A surety bond is an agreement among three parties where the surety ensures the obligee (project owner) that the contractor (principal) will make an agreement with respect to the contract documents. Further, when the contractor requires its subcontractors to obtain bonds, then the contractor becomes the obligee and subcontractor becomes the principal.
The federal state and local governments require these bonds for risk management for construction projects and protection of taxpayer's money. Surety bonds can be used by public and private construction projects. Below listed are a few steps that will help in obtaining surety bonds without any hassle:
Surety Bond Agent
The first step is to hire a surety bond agent or broker who specializes in contract surety. The agent is responsible to guide the contractor throughout the bonding process. Understanding the business requirements, the agent adapts the contractor's submission for the desired needs of the surety firm. Then, they submit the account to the surety company which best matches with the contractors' profile. Hence, an agent plays a vital role as a medium of communication between the contractor and the surety company.
Surety Company Underwriter
After collection of information, the agent forwards the information to the surety company's underwriter. The underwriter is responsible to give insight about the business's operations and ensures its capability for the project. The underwriter may call upon a meeting with the contractor to discuss the information and the advices related to it.
Pre-Qualification Process
The contractor goes through a careful and thorough process known as pre-qualification before underwriting the bond. This process takes plenty of time as the producer collects and verifies information; see to future and current obligations, verify necessary equipment available to perform the project, and relevant experience with respect to the project. The agent also reviews overall management, and if the company can meet obligations on time.
Financial Statements and Accounting Methods
The surety will request the contractor to provide them with the fiscal year-end financial statements depending on how long the contractor has been in the business industry. The financial statements of the past three years must be audited by a Certified Public Accountant (CPA). The required financial statements of three years may include balance sheets, income statements, CPA's opinion page, statement of cash flows, and schedules of account receivables and payables. In addition to this, general and administrative expenses, contracts in progress and completed contracts, management letters, and necessary explanatory footnotes will also be required.
Complete and accurate accounting systems are important to surety companies. The percentage of accounting completion method determines the real and accurate financial condition during the accounting period. Contractors will be requested to prepare a quarterly schedule of the work in progress. The schedule list should include total contact price, changed orders, cost incurred to date, and amount billed to date.
Commitment
The surety company has to perform its contractual obligations under the bond. They may also ask for a demonstration of commitment from the construction company owners via corporate indemnity. The indemnity agreement protects the surety company from any loss or mishap caused by the contractor's failure to fulfill the bond's requirements. This ensures the surety company that the contractors will stand firm in case of any issue.
Maintaining the Relationship
In order to maintain a healthy relationship with the underwriter and the producer, the contractor must be committed, open in communication, and must timely report about the financial position. All the three parties must work in collaboration to sustain the relationship.
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