Surety bonds: How they work!

For contractors, a surety bond is a credit tool that lets them benefit from the financial stability of their surety firm. This is not an insurance policy. Surety bonds are often used in the construction industry, and they are not to be taken lightly. The ability to secure a proper surety program may prove to be a key factor when it comes to creating value for a contractor.

The benefits of surety bonds

• Surety bonds act as a guarantee, instead of having to use money
• Surety ’s solvency aims to protect the client
• Bonding capacity demonstrates the credibility of the contractor

It is important for a contractor to understand how the conditions of a surety program have been determined in order to take the necessary steps to maintain and improve these terms.

The surety underwriting process is primarily based on the three factors outlined above: capital, character, and capacity. A surety firm bases its decision to support a contractor on these factors. Let AccèsConseil explain how this works.

Capital

Capital is the financial analysis that allows the establishment of a global limit on a surety program. We say global here because this limit includes all work to be done, whether bonded or not. The global limit is a multiplier of working capital or the net value of a company, and varies by industry (civil engineering, general contractor, specialized contractor, and so on). The financial analysis also includes the profitability of projects and quality of the balance sheet.

Character

Character is about the surety firm knowing that it can trust the contractor to make the right business decisions. Character encompasses a wide range of elements, including any bankruptcies in a contractor’s professional history, the frequency and nature of legal actions or lawsuits they may be facing, their relationship with creditors, as well as good communication with the surety firm.

Capacity

Capacity refers to a contractor’s technical ability to carry out a contract. This is essential, as it helps determine bonding capacity at a project level. Capacity is analyzed based on elements such as the nature and size of past projects, as well as the expertise of managers and key employees. Sureties will always look at a contractor’s know-how to ensure they are capable of properly carrying out the contract they require bonding for.

AccèsConseil’s recommendations

Your ability to secure a bonding program can be a key growth driver for your company. That is why it’s so important to work with experts who know the industry and how to guide you. Our dedicated surety team at AccèsConseil knows exactly how to help you, no matter what you need—from getting started with a surety program to improving conditions on your existing one. Our expertise and well-established relationships with sureties enable us to offer the best advice and ensure your surety program is taken care of in the most professional manner.