In a prior post, I mentioned that the process of obtaining a surety bond is often used as method to determine whether a contractor has the working capital to perform the work under the contract. This “benefit” has a direct correlation to the information a surety company reviews before it will agree to bond a company.
In a very basic sense, surety companies become business partners with the construction contractor for whom they issue bonds. As with any company extending a loan or line of credit, sureties look at a number of factors to determine the amount of risk involved and whether the contractor is credit worthy. If the contractor is deemed worthy of bonding, the surety will then enter the business relationship with some additional legal protections built into “the deal”.
When you think of it in these terms, the question of what surety companies look for becomes rhetorical in many respects. Anything that will reflect on the contractor’s credit worthiness and/or ability to complete the project is considered. Some of the more basic factors are cash on hand, credit history, and working capital. A contractor’s balance sheet and overall financials need to be healthy and organized.
A company’s financials are not all that is reviewed though. Sureties also look at whether the company has defaulted on previous projects, whether the company has done projects like the one for which a bond is required before (both in terms of the work and the size of the project), and whether the company tends to meet its obligations generally. The contractor’s experience, the skill level of its workforce, the adequacy of the equipment available, and the use of subcontractors are also considered.
In short, there are a number of factors reviewed when a surety considers issuing a bond for a contractor. It is this process that allows owners to vet contractors before the work begins. In essence, the surety does the owner’s due diligence on the contractor because it insists on doing so before making itself a business partner. For all of these reasons, contractors considering work on bonded projects should be prepared for close scrutiny by a surety before they will be in a position to do so.