Leading experts in Surety Bonding answer the tough questions on construction bonding, surety, risk management, dispute resolution and more.
What Documentation Should A Contractor Bring To An Initial Meeting For Establishing A Bond Limit?
Vice President, Surety
FCCI Insurance Group
Remember the TV show “Name That Tune,” where contestants competed to identify songs in as little as one note? Well, that is what it seems like these days with the advent of “express bond” programs and limited informational requirements in this competitive market.
This may be great news for contractors looking to establish their first bonding line, but they may be selling themselves short in the long run. More information is always better, particularly when you want to stretch beyond your past experiences or if you run into any speed bumps along the way.
At a minimum, contractors should provide three years of corporate financial statements, current personal financials and a contractor questionnaire. Additional items regularly include aging schedules of accounts receivable, work-in-process schedules, bank line information, résumés on key personnel and references.
If you really want to develop a longstanding surety relationship, be prepared to discuss your current business plan and resist taking shortcuts.
Antonio C. Albanese
Vice President – Head of Surety
Distinguishing yourself from your rivals in today’s highly competitive marketplace can create new opportunities in the public work sector. To be eligible to bid on public work, you must obtain bid, performance and payment bonds. First, you must be prequalified by a surety that can establish parameters that will allow you to bid on this work.
Begin by finding a respected, professional surety bond agent. Then be prepared to share your corporate and personal financial statements, recent tax returns and a copy of your bank line. Bring a list of your largest completed projects, reference letters, relevant résumés, supplier contact information and any other information requested.
He or she will then help you find the surety that is the best fit for your goals. After vetting your background information, your new surety will establish a single and aggregate limit for you to pursue public work.
A long-term surety relationship is built on trust between both parties. Take the time to establish a solid foundation from which to grow.
What Should Contractors Know About Purchasing Surety Bonding Online?
Vice President Marketing
Merchants Bonding Company
The relationship a construction company has with its professional surety agent and underwriting company is one that can add great value. To secure surety bonding online without the benefit of surety professionals is rolling the dice on quality and value.
A construction firm using online tools should be sure it is working with a reputable company. Top sureties provide easy-to-use online tools, as well as provide expertise on things like onerous provisions in the contracts. Even online, they will promote a close relationship with a trusted team of financial advisers, including a surety agent, underwriter and construction accountant. This team will help a construction company navigate the complexities, protect itself from risks, and help the company with smart growth that is profitable, sustainable and compliant with the ever-changing regulatory climate.
To be pointed to reputable resources that provide easy-to-use online tools, look to the memberships of The Surety & Fidelity Association of America and the National Association of Surety Bond Producers.
In What Way Does Surety Bonding Protect Subcontractors And Suppliers Working On A Project?
Alan P. Pavlic
President & COO
Old Republic Surety Company
First, the requirement of surety bonding provides some assurance to subcontractors that there is sufficient financing for the project. Most surety underwriters will undertake some due diligence to ensure that there is adequate financing in place. A savvy subcontractor and its surety will understand that the general contractor’s surety has reviewed this issue and concluded that, in its opinion, satisfactory evidence of financing of the project is in place.
The primary protection for subcontractors on a bonded project is the payment protection offered by the payment bond. This is not an unconditional guarantee of payment, nor should it be. As long as the subcontractor/supplier can document its claim and comply with any statutory notice requirement and any notice requirements in the payment bond (subject to any contract defenses of the general contractor), the payment bond will respond to the claim.
The performance bond guarantees, under certain circumstances, that the project will be completed and the subcontractor/supplier will be able to count on that profit at completion.
Is It Helpful For A Construction Business To Have A Dedicated Risk Manager?
Senior Vice President
It is helpful, but various considerations can affect how and by whom risk is managed within a construction company. How much of a construction company’s resources are dedicated to risk management may depend on its revenue, geographical footprint, complexity of work and particular construction discipline.
Everyone in a construction company participates in the risk management process at some level; however, the larger a company is, the further it ventures away from “home,” the more complex and risky its projects are. In addition, the type of work the company performs itself and through others has an impact on the need for dedicated risk management resources.
In a smaller, local company, the CFO may perform the risk management functions. But as a company grows, it may be necessary for it to add someone who specifically handles these functions, such as prequalifying subcontractors, managing the insurance and surety relationships, and obtaining the insurance coverages and surety bonding program for the company.
How Can Construction Project Stakeholders Resolve Disputes Efficiently?
Michael A. Marra
Vice President Construction Division
American Arbitration Association
Most construction clients expect the arbitration process to be fast and cost effective.
In response to that, the American Arbitration Association’s® (AAA) Supplementary Rules for Fixed Time and Cost Construction Arbitration, developed in conjunction with the National Construction Dispute Resolution Committee, were designed to give owners, contractors and construction professionals confidence that disputes will be resolved quickly and effectively.
These rules give parties the ability to consistently determine the time it will take from filing a demand to receiving an award, as well as forecasting the budget for this process.
By using the Supplementary Rules, parties can calculate:
- maximum number of days to complete the total arbitration process;
- maximum number of hearing days the arbitration will run;
- arbitrator costs throughout the arbitration process; and
- AAA case administration fees.
The rules complement AAA programs for effective mediation, arbitration and dispute avoidance. To learn more, visit adr.org/construction.
How Do Changes To Aia’S Principal A201 Document Impact Contract Language Regarding Bonding?
Kenneth W. Cobleigh
Managing Director and Counsel
The American Institute of Architects
The new Insurance and Bonds Exhibit is the single most significant revision to the AIA contract documents. It allows flexibility in developing project-specific insurance and bond requirements. The exhibit provides details pertaining to required coverages, prompts the parties to consider various optional coverages and encourages discussion between parties.
Article 11 of the A201 also was revised substantially in conjunction with the development of the exhibit. One notable revision to Article 11 is at section 11.1.2, which now requires that the bonds be purchased and maintained from a company or companies lawfully authorized to issue surety bonds in the jurisdiction where the project is located.
This change was made in response to a comment made by the National Association of Surety Bond Producers, one of the industry groups that reviewed A201-2017 during the revision cycle. The revision was made to help ensure that project bonds are issued by adequately capitalized and viable sureties.
What Are Sureties Looking For When Underwriting For A Construction Company That May Experience Sudden Growth?
Michael P. Cifone
Senior Vice President – Surety Underwriting
Hudson Insurance Group
Sudden growth, when anticipated, can be a very profitable opportunity for a contractor. The surety looks for the reasons behind the growth, as well as the infrastructure that is in place to execute the new growth.
Planned growth with known owners or general contractors in familiar territories is preferred. Contractors venturing out to new owners in unfamiliar territories usually raise concerns for the surety.
The surety also looks to see that the contractor has sufficient qualified personnel in place to oversee the new work. Adequate project supervision and skilled labor continues to be an issue in today’s construction market. The surety is also concerned about the contractor’s estimating skills and ability to maintain expected profits throughout the project.
Most contractors are not struggling to find work in this environment; instead, the struggles are seen in properly staffing their projects and executing projects in a timely manner.
VP Contract Underwriting
Liquidity and the capacity to staff and manage the work are essential to successfully handling rapid growth. The biggest mistake a surety can make is bonding more work than a contractor can fund and manage.
Growth consumes cash, and rapid expansion requires liquidity. Regardless of the profit potential that growth offers, a significant disruption in cash flow can be a death knell for a contractor.
But opportunity and cash are not enough to guarantee success. Without the right people to manage the work and provide financial oversight, more work means much more risk. Contractors frequenctly cite finding quality people as the biggest challenge they face in today’s market.
Successful contractors were able to right-size their organizations to cope with the recession, but an even bigger challenge is whether they can effectively staff up to take advantage of the growth opportunities that the recovery cycle offers. Revenue growth is tempting, but if it’s at the expense of the bottom line profits, is pursing rapid growth really worth the risk?
Vice Chairman and Principal
Sureties are looking for three core fundamentals that are particularly important for a construction company experiencing rapid growth.
First, you need a strong balance sheet showing equity in the company, liquidity driven by good cash flow and accounts receivables that are consistently current.
Equally important, sureties value depth and experience for principals and senior management. It’s critical to showcase that the company has built a track record for delivering projects on time and on budget.
Lastly, the support of a banking institution gives surety companies an additional level of comfort. As a construction company grows quickly and takes on a higher volume of projects, potentially with additional complexities, a sufficient line of credit readily shows there is a cushion in place should issues arise with payment or project delays.
Vice President – Surety
Sureties are conservative by nature, so they appreciate a heads up about sudden growth in job size or backlog. An understanding of the contractor’s thinking about managing the sudden growth, via a plan, will assist the bonding company.
If the growth is in the contractor’s sweet spot (i.e., familiar owners, type of work and territory), the surety will look at this more favorably and stretch farther.
Bonding companies would prefer that contractors proceed with caution with new owners, types of work and territories.
As we all know, growth eats cash. It’s used to start new work, hire new people, purchase new equipment and pay down debt. Accordingly, the surety will want to make sure the contractor’s working capital keeps pace with its growth.
If the contractor’s balance sheet already supports the jobs and backlogs that are targeted, working capital won’t be an issue. If analyzed working capital doesn’t support where the contractor is headed, the surety will want profits to be retained in the company to maintain an adequate working capital to backlog ratio.
Senior Vice President
Marsh & McLennan Agency
Sureties prefer to see firms take on growth in a gradual, calculated manner. Doubling or tripling volume in one year is of major concern, and as history indicates, too much too quick can lead to a disastrous end result. Sureties thoroughly evaluate these opportunities and their potential impact on the organization when underwriting to support a significant increase in backlog.
Can the firm effectively manage the new work? The contractor should be able to answer this question internally and prepare for a detailed discussion demonstrating the experience, systems, people and resources required to manage the increased obligations successfully and profitably.
Equally important: Is sufficient capital and liquidity in place to cover the inevitable cash flow challenges that often accompany multiple project starts and increased volume? The surety will look for larger than normal liquidity reserves and banking support to cover a potential cash strain. In most markets across the country, project opportunities are abundant, yet labor, schedule and margin pressure remains a concern.
What Insights Can You Offer To Contractors Seeking To Increases Their Bonding Capacity To Bid On Larger Government Projects?
Henry W. Nozko, Jr.
Chairman, President & Chief Executive Officer
ACSTAR Insurance Company
Patience and moderation can pave the way for greater bonding capacity. Avoid excessively high requests and demonstrate a quotient for consistency.
For example, if the largest prior project your organization completed is $500,000, don’t ask for a $5 million bond. That will likely result in a declination and might scare the underwriter. Your next bigger bond request should probably not be more than about twice the size of the largest prior completed project (in this example, $1 million).
If your surety declines such a request, you most likely could find another surety to approve the higher bond amount. A fresh review from a new surety could take a week to a month depending on the size and complexity of your organization and the surety conducting the review.
But be careful; a record of hopscotching around can spook a new surety.
If the $1 million bonded project gets approved and successfully completed, it could be the bridge to a $2 million bond approval and so on.
Patience and constraint will get you there.