As with any job, being a construction contractor has its risks and challenges. Construction projects can be unpredictable and a lot of things can go wrong, leaving contractors exposed and liable.
While contractor default can be the result of irresponsible or intentional actions, sometimes a default will occur despite the best intentions of all parties involved. This is why surety bond companies are there in the first place.
Apart from functioning as a safety net for obligees, surety bond companies can help contractors in many significant ways, and either lead them out of a default situation or prevent one from occurring at all. The right surety bond company can make the difference between a contractor’s success or failure.
Warning Signs for Potential Default
Contractor default is usually associated with a number of factors that fall within the categories of financial and managerial problems, issues with materials and labor and, finally, unexpected issues related to the work environment and the nature of a particular project.
Financial and managerial problems are those that arise due to bad management practices, weak control over internal processes and poor project oversight. Those are issues related to poor decision-making. Low profit margins, under-capitalization and high overhead, as well as rapid growth and making too many high-risk decisions are all symptoms of problems.
Material and labor problems that can lead to contractor difficulties or default are related to factors that are sometimes beyond a contractor’s reach. For example, labor or material shortages as well as unpredictable cost escalations can end up causing trouble for a contractor, but are often due to larger economic and social processes. Subcontractor failure also can incur severe damages, especially if subcontractors were not properly bonded.
Work environment and project-specific problems are related to either catastrophic events such as hurricanes and major economic downturns or contract terms that are obscure and onerous.
Two main problems that lead to contractor default are the lack of margin discipline and contract language that has gone unchecked. The latter can lead to unreasonable expectations and demands that can force a contractor to default.
A surety bond company can help a contractor avoid or prevent these problems.
A Surety Bond Company Can Help Improve Business
Surety bond companies are more than just underwriters of surety bonds. For example, before a surety bond company issues a performance bond, it makes sure that it is issuing it to a company that is financially stable. But a surety will usually make a greater effort and dig deeper.
If, for example, it finds that there are managerial problems in a company that it sees as symptoms of potential contractor default, it may decline to issue a bond before the company fixes those issues.
Frequently, sureties will offer their support and even provide the specialists who can address and help correct problems related to management, accounting or other practices. As long as companies are willing to change and adapt, they will usually find an outstretched hand on the side of sureties.
A Surety Will Offer Support Throughout
Beyond all the checks and recommendations a surety makes to a contractor, there’s the continuing support that sureties offer to their clients before, during and after a project.
This is especially valid if contractors keep up with communication and contact their surety to inform them of any successes or difficulties they are experiencing. And if communication should be useful, contractors on their side must ensure they keep track and maintain accurate financial records and document orders, as well as disputes, claims, etc.
This, in turn, enables sureties to exercise their expertise and make the necessary steps to avoid troubles or even a default. A surety could, for example, help a contractor spot inconsistencies or ambiguities within a contract before work commences.
It could also warn a contractor of potential risks a project carries or that it is beyond the scope of a contractor’s capabilities. It could also offer ongoing support during a project if a contractor is faced with difficulties that are beyond its control and are threatening the business’s stability.
Working With the Right Surety is Important
Obtaining a surety bond, much like other business relations, is not a one-time event. Rather, working with a surety bond company is much like a partnership that can be developed over time. If the parties trust each other and work together, this usually increases the benefits for both sides.
Before committing to working with a particular company, it pays to know the surety. Work with an accredited A-rated and T-listed surety bond company or a reliable surety bond agency that can place the bond with the right surety company. It helps prevents problems like surety bond fraud schemes, which can drag down projects and hurt business.