Where does your construction contracting firm stand? Have you assessed your bonding capacity? Bonding capacity is an important issue for contractors because it determines which construction projects they can pursue or bid for. Discover new ways to increase your firm’s bonding capacity to bid for the projects you want.
- Understand your financial position: As a contractor, understand your true financial position as the surety sees you. Working capital, total net worth, balance sheet, and fiscal year- end financial statements will provide you more information about your firm’s financial strength.
- Work with your CPA: To increase your surety limits, work closely with your certified public accountant (CPA) or financial adviser, who’s focus is construction, on preparing financial statements and tax planning.
- Improve your credit score: If you don’t know your credit score, it’s time to find out. A good CPA or financial adviser will help you improve your personal and firm’s credit score.
A surety company always analyzes the financial stability of a contractor, such as cash flow, capital, and bank relationship, before issuing a surety bond. Since surety bonds secure contractors on construction contracts, surety bonding companies thoroughly review their financial statements and bonding capacity. Maximize your bond limits to increase opportunities for getting surety bonds.
Contract and Commercial Bonds are the two main categories of surety bonds. Although both bond types are issued by a surety company, they are distinct in their usage and application.
- Contract Surety Bonds
Contract bonds are exclusively secured by firms guaranteeing a contract. It is a contractual agreement between three parties: project owner, contractor, and a surety. The surety company guarantees the contractor will complete the project as per the specifications of the contract. There are several types of contract bonds including Bid Bond, Performance Bond, Payment Bond, Maintenance Bond, Warranty Bond, and Advance Payment Bond.
- Commercial Surety Bonds
Commercial bonds are required on the basis of a legal statute. A commercial bond is a guarantee of financial performance. These bonds are required by municipalities or public authorities to protect the general public against loss in the event of violation of regulations. Commercial bonds are comprised of several types of bonds including a license and permit bond, court/judicial bond, tax preparer bond, notary bond, process server bond, and other miscellaneous types of bonds.
Both contract and commercial surety bonds are underwritten by a surety company. It is important for you to work closely with a surety bonding company to make sure you receive the right surety bond at the best terms.
A surety bond is a guarantee provided by the surety to the obligee (project owner) that the principal (contractor) will complete the job as per the terms of the contract. There are many operational benefits of surety bonds for contractors. These include-
- Obtaining a surety bond means contractors have been judged capable of fulfilling the obligations of the contract. This can go a long way when it comes to enhancing their reputation in the industry.
- Banks can put restrictions on submitting tenders. A surety bond allows the contractor freedom to submit tenders.
- As the financial status of the contractor has been assessed by the surety (an independent third party), the bids of the contractor are viewed more favorably.
- The financial, technical and management assistance provided by the surety can go a long way when it comes to completing the project on time.
Also, the premiums payable for surety bonds are more competitive when compared to bank guarantees. With all these advantages, surety bonds are considered essential for contractors and are a critical tool in construction industry.
A surety bond is a contract. It is an agreement in which a surety company assures a project will be completed according to contract. If you are a contractor bidding for a construction project, this infographic will help you understand exactly what a surety bond is. It also shows why there is a need for surety bonds, and how they benefit contractors.
Surety bonds involve three parties: the surety company, the project owner, and the contractor. Whether a contract is for federal construction or the private sector, contractors must obtain surety bonds before bidding for a particular construction project. Contractors can obtain surety bonds from a surety company after undergoing a thorough pre-qualification process. A surety assesses the financial strength, business operations, and other qualifications before issuing a surety bond to a contractor. Surety bonds not only minimize the risk of contract default, but also increase a contractor’s project opportunities. However, there are different types of surety bonds used in the construction industry. See the below infographic to learn about the types of surety bonds your business needs.