Author, Andy Roberts, Account Executive, Surety Division, Rancho Mesa Insurance Services, Inc.

When we have clients that are required to bond for the first time, often their first questions are what is a surety bond, how do they work, and why am I being required to provide one.  

In its basic form, a surety bond is a three party agreement between the contractor, called the principal, the project owner, called the obligee, and the surety company. The surety company provides a financial guarantee to the obligee that the principal is both qualified and capable of performing the contracted job.

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

The majority of Rancho Mesa’s contractor clients have a fiscal year, end of December 31, for their company financial statements. During March, April, and May we collect a variety of financial information from our contractors to update the bonding company. The underwriting items we request include the 12/31 CPA financial statement, along with the work in progress and closed contract schedules. We also request an updated bank letter, account receivable/account payable schedules, and a personal financial statement from the owner.

Author, Andy Roberts, Account Executive, Surety Division, Rancho Mesa Insurance Services, Inc.

For a contractor that is wanting to bid a job, or has won a job that’s requiring a bond that they are not able to qualify for on their own, one option for increasing their bond capacity and ability to qualify would be to have a third party also indemnify to their Surety.  While there are definite risks, this type of agreement can be very beneficial to both parties.   

Author, Andy Roberts, Account Executive, Surety Division, Rancho Mesa Insurance Services, Inc.

For small or new contractors that are looking to break into the world of government contract work, the process of getting a surety bond program in place can seem like an onerous one. It requires the contractor to compile a lot of paperwork and detailed financial reports, which can be a daunting task for any contractor, regardless of size or experience. However, there are now several “A” rated sureties that provide credit-based programs for writing smaller bonds.

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

When an owner or general contractor is looking to pre-qualify a contractor for a specific project, they will often request the contractor to submit a bondability letter from their bond agent. The bondability letter provides the owner with an assurance that the contractor has been underwritten and approved by a surety company for support of a specific project. The bondability letter is issued for no cost (it is regarded as a standard service provided by the bond agent).

Author, Andy Roberts, Account Executive, Surety, Rancho Mesa Insurance Services, Inc.

When we review contracts that require bonding, one area that we need to understand is the warranty obligation. I would expect that over 90% of the contracts that we review for our contractor clients contain a standard one-year warranty term. Since Performance & Payment Bonds respond to the contract, the surety company is also on the hook for this one-year obligation. Premium rates for bonding already include the cost for this one-year warranty in the cost of the performance & payment bond.

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

Some of my most successful bond clients opened their construction business with a good amount of working experience on their resume, but only a minimal amount of cash and capital. Unfortunately, bond companies like to see a strong amount of cash and capital. Therefore, my goal, as their bond agent, is to work with what they have at the present time to explain why they are a “good risk” now for bid, performance, and payment bonds - along with ideas on how to overcome the initial cash and capital constraints.

Author, Andy Roberts, Account Executive, Surety, Rancho Mesa Insurance Services, Inc.

When a surety carrier is evaluating a bonding program for a contractor, they use many different underwriting factors to determine an acceptable amount of bond capacity. They will consider a contractor’s working capital, net worth and work in progress schedules, to name a few. Another important factor that can help increase a contractor's bonding capacity is a bank line of credit. 

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

I recently had the opportunity to work with a new client who is a landscape professional. He wanted to bid on a maintenance project for a local municipality and wasn’t sure if he would qualify for the required performance bond.

Author, Matt Gaynor, Director of Surety Bonding, Rancho Mesa Insurance Services, Inc.

One of the key documents required when we are assembling the Bonding Programs for our construction clients is a fiscal year-end financial statement prepared by an outside Certified Public Accountant (CPA).  Although we monitor internal financial information from our contractors throughout the year, at the fiscal year-end (usually 12/31), the bond company will require that the statement come from a third party CPA.  That way, they have some certainty that the information has been prepared by an independent financial source that has a background in working on contractor financial statements.