Darlene Musica, Surety/Fidelity Bond Underwriter, Erie Insurance, spoke at the January Triangle Chapter luncheon meeting of the American Subcontractors Association of the Carolinas. Following are excerpts from her speech.
The first step towards establishing surety capacity is to contact a professional surety bond producer, one who understands the intricate process of surety bonding and unique underwriting standards and practices of the surety companies he or she represents.
As a contractor you must have reasonable expectations. Requesting a bond for a project several times larger than any past job completed is unrealistic. The number one cause for contractor failure is growing faster than resources allow. Contractors should start small and gradually work their way up to larger projects. Taking on work that is outside your normal area of expertise can be devastating. The surety seldom wants to pay for the contractors learning experiences. Stay in your own territory. Doing work long distances from your home base can create problems including weather, local politics, soil composition, and unexpected miscalculations.
Give the surety enough time to review your bond application. For a new account bidding a small project ($500,000 and under) the surety company will need 2 or 3 days to get you an answer. Don’t miss a bid opportunity due to lack of planning.
A contractor’s success is also dependant on having adequate working capital. Sureties calculate working capital by taking the current assets and subtracting the current liabilities. It is not a straight forward calculation as current asset values are almost always discounted. Adequate working capital indicates the contractor’s ability to perform all work in its current backlog without encountering financial difficulties. Contractors also need to have good in-house accounting and record keeping.
A contractor with good internal bookkeeping systems and financial statements prepared by an independent CPA is better equipped to estimate and mange job costs and turn a profit. The ability to maintain a bank line of credit can make or break a contractor when faced with unforeseen problems on a job. With an available line of credit the contractor can maintain positive cash flow and finish the work without adversely affecting the remaining work on hand.
The surety industry is committed to helping small, less experienced contractors obtain their first bond and increase their bondability. Many sureties have developed programs especially for contractors called the prequalification process. The prequalification process is the surety company’s underwriting process to enable the surety company to capture a clear picture of the contractor and how the surety company feels they could best support the contractor As the size and number of projects the contractor wants surety bonds on grows, so does the surety underwriting requirements.
Additional resources are available from the National Association of Surety Bond Producers.