When a new project opportunity arises, the time available to prepare a bid may be limited. If the project requires a bid bond, it helps to have the groundwork in place before the opportunity appears. Reaching out to a surety bond agency in advance can help you understand your bonding position and prepare for upcoming bids.

If you are bidding on a project that requires bonding and you have not yet contacted a surety agent, there may still be time to move efficiently. Surety Bond Professionals explains the bonding process and the steps that can help contractors obtain the required bonds as quickly and seamlessly as possible.

Key Takeaways

• Many public and private construction projects require bid, performance, and/or payment bonds.
• A bond agency can streamline the bonding process and help position you to secure the best terms.
• The appropriate underwriting approach depends on factors such as bond size, project requirements, financial strength, and the contractor’s overall bonding needs.
• Underwriters will require documentation to assess your application, including financial statements, business information, and project details.
• Building a long-term relationship with your surety agent can help you secure more bid opportunities.

 

 

1. Decide What Bonds Your Project Requires

Before beginning the bonding process, identify which bonds the project requires and when they must be provided.

Bid Bonds

Bid bonds provide assurance to the project owner that, if awarded the contract, the contractor will enter into the contract and provide any required performance and payment bonds. If the contractor does not honor the bid, the surety may be responsible for covering costs up to the bond’s penal amount, subject to the bond’s terms. The penal sum on a bid bond is 5% for most projects but can go up to 20% on federal projects.

Bid bonds are usually required with the bid and demonstrate that the contractor has been reviewed by a surety and has support for the opportunity being pursued. For these reasons, many government construction projects require bid bonds, as do some private commercial projects.

While some bond agencies will charge a fee for bid bonds, other providers won’t.

Performance and Payment Bonds

Performance bonds are a guarantee that the contractor will deliver the project to the contract’s terms and conditions, which may cover quality standards, construction methods, and timelines. If a contractor fails to deliver the project in accordance with the contract agreement, the surety can:

• Finance the project’s completion with the current contractor.
• Pay for a replacement contractor to finish the project in line with the contract.
• Compensate the project owner for any covered losses up to the bond penalty amount.

Payment bonds are designed to protect anyone the contractor incurs a cost with throughout the project, such as subcontractors, suppliers, and laborers. These bonds guarantee that if the contractor can’t settle their costs, all parties will still receive full payments for their labor or materials.

Under the Miller Act, federal construction contracts exceeding $150,000 generally require performance and payment bonds, subject to limited exceptions. The performance and payment bond amounts are generally 100% of the original contract price. State and local requirements vary by jurisdiction, and private contracts may also require these bonds.

Together, performance and payment bonds help mitigate the risks that project owners and general contractors face on construction projects. Performance and payment bonds are commonly issued together after contract award and before work begins.

2. Engage a Bond Agency Before the Bid Deadline

Once you know what bonds your project requires, engage an experienced bond agency to help you obtain the required bonds. Federal and commercial project opportunities often move quickly once general contractors begin assembling their project teams. If you already have a relationship with a surety agent, you can avoid delays, respond to bids quickly, and place yourself in a better position to pursue the contract.

By reaching out to the agency early, you can also understand your current bonding position, identify any documentation gaps, and begin the subcontractor bonding process without any unnecessary time pressure.

In addition to allowing you to respond to bids faster, your surety agent can guide you through the bonding process, help you organize the submission, and advocate for your business with the appropriate surety markets.

When you reach out to a bond agency, they may need background information on your business, such as:

• Type of legal entity
• Ownership
• Location
• Subcontractor selection process
• Percentage of work that requires bonding
• Ratio of work for private project owners to public owners
• Ratio of work as a prime contractor to subcontractor

Contacting a surety agent early also gives them more time to understand your business, project history, and bonding needs before identifying the appropriate surety market and program structure.

3. Gather the Documents Underwriters Need

Next, your bond agency will begin the application process, which will require various documents.

Financial Statements

The financial statements needed for the underwriting process will vary depending on the program, bond size, and complexity. Standard underwriting may require documentation such as:

• CPA-prepared year-end financial statements for the most recent fiscal year or two
• Interim internal statements
• Working capital analysis
• Net worth
• Cash flow

Underwriters generally place greater reliance on higher-quality financial statements, such as CPA-reviewed or audited statements, particularly as bond size and complexity increase. Providing complete, current financial information can help reduce delays.

Credit-based or fast-track program applications require less financial documentation, since the bonds are primarily credit-based.

Work-In-Progress Schedule

Often used in project management and construction, a work-in-progress (WIP) schedule provides detailed information on all current projects that a business is involved with. While the WIP schedule is usually used to monitor progress and aid resource management and cost control, underwriters also use it to assess whether the contractor has sufficient capacity to take on additional work.

Ensure your WIP schedule is current and accurate, or underwriters may misjudge your ability to take on a new project. An outdated or inaccurate schedule can also cause delays in the process as the underwriters wait for you to update and resend your WIP schedule.

Project Details and References

Finally, underwriters will need to understand the project details so they can provide you with the correct bonds. You’ll likely need to supply the following project information:

• The name of the project owner or general contractor who requires the bond
• The project description and location
• The estimated or confirmed contract value
• The bid date

A history of completed projects similar to the one you are bidding on, along with relevant project references, can strengthen your submission. Depending on the contractor, project type, and underwriting requirements, the surety may also request safety information or other supporting documentation.

If you have any potential causes for concern for the underwriters, provide an explanation for these when possible.

4. Submit Your Application and Work Through Underwriting

Once you’ve gathered all the necessary documentation, you can submit your application to your surety agent. To speed up the process and reduce the need for paper files, most agencies and sureties allow you to apply for surety bonds online. You’ll send all the relevant documentation and business information, ensuring that your information is organized, accurate, and easy to understand. Otherwise, you may experience delays in the process.

Your surety agent will then review the submission for accuracy and completeness, follow up on any missing information, and present the account to the appropriate surety market. The agent will then keep you informed throughout underwriting and work with you to respond to additional questions from the underwriter.

The time required to complete the assessment can vary, but smaller bonds are often approved faster, particularly those based on credit scores. However, if the underwriters have to request additional information from you, or if the application is particularly complex, the timeline can stretch from just a few days to several weeks.

5. Choose the Right Bonding Program for Your Business

If the underwriting is approved, the surety will establish the terms under which it is willing to provide the required bonds. Premiums vary based on factors such as the type and size of bond, the contractor’s experience, and the underwriting profile.

Two common underwriting approaches are standard bond programs and credit-based fast-track programs.

Standard Bond Programs

Standard bond programs are the traditional method of underwriting bonds, requiring an in-depth dive into the contractor’s business and finances. During the underwriting process, your business will be assessed on the three Cs — capital, capacity, and character.

Standard programs use more detailed financial underwriting and may require CPA-prepared financial statements, particularly as bond size and complexity increase. The deeper review gives underwriters a more complete understanding of the contractor’s business, financial position, and project experience and can support more competitive terms.

This process can take longer for contractors establishing a bonding program for the first time. Once the surety has current information on file and understands the business, future bond requests may be handled more efficiently.

Credit-Based Fast-Track Programs

Credit-based programs, commonly called fast-track programs, allow contractors to become bonded through a streamlined process. These programs rely more heavily on credit and require less financial documentation than standard underwriting. Depending on the surety, bond size, and applicant, fast-track bonds may be approved in as little as 24 hours.

Fast-track programs can be well-suited to contractors seeking bonding for the first time or for smaller bond needs. Eligibility limits and premium rates vary by surety and program, and contractors with recurring or larger bonding needs may be better served by a standard program.

6. Build a Bonding Relationship That Grows With Your Business

Obtaining a bond is not necessarily a one-time transaction. It can be the beginning of a long-term surety relationship that supports your company as its backlog, project size, and bonding needs grow.

Your surety may expect financial updates for the duration of your bonded projects. These updates should include project completion percentages, costs, and billings. Your continued demonstration of meeting your contract obligations places you in good standing to work with your surety for future projects.

You should also cultivate your relationship with your surety agent. As the agent gains a deeper understanding of your business, project history, and goals, they can advocate for you with surety markets. They can help position your business for favorable terms and greater bonding capacity, and respond more efficiently when new opportunities arise.

Your surety agent can also help provide bonding or capacity letters when requested for a bid or prequalification. These letters may indicate the bonding levels a surety is prepared to consider based on the contractor’s current financial and operational profile, subject to underwriting and the specific project. They can help owners evaluate a contractor’s bonding support and help contractors understand how upcoming opportunities fit within their current program.

Simplify the Bond Process With a Surety Agent

Securing the right bonds for your contract bid in a timely manner can be the difference between winning the contract and not. However, this requires understanding the bonding process and connecting with a surety that can provide the bonds for your contract. A surety agent can assist with all of this and more.

From ensuring your bond application is accurate and complete to identifying the appropriate surety market and program for your business, your surety agent can help you navigate the entire bonding process. This can help streamline bond requests, position your business for greater bonding capacity, and support access to more project opportunities.