The Three C’s of Construction Bonding
You’ve waited for the job to come along for a long time. You pull the specs, begin reviewing the job details and come across the words, “Payment and Performance Bonds will be required by the low bidder.” Does this become an end, or is it a start to a newer, larger world of construction contracts. The answer begins with a good firm understanding of surety bonds, what they are used for and what are some of the basic qualifications.
First, surety bonds are not insurance. Insurance pays for claims for which you hold responsibility. Surety is the analysis of the basic functions, experience and financial strength of your firm. It then guarantees that surety will make sure the work you are responsible for gets completed.
Although there are many factors used by the surety to analyze a contractor’s ability to perform work, the start is always with the “3 C’s of surety.”
- Character: The surety will review the construction firm and its owners for a proven, respectable past, an acceptable track record for the type work they wish to perform and evidence that prior contract obligations have been met.
- Capital: This might be an analysis of your credit history, project history and current financial ability. It will involve a detailed review to see if cash, cash flow, equity and ability to complete a project or projects can be met by the contractor.
- Capacity: A surety will begin to determine what size, amount and type of work your firm is capable of completing. This usually will involve a comprehensive evaluation of the company’s management skills, supervisors, workers and equipment needed to perform the work.
As you begin to contemplate working with a surety company, the best advice is turn to trusted advisors, CPA’s, lawyers and most important, a surety agent who can point out the ramifications and process of surety bonding.
