Contract (or Construction) Bonds can drive a Contractor crazy, especially if that contractor is dealing with a municipality.  However, despite most contractors familiarity with construction bonds, this common form of insurance product is quite frequently misunderstood.

The primary purpose of a construction bond is Protection for Taxpayers!  The protection a construction bond provides defends the project owner (often taxpayers in municipal jobs) against the contractor or builder (who purchased the bond) defaulting, performing shoddy work, or a laundry list of other maladies that could befall a public works project.

There are seven main types of Construction Bonds.  The two most common are Bid Bonds and Payment and Performance Bonds.

• Bid Bonds – ensure a contractor can handle the work if awarded a contract.
• Payment and Performance Bonds – guarantee that subcontractors will be paid and the contract will be followed to the letter.

With the current economic credit situation and increasingly stricter underwriting, choosing the right Bond company has become extremely important.  Bonds are underwritten different from insurance premiums.  Don’t assume a carrier with competitive property/casualty premiums will have competition Bond premiums. Work with a Broker who has experience in the construction and contractor industry and can properly handle your Bond needs.

Chris Birk of SuretyBonds.com (via About.com) put together this list of 6 key ideas to help contractors choose the right surety company:

• Pick a Pro – Professional, well-built surety companies will understand the overall market for your specific bond needs. They’ll also have a stringent underwriting process that can actually help a contractor better understand its own finances, capabilities and needs. A good surety company can provide a valued, experienced assessment of your business and its trajectory.
• Finance and the Law – Look for surety companies that possess a keen and broad-based understanding of the construction field, from management and contract law to an awareness of market conditions on a local, state and national basis.
• Credit and Underwriting – You want a surety that makes its underwriting standards and criteria clear and easily discernible. Bond producers will scour financial statements, balance sheets, cash flow statements, personal financial information and a host of other key fiscal indicators when evaluating an application. Look for certification or familiarity with national standards, like the American Institute of Certified Public Accountants, which has an audit guide explicitly for construction accounting.
• A Track Record – As part of your due diligence, delve into the background and industry reputation of a given surety. Make sure there’s a track record of working with legitimate companies that have thrived in part because of the relationship. State insurance departments regulate surety companies and insurers that write these bonds. Check with those governmental agencies, with industry organizations like the National Association of Surety Bond Producers and others to gain insight into a particular company.
• Industry Affiliations – Consider what industry organizations or advocacy groups, if any, a prospective surety company belongs to or works with. The National Association of Surety Bond Producers is a nationwide bond education and awareness group with more than 5,000 surety agents and brokers. The Surety & Fidelity Association of America is another major trade organization comprised of major companies that write surety bonds.
• Trust Your Instinct – Last, and perhaps most important, is that tried-and-true maxim: Go with your gut. Look elsewhere if you have concerns — even slight — about a company’s willingness to work with you or questions about whether they’re truly interested in helping you succeed. Surety bonds are a major investment. The last thing you want to do is spend money with someone who isn’t concerned about your best interests.

 

Have Questions about Construction Bonds? 

Thank you,

work with ryan now

Ryan H.

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