Almost half of today's non-residential (single-family) construction takes place in the public sector where contract surety bonds are required by law as a way to protect taxpayer dollars.
In addition, more and more private project owners or their lenders are stipulating bonding requirements on their construction projects. Prime contractors are also more frequently requiring subcontractors to obtain bonds.
In today's competitive marketplace, where, according to the U.S. Census Bureau, the value of construction put in place excluding single-family residential construction is about $600 billion-about $275 billion of which is public-a contractor's ability to acquire work is becoming more and more limited if he or she has not arranged access to surety bonds.
The Miller Act
Contract surety was federally codified in the Heard Act of 1894, which was replaced by the Miller Act in 1935. States followed suit in a series of state acts commonly referred to as Little Miller Acts. The Miller Act and other related rules and regulations were designed to protect taxpayers' money on public contracts.
"In addition, these acts were designed to protect the financial well-being of the hard working people who provide labor and materials to public projects," explains Gary T Dunbar, bond division president, Great American Insurance Co., Cincinnati, OH, and past chair of The Surety & Fidelity Association of America (SFAA) board.
Surety bonds are just as essential in private construction. The ability to obtain a surety bond is independent validation of the contractor's capabilities and is viewed favorably by banks as lending partners and private owners as potential customers.
Surety bonds provide contractors with a clear, distinctive advantage over unqualified competitors, and the ability to provide bonds sends a message of credibility and trust to the project owner. Having a surety bond tells the owner that an independent third party believes in the contractor's ability to perform the job.
Obtaining a Bond
Most surety companies issue surety bonds through professional surety bond producers. The first step in obtaining a surety bond is to contact a producer, also known as an agent or broker. A list of producers is available through the website of the National Association of Surety Bond Producers (NASBP) at www.nasbp.org/bond.cfm.
The producer guides the contractor through bonding, helps establish and foster a relationship with a surety company and assists in managing the contractor's surety capacity. After meeting with the contractor and gaining an understanding of the firm's business and needs, the producer customizes the contractor's submission for the specific requirements of the surety. The producer then submits the account to a surety company best matched to the contractor's profile and needs.
The surety underwriter examines the contractor's entire business operations and must be satisfied that the contractor is capable of completing the project. This process, known as pre-qualification, assesses the contractor's financial strength and ability to support a viable business.
Benefits of Surety Bonds
In today's construction market, the value of pre-qualification is high. Not all contractors qualify for bonds. The fact that a contractor has a relationship and bonding capacity with a surety company is a strong indication of the contractor's qualifications.
Experienced surety underwriters and bond producers can be two of a contractor's greatest assets. These professionals possess or have access to a wide variety of resources to assist contractors. For example, the surety team interacts with a cross section of the construction industry and can assist the contractor with professional references such as construction accountants, lenders and attorneys.
For contractors involved in private construction, it is critical to know the source of the project owner's funding. Many contractors have faced bankruptcy because they did not verify funding. The surety frequently insists on knowing the source and adequacy of funds before it will commit to bonding a project.
Many sureties also review contracts to identify contract terms, general condition requirements or anomalies in the specifications, or bond forms that may be onerous, unacceptable or add undue
