Help Contractors Prepare for the Rebound with Contract Bonds

Are you offering your commercial clients all the products and services they need?

You may want to consider establishing a bond program for contractors. Bonds complement a commercial book because:

• Bonds boost retention by strengthening client relationships;
• Bond commissions provide another revenue stream; and
• Bonds often are the livelihood of construction contractors desiring work in the public sector.

A surety bond offers a guarantee that within a three-party agreement between a principal (insured), obligee (owner) and the surety (insurance company), the principal will fulfill the terms of a contract or agreement between themselves and the obligee. If the principal fails to meet the terms and conditions of the agreement and bond, the surety stands in the principal’s shoes to fulfill the obligation. A surety acts like a co-signer on a loan where the principal is the primary borrower.

Contract or construction bonds provide financial security and construction assurance by guaranteeing that a contractor will perform the work per the construction contract and deliver the project lien-free by paying all subcontractors, laborers and material suppliers involved with the project.

Of the most common contract bond types:

• Bid bonds guarantee that a contractor will enter into a contract, if awarded, and furnish contract bonds as required by the contract.
• Performance bonds guarantee faithful performance of the terms of a contract of construction or furnishing of supplies.
• Payment bonds guarantee payment for labor and materials used in the work that the contractor is obligated to perform under the terms of a contract.
• Maintenance bonds guarantee against loss because of defective workmanship or materials used in the construction project.

Before a contract surety bond is issued, a surety company will evaluate your customer based on what is referred to as the three C’s of Credit — character, capacity and capital. Character refers to how a contractor has met obligations in the past and how he manages his business. Capacity is the firm’s ability to perform the work as contracted. Capital is the financial strength of the contractor.

The economic downturn has affected the construction industry, and many contractors have been forced to expand their geographic area of operations, bid on work at or below margins, or pursue work outside their experience. This has affected their financial condition and ability to attain surety credit.

While the construction industry is predicted to face economic challenges into 2013, many contractors who are managing their operations well would have no problem obtaining surety credit in what has become a highly competitive surety market.

Now is the time to get pre-qualified with a surety company for bid bond, performance bond, payment bond and/or maintenance bonds. As construction projects pick up, your customers will be prepared to bid on projects that will grow their businesses.