The Keys to a Strong Surety Relationship

The following article originally appeared in the April/May issue of Merchant Bonding Company’s “Leaderboard Magazine”.

A contractor’s ability to develop and maintain a strong relationship with a surety may be critical to whether they will grow and develop or wither and expire. It’s important to have a clear understanding of how a surety evaluates a construction firm for surety credit, what information the underwriters need, and how to communicate both positive and negative company and job information. This level of understanding will help mitigate a construction firm’s risk for compromising the relationship with a surety firm and ultimately, operations. Surety bonding lines are established between the contractor and surety firm, very similar to that of a banking line of credit. While a construction firm’s banking line of credit is very important and is underwritten with financial scrutiny, a company’s bonding line can be even more important and have a more intense underwriting process. A credit analyst with a surety firm is well versed in all nuances of a construction firm and is skilled at dissecting financial data at the job cost level, as well as the global operating level of a contractor.

Underwriting Variables

Surety firms will evaluate many variables prior to determining bonding capacity and establishing bonding lines at the project level and company level, including but not limited to:

• Financial health and liquidity
• Bank lines of credit terms and conditions
• Prior job performance experience and references
• Prior job gross profit fade experience
• Claims and change order history

Contractors’ Keys

Generally, a financially sound, successful construction firm should be able to obtain bonds on a somewhat routine basis if the firm is focused on key operational areas such as:

• Project selection
• Project management and oversight
• Project change order resolution controls
• Corporate overhead cost control

The key to a successful bonding relationship is open, active, and honest communication. Surety firms must be kept up to date on a variety of matters such as:

• Projected financial results
• Changes to banking relationships
• Backlog update and job fade issues

This should occur on an interim basis and then once more when the CPA firm completes the final, year-end financial report. Whether the contractor is celebrating a success or milestone or whether a major project issue has occurred or there’s been a key personnel change, the lines of communication should always be open. Surety firms certainly do not like “bad” surprises. Waiting too long to address bad news is a mistake.

Open Communication

Managing and enhancing a surety relationship is no different than managing any other business relationship. A construction firm must completely understand that a surety firm has a real interest in the operations and success of the construction firm’s operations and is financially exposed during the life of the job. While strong performance has a way of curing most issues, open, continuous communication with the surety firm should not be overlooked. Viewing the surety firm as a business partner rather than an adversary can be the difference between a successful construction firm and an unsuccessful one.