How are surety bonds underwritten by a surety? Contractors understand the importance of obtaining surety bonds before and after winning a bid for a particular construction project. But do they know the three C’s of surety underwriting criteria to increase their ability to get bonded?
Surety companies perform a rigorous pre-qualification process before issuing a surety bond. Generally, surety companies follow three “C’s” when determining whether or not a contractor qualifies for a surety bond.
- Capacity: Does the contractor (principal) have the necessary skills, knowledge, manpower, and ability to complete the project? For this, the surety analyzes the previously completed projects of the contractor.
- Capital: Does the principal have financial stability? A surety company carefully scrutinizes the financial strength of the principal by looking at their tangible net worth, working capital, debt load, credit score, non-construction investments, and contingent liabilities.
- Character: What is the contractor’s standing and reputation in the market? This includes the contractor’s personal history, the firm’s professional history, any previous legal disputes, and banking relationships.
Surety bonds are required for contractors working on public works projects and private contracts. If the contractor is lacking any of these qualities, the surety company may not issue a surety bond.