The construction industry is ever changing. One constant in construction is the importance of understanding how surety companies decide whether or not to provide contract bonds. Most contractors that have been in businesses for a while have likely been turned down for a desired project that they viewed themselves as being worthy of. Surety companies aren’t the enemy, when they decline a contractor for a job there’s good reason behind it. In the end the surety wants to ensure that the contractor is successful in the long term while building a sound business relationship; that may mean turning them down when they see fit.
With the high competition inside the construction industry, contractors are always hungry for new projects and are understandably upset when they are turned down for the bonds that they need to qualify. When this happens, it’s really just a result of the surety’s and contractor’s clashing of opposing views on their ability to perform the work. The surety company gets the final say since they are the ones financially backing the bonds. Besides looking at the owner’s personal credit, the surety bases their assessment on a few factors, the three “C’s”, and it’s important for the contractor attempting to get bonded to understand exactly what they are.
Capacity: This includes the contractors know how, experience and ability when it comes to the project and work at hand.
Capital: This refers to the contractor’s financial condition and whether it’s strong enough to complete the work, fulfill the contract and meet all other financial obligations. Sureties will look mostly at working capital but will also consider their equity.
Character: A little less black and white, this is referring to the surety’s judgment of a contractor’s dependability; examining the performance of their past jobs and work helps them do this. Character is very important since it’s hard to build with a surety while a breach of one contract can scar it forever.
Once a contractor knows what sureties look for when applying for bonds, they will know how to better communicate with the surety company and will also know how to go about making improvements. The success of a contractor benefits both them and the surety and that’s what they are trying to ensure.
Part 2 of Building Contractor-Surety Relationships will go beyond what sureties look for in a contractor and explore ways to build strong surety-contractor relationships.