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Surety bonds require more than premiums
Most
public and many private construction projects begin with a surety bond that
assures owners the contractor will complete the work on time and pay bills
without undue delay.
Getting those bonds, especially the first time, can take a lot of time and
effort. Although they may appear similar to insurance policies, surety bonds
are more akin to bank credit, because the contractor retains the risk for
nonperformance.
Insurance companies underwrite surety bonds, but surety premiums are not paid
for coverage in the event of losses. Instead, they compensate the surety
company for lending its good name to the contractor.
Guaranteed performance
The surety company prequalifies contracting firms on the basis of credit
strength, experience and capability, and guarantees performance, but
contractors may be required to sign agreements holding the surety company
harmless economically.
The surety’s guarantee means that all parties assume there will be no
performance failure, and therefore no loss.
Before they will issue bonds, surety companies want to know that the
contractors they guarantee are well-managed, profitable, honorable and
trustworthy. Providing that assurance can require significant time and
expense, and perhaps even changes in the way a company does business.
Documentation
Contractors who are interested in obtaining surety bonds should pick surety
agents with as much care as they use in selecting any other professional, and
should expect to provide extensive documentation in such areas as company history,
work records, work in progress, budgets and financial statements for as much
as five years.
Resumes of key company managers are also likely to be requested, and
subcontractors, suppliers and former customers will probably be asked for
their opinions of the company.
In addition, surety companies will want to see continuity plans that identify
ways the organization can avoid or minimize disruptions after occurrences
such as the death of an owner of a closely held company.
The documentation and interviews are intended to give the surety company an
accurate picture of what the company has done in the past and what it might
reasonably be expected to do in the future.
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