THE IMPORTANCE OF SURETY BONDS
A bond is an agreement in which one party guarantees that the other party will follow through upon an obligation to the obligee ( the party to whom the obligation is owed ). “ So when a public agency requires a contractor bond a project , the contractor ’ s surety bond is guaranteeing that the contractor will complete the project per the contract specifications and requirements .” Thus , should the contractor fail to perform as agreed , or not pay his subcontractors and suppliers , the project owner can file a claim against the bond if the terms and conditions were not met .
As Ken outlines , a construction contract bond is different from a contractor ’ s license bond because the contract bond is tied to a contractor meeting the terms and conditions of a specific contract , whereas a license bond protects a contractor ’ s clients from poor workmanship or malfeasance by guaranteeing that the contractor will abide by the requirements of that license . If a contractor doesn ’ t meet the professional standards of his or her profession , then a client can file a claim against his / her license bond .
Approval of surety credit requires an extensive underwriting process to weed out potentially high-risk contractors . “ When a surety is extending credit , they have to be able to trust that your financial information is accurate and credible . Since the bond is in place to protect the client from a failure of the contractor to perform to the terms and conditions of the agreement , it is vital that the surety bond underwriting process ensures that the contractor is not likely to fail in performing the contract ,” says Ken . He advises that contractors avoid a bond claim at all costs .
Preparing for the Underwriting Process
A good surety broker will counsel contractors on what areas they will need to strengthen prior to applying for a bond . “ Your surety broker will need to learn everything about you and will gather and analyze the information required for underwriting , this includes business and personal financial statements . A good surety broker should know what the underwriters are looking for and will want to help you prepare to ensure that you have the highest likelihood of securing bonding ,” notes Ken .
Of key importance in preparing to apply for bonding is ensuring that your personal and business financials are strong and well documented . “ Take good care of your personal and business financial health because it is the most important factor in securing bonding credit ,” emphasizes Ken . “ Although sureties always look to your business financials first , your personal financials - including your credit rating - also play a large role .”
He shares that some contractors initially don ’ t like the idea of having to illustrate their personal creditworthiness or having to personally back their company , but points out , “ Why should a surety company extend credit to you if you have no skin in the game ? If you are not willing to personally back your company , why should the surety company back your company ?”
FIRST QUARTER 2025 CONTRACTOR TOOLS - 19