Before a contractor can obtain a bond, he or she undergoes an extensive prequalification process called underwriting, which enables the surety to capture a clear picture of the company. While each surety company has its own underwriting standards and requirements, there are shared fundamentals and all must be satisfied that the contractor has the program expeience and ability financially to meet its current and future obligations. The surety also looks for contractors who run a well-managed, profitable enterprise, and perform their obligations in a timely manner.
Since the contractor’s financial situation fluctuates from day to day, from job to job, this consequently is the area that is subject to the greatest scrutiny. When applying for bonds, the contractor must be aware that once the underwriter is satisfied as to the technical ability to perform, they will then review the financial results of performance and translate that into a decision on the firm’s present and future ability to pay bills, finance additional undertakings, and accept or mitigate risk. The numbers are always the scorecard that tells the parties how well the contractor is performing.
Sureties will review and make analytical judgments about the contractor's choice of outside advisory staff including their surety bond professional, risk management professional, CPA, banker, and attorney. All are of great significance in facilitating the accuracy and timely flow of information.
Character and Integrity
Character and integrity are the foundations of trust and must exist to develop any business relationship. It is this subjective confidence that sureties seek in the owner and decision makers. Since not readily ascertained, often sureties will gather information and draw conclusions from past project owners, vendors, or their advisory staff.
Evaluation of the management team and structure is essential in making credit extensions. This includes depth and experience in estimating, project management and execution, and financial management. Sureties also look for maturity and business sense in management; comfort in risk assumption and job selection.
Business acumen is demonstrated through a formal business plan which identifies the companies’ mission and vision statements, articulates it's values and principals, and assesses strengths, weaknesses, opportunities, and threats. Business plans also identify company goals and the action steps to achieve these goals.
Sureties must look at a contractor's technical ability, (ability to build the job in accordance with the plans and specifications), throughout the project design phase, engineering, estimating, project management, field execution, and final accounting. This is generally accomplished through past project experience.
Financial capacity is perhaps the most critical evaluation that sureties will employ both at a point and time, and in trending the overall direction of the company. Though a contractor has the character, management expertise, and construction capabilities, they must also be properly capitalized to cash flow the work and address any unforeseen occurrences.