Times are tough when it comes to job opportunities. Our economy isn’t in its prime, and with more and more individuals looking for work it makes for a competitive job hunt; it’s no different for construction contractors looking for public construction projects which often require surety bonds. One thing that can put a contractor one step ahead of the competition is to provide professional financials to the surety companies who hold the key when it comes to providing bonds.
Surety companies are quite strict when it comes to contract bonding. If you’re interested in working on a public job that requires a bond, sureties will carefully research your financial condition in order for you to acquire a bond. The reason a surety company looks at the financial condition of a company is because they are the ones taking the risk and backing any bonds they write. The surety runs the risk of a contractor not fulfilling the contract of a project or having them walk off the site altogether. The sureties want to avoid claims at all costs on the bonds because if a claim does go out on the bond for an uncompleted job, the surety company is the one on the line and has to pay the claim. The surety company will in turn go back to the company that caused the claim on the bond for reimbursement which is called “recovery” and isn’t always easy process; that’s why sureties carefully look at the contractor’s financial health that’s being considered for bonding.
When trying to obtain a contract bond, your bonding eligibility is mainly based off of your corporate business financials and your personal credit. Surety companies are very strict when it comes to personal credit with construction bonds. Unlike commercial bonding where there are high risk/ non-standard markets for people with credit issues who have had trouble obtaining bonds in the past, the contract bond world doesn’t offer any alternatives.
A $250,000 contract is considered pretty modest when it comes to contract bonds; but with commercial bonds, it’s more common to see bonds of $100,000 and less; the surety companies take much more risk with contract bonds since the bond amounts are much greater, which means the potential claims are greater and as a result the sureties own financial results could vary significantly if they take on some poor risks. It’s standard for them to look for decent credit of the owners right off the bat; generally a 650+ score plus no negatives items such as open collections, bankruptcy, etc. There are always exceptions to these requirements being every project is different from the next and each contractor must be weighed and viewed in its own light, but these are the general credit guidelines surety companies go by.
Unfortunately with contract bonding there is little to no leeway for contractors in a tough financial patch because of the high bond amounts. Part two of this article will delve deeper into what the surety company’s look for and why when it comes to the importance of business financials concerning the quest to obtain bonding for a public construction job.