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The Keys to a Strong Surety Relationship

Man in yellow construction vest shakes hand of man in button up shirt Man in yellow construction vest shakes hand of man in button up shirt

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.

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