For most, the best way to run a company in an organized fashion is to hire professionals they can count on to assist in decision making. A bond producer well versed in contract bonding should be a top priority. If your agent is not knowledgeable enough or does not have the markets to fit your company’s needs, then there is little they can do to help with your bonding needs. An experienced bond producer is a must to ensure you are competitive in your bids and to allow for a bond line size that suits the needs of the contractor. An accountant that understands construction is a must. The business financial statements are the highest weighted item for underwriting a contractor. You can think of them as the underwriter’s window into your company. A contractor must walk away if their accountant does not know how to complete financial statements on a percentage of completion basis. A good relationship with a banker is a rather obvious need for any business that relies heavily on loans to operate. There are numerous other professionals that one could utilize such as a good controller and legal counsel, but we will stop our list here so it still applies to most contractors.

Surety underwriters will want to periodically meet with their medium to larger sized contractors. The underwriter will want to see that the contractor knows their cash flow and their receivables that are over 90 days. The underwriter will also want to see that the contractor can answer all other questions regarding their company. In other words, the underwriter will want to leave feeling confident that the contractor knows their industry and the specifics on their company.

Earlier, I mentioned that a contractor must practice restraint when necessary. By restraint, I mean that they can not be blinded by profits and take risks above and beyond their ordinary work. A surety will not be comfortable approving a bond twice the size of any previously bonded work for a new company. A red flag is raised for any contractor that wants to do work outside of their niche and or territory. If an underwriter is not comfortable with the contract for any reason, they will decline the contractor.

A contractor must keep in mind that they are essentially obtaining surety credit. Underwriters must use the financial documentation provided and personal relationships to decide the risk on a particular account. A contractor that is well organized with a team of professionals to assist them will create a great deal of confidence in a surety’s underwriters.

Do you recall the late 90′s and way early in 2000 when getting approved for contractors Performance & Payment bonds were as easy as having a pulse? “Oh, you’re breathing? You’re approved!” That time period was an interesting but a rather frightening time in the surety industry. All the bonding companies began to become more and more competitive in this dog eat dog industry, so much that sureties were giving things away to contractors! Waving your spouse from the agreement? SURE! waiving personal indemnity all together for that matter! Dropping rates down to $6 per thousand….the list goes on.

Since the sureties have exceeded losses in the past couple years more than the losses they had throughout the whole past decade, has forced them to re-group themselves. Underwriting has taken an entire swing the other way and is incredibly conservative in all spectrums of underwriting. Aggregate bond lines have been sliced in half, rates have doubled, the re-insurers even writing surety have dropped to a measly 10 and all of this is all a snowball effect of one thing affecting another. However, In the end, it does change the industry in a positive way.

For one thing, it means that any contractor OR sub-contractor with a Performance bond in hand for the guarantee of their contract, likely, truly is qualified to get that job done-AND will get it done per the terms of their contract.

The obligee (who is requiring the bond) won’t feel the reluctance in accepting a bond as they may have in the soft bond market previously due to the soft underwriting that was occurring. Previously, many contractors still defaulted on jobs, and did so more willingly with no personal indemnity on the line.

Now, there is a rigorous underwriting process that each contractor must face. And there should be! Applying for a bonding line of credit and or Performance bond is just like applying for a line of credit from your bank. It is CREDIT. In this case, it’s not simply just to pay back a loan but to actually perform on a contract. Of course, with this type of guarantee the bonding company must make, their research into each contractor is complete.

This makes performance bonds not only a stronger tool for the owner that accepts them, but it sure does make us agents work for a living!