The surety bond process

There are a number of factors that contractors need to consider before obtaining surety bonds, and many different types of surety bonds available on the market. Some sureties might charge a different premium rate, resulting in savings for the contractor, and this surety bond will become more attractive than some others available to them. It is advisable for the contractor to find out the strength and experience of the surety, as this will affect how the project will develop.
Surety bonds can be obtained from a number of establishments and websites; however contractors are usually encouraged to go to the insurance broker that they use for all their business. It is likely that the broker already has sufficient financial information about the contractor and might even be the primary contact point between the contractor and the surety.
All contractors will have to have their work evaluated before a surety bond is agreed upon. Obviously, the surety guarantees the performance of the contractor, so a thorough evaluation of its operations is necessary. This evaluation process is sometimes described by the 4 C’s: Character, Continuity, Capital and Capacity.
Character – The point of a surety bond is to guarantee the performance of a contractor, and this works with regards to honour, efficiency and dependability, among other things. The surety will look at the contractor’s reputation within the industry, both of the business and its key personnel. The surety will also look at the contractor’s management structure and assess how it is run, searching for indicators of a well-run business that can be relied upon.
Continuity – The surety company is interested in seeing long-term plans for the company and any contingency plans it may have in place for certain events. Basically, the surety wants to see a well-thought-out plan for the continuation of the business, with regards future contracts and management changes.
Capital – A surety will also be interested in how much the company is worth, not just in cash but in current and future contracts, and any fixed assets such as headquarters. This will help them assess whether the business is financially stable and whether they have the financial capacity required to complete contracts.
Capacity – Every contractor has a limit to how much work they can physically take-on and complete, and the surety must assess this in order to set a bonding limit. One of the main interests of the surety is to ensure that the contractor doesn’t become over-worked by taking on more than they can handle, and hence their performance faltering.