In the simplest terms, most surety bonds guarantee that a construction company will complete the work in the established time frame and/or will pay their subcontractors on the job. But how does a contractor get a bond?
“The steps in obtaining a bond are fairly straightforward,” said Ty Ruff, contract underwriter at Liberty Mutual Surety, “but getting that first bond requires more than just steps, it requires due diligence in selecting an agency and a surety carrier.”
1. Select an Agent or Broker
“Think of your agent as your spouse. Pick someone who you want a long-term relationship with and who will have your back, in good times and bad. “The most important thing to know is that working with the right agent or broker to get a surety bond is imperative,” said Ruff.
You must select someone who has experience in surety, the construction industry, and your geographic territory. This person may or may not be your current insurance agent. As a starting point, you should reach out to the National Association of Surety Bond Producers (NASBP), an organization comprised of surety specialists. Or get recommendations and referrals from your peers or local construction association chapters.
Make sure you interview and get to know a few agents before picking one. Are they knowledgeable? What other staff would you work with? Do they specialize in any markets? Are they a good fit with your company? Who are their clients? What sureties do they work with?
2. Choose a Surety Carrier
A good agent will recommend a few sureties they think will be a natural fit for you. Agents will take into consideration factors such as your size, experience and specialization (e.g., subdivision, sub work). The same way you researched your agent, you should also investigate sureties.
How big is the surety? Does the surety specialize in certain-size businesses or products? Is it regional, national or global? Better yet, is it global but with local offices?
According to Ruff, “You should choose a surety with a proven track record. The surety industry is competitive, and many new players have entered the market in recent years. Unfortunately, when times are rough, a significant loss can wipe out a company. Choose a strong surety with good financial ratings.”
What other products and services does the surety provide? Do they have in-house legal teams that can provide you with legal insights? Do they have engineers and accountants that can help you become a best-in-class contractor?
How is their claims department organized? Do they have in-house claims teams, or do they outsource attorneys? Do they have a local presence? Check around or ask your agent what their claims reputation is. While you may not select a surety because they have a great claims reputation, you should absolutely avoid sureties that have a negative one.
Most importantly, can the surety support your business plan and goals? Will they be able to provide larger bond programs as you grow, expand territories, and become more successful? If you hit a rough patch, do they have programs in place to continue your bonding? You should select a surety carrier that will be there for you now and in the long run.
One factor you shouldn’t worry about is pricing. For the most part, surety is a regulated business, so the rate isn’t something that needs to come into play when choosing your surety. It’s the relationship that matters.
3. Provide Documentation
Sometimes, this step is done in tandem with, or even before, selecting a surety carrier. For a surety to be able to provide you with your first bond—usually a bid bond—you’ll need to demonstrate that you have the right amount of experience and financial wherewithal to fulfill the contractual obligation.
What you’ll be asked to provide is dependent upon a few factors, but the primary one is the size of the job. Depending on the size of the job, you may be asked to submit the following to your agency who will pass it on to the surety:
- Financial statements (company or internal)
- Work-in-process schedules (WIPs)
- Bank line of credit or bank documentation
- Aging receivables
- Insurance certificate
- Character references
“In general, the smaller the job, the less documentation required, and vice versa,” said Ruff. “Also, the larger the job, the more important character becomes. A surety underwriter may want to meet with you in person to get to know you before approving a first bond.”
4. Get the Bond
After you’ve provided all the necessary documentation and possibly met with the surety, the underwriter will assess the risk and ideally approve your bond request. In some cases, the surety may ask for more information. Again, having a surety with a wider appetite for different size risks and programs to help new or challenged contractors increases your chances of getting a bond.
To further maximize your success in quickly obtaining a surety bond, contractors should make sure they have solid business partners including a bank/lending institution that has experience with construction and a skilled certified public accountant. Having these resources will make the process of getting the bond faster and more efficient.
Keep in mind that contractors do not necessarily need to wait for the first public job to present itself before selecting their agent and surety. Contractors can take care of steps 1 and 2 first, and be ready to go when its time to bid their first public job.
“Getting your bond ultimately comes down to underwriting the risk,” said Ruff. “But the actual process of getting a bond doesn’t need to be difficult if you choose your agency and surety carefully. Put in the effort upfront—it can pay off in the long run.”
