underwriting process also are important. You need to be comfortable with the surety’s reputation for underwriting consistency and that it can support you as you consider new work.
The best managed construction firms evaluate the surety’s claims department capabilities and reputation. In the event of problems, you want strong claims expertise that can help you manage difficult situations.
The best contractors also recognize the importance of a strong surety relationship that includes a surety-oriented agent or broker. Choose a surety that can be a trusted advisor to your business in order to maximize the benefit of the relationship.
How can contractors ensure they are not purchasing a fraudulent bond?
Chief Underwriting Officer & Senior Vice President
Fraudulent bonds are not a pervasive issue for the surety industry, but that’s of little comfort if you happen to be in the small minority that is deceived.
The most effective way to authenticate a bond is to contact the company that purportedly issued the bond. A phone call, email or fax can eliminate potential aggravation and cost. Many sureties include bond verification procedures and contact information on their power of attorney attached to the bond. However, this information can be manipulated by anyone with the intent to defraud, so you may not want to rely on it.
Use the surety’s website or the Surety & Fidelity Association of America’s online Bond Obligee’s Guide to obtain the surety’s contact information. The U.S. Department of Treasury’s online Listing of Certified Companies (Department Circular 570) is another resource for contact information.
Finally, securing the bond from a reputable agent or broker that is a member of a recognized professional organization is a good best practice.
What should surety companies understand about joint ventures?
KEVIN T. WALSH
Account Executive, Construction Services Group
Aon Risk Services
Joint ventures can be beneficial due to local market and labor knowledge, combined expertise within project scope and financial support. However, because the participants will be jointly and severally liable to the owner and ultimately responsible for the performance of the entire contract, careful partner selection and contract formation is paramount. Bonding companies must understand the following details of the joint venture.
- How familiar are the partners with each other?
- What is the ownership split of the partners and who will be the lead?
- What are the roles and responsibilities of the partners?
- Who can make key decisions and has control of the project funds?
- Who will manage key initiatives, such as safety, subcontractor management, accounting, monthly project and financial reviews, and insurance coverages?
Additionally, the surety will want to understand capital contributions from, and distributions to, the partners, as well as arrangements should default occur.
Why should a contractor consider pursuing bonded work?
HENRY W. NOZKO, JR.
ACSTAR Insurance Company
Contractors that perform projects that do not require bonds usually save on the expense of annual audited statements and sophisticated job costing and accounting systems, and usually are isolated from the rigors of regulatory oversight. On private (non-bonded) work, there is also the luxury of being one of two or three bidders versus one of 200 or 300 bidders, as well as many opportunities to negotiate with the customer. When you “negotiate” with the government, you get a chance to cut your price after being the lowest bidder.
So why consider bonded work? Approximately $570 billion of U.S. nonresidential construction is performed annually. Public works accounted for $270 billion of that total and is practically all bonded. About 25 percent of the remaining $300 billion of annual construction is bonded (i.e., private owners that require bonds or prime contractors that require bonds of subcontractors). Therefore, about 60 percent ($345 billion) of work that is available annually is bonded. It is hard to make a case that a contractor should preclude itself from having a chance at 60 percent of the nation’s projects.
What documentation should a contractor bring to an initial meeting for establishing a bond limit?
Travelers Bond & Financial Products
Before meeting with a surety company for the first time, submit three years of financial statements, corresponding work in progress schedules, a current financial statement with schedules, and any other material background information on your firm.
As you prepare for the meeting, put some thought into how to articulate your goals and provide an accurate picture of your business. While you will be asked about financial information, the more telling conversation will be centered on your business operations and goals. Be prepared to outline your business plan in the clearest terms possible and to discuss how you manage operations from the field to the back office and all that’s in between.
Finally, be as forthcoming as possible. A surety can best support your business when it truly understands what you are trying to accomplish. Trust is an important part of that. This holds true not just for the contractor, but for all parties involved. Openness and trust between a contractor, surety and agent will serve as the foundation for a productive, long-term relationship.
STEPHEN C. RUSCHAK
President and COO
The Guarantee Company of North America USA
Assuming your agent has already submitted the customary initial financial information, remember that the surety is a risk-bearing entity and is seeking to get to know you better. Be careful not to over-sell yourself, or you may look unfocused and undisciplined. The surety guarantees your performance of a contract and payment of bills, so it is keenly interested in your ability to complete the project on time and on budget, and that you have the wherewithal to finance the projects in your backlog. Take time to emphasize your competitive advantages.
Impress the surety with your skills as a risk manager, including how you evaluate and assess the specific risks of a project, owner or new type of work. Provide examples of when you came to the conclusion the risk was greater than the potential reward.
Demonstrate internal management systems that allow you to track job costs, monitor overall profitability and cash flow, and keep a project on schedule. Most importantly, show your ability to sense a job isn’t going well and the steps you take to get it back on track.