How to Choose your Surety Team
Since private work is not expected to rejuvenate itself in the near future
, you've decided to enter the public work arena to supplement revenues. It's a great decision, where to begin? The construction isn't different; it's the process of becoming qualified for public work that often stumps contractors starting to bid on public projects
The best place to start is by finding a surety bond producer; he/she will be able to make the transition from private works to public work smoother. There are a variety of places to look for a surety bond producer. Many people look toward their insurance company representative for assistance. Although insurance agents are very knowledgeable on insurance policies, they normally have little insight into surety bonds because it is such a specialized niche of insurance. Insurance agents can be most helpful finding a surety specialist, usually their company has a producer they use for all of their bonding needs.
Another opinion is to contact a surety producer directly. The National Association of Surety Bond Producers website (
www.nasbp.org) lets users pick their state and geographic location then lists registered surety bond producers and their contact information. Feel free to contact as many producers as necessary until you find someone that matches well with your company's needs and situation. Discuss the company with them over the phone or email, and then invite them to your company for an in-person meeting. Surety is a credit product; it's similar to having a professional co-signor saying they believe this company is capable of handling this job. Therefore, the bond process is invasive for information, like applying for a bank loan. If the contractor fails to meet any of their obligations the surety company has to burden the losses.
Now it makes sense why underwriters are interested in contractors who are profitable, have good performance records, solid financials and respectable reputations. The underwriters are supposed to underwrite accounts to a loss ratio of zero. This is different from insurance, insurance companies use a specific loss ratio to determine expected losses for their policies. Surety bond factors are too complex to create a predictable and reliable loss ratio equation. This means that surety underwriters are going to ask for the following items:
Organizational Chart and Resumes
Business Plan and Continuity Plan
Current Work in Progress
Bank Line of Credit
References
Previous Three Years Financial Statements
Personal Financial Statements
This appears to be quite a laundry list of items, but they are all necessary for the underwriter to complete their due diligence. While the surety company expects these things from you, there are services you can expect and request from your surety bond producer.
These questions should be asked when you are looking for the appropriate surety bond producer for your company:
How will you help my company grow? Look for a producer that discusses the opportunities he/she sees in your company; you want to make sure they are personally invested in your company to be sure they will have your best interests in mind when evaluating bond capacity. Make sure they touch on strengths and weaknesses they see in the financial statements, it's a sign they are honest and experienced.
What is your success record? This is a record many surety producers are proud of. If they have a history of helping companies last through the cyclical construction industry over many years they can be an asset to your company as well.
How much experience do you have underwriting contractors in my line of business? A weakness of some surety bond underwriters is they underwrite every account the same way, just checking the boxes. A steel company is going to have a very different balance sheet from a general contractor. This doesn't mean one is stronger than the other; there are specific financial indicators of strength for each area of construction. Make sure the surety producer you select has successful experience with your area of construction.
Are you licensed in the proper geographic areas where we perform work? Many surety producers can write bonds nationwide through the surety company, which means they should carry an insurance license in every state. Some surety producers don't do this because it is expensive and time consuming. Some states require a license number on the bond forms for the surety producer; this is becoming more common because it deters dishonest people from conducting business in the state.
Is your surety company listed on the U.S Treasury Department's T-List and what is your AM Best credit rating? A surety company is rated by the Treasury Department on the quality of their financial statements and ability to cover the bonds issued by the company. An A rating is excellent and B rating is good, a company with A or B paper should be satisfactory. A positive or negative sign portrays the outlook of the surety company. Try to avoid any producer that wants to place your company with a surety company with a negative outlook, or you may be going through this process again once they dissolve.
Taking the time and resources to find the best surety bond producer for your needs can open a vast amount of opportunities for your construction company. It's a process that needs to be taken seriously; the rewards for putting in the effort up front can last for many profitable years in the public contracts sector.
How to Choose your Surety Team
By: John Page
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