Surety bonds are a central requirement for most construction projects. They guarantee the faithful execution of a project by the contractor who has been awarded the contract. Yet, to get bonded, it is not simply enough for a contractor to contact any surety and have them provide a bond.
The surety is one of the backbones of the construction project and an important ally to contractors if something should go wrong. For this reason, when a contractor contacts a surety agency to apply for a construction bond, it is important that they look out for certain things that qualify it as a reliable one.
Here are five things to consider when choosing a surety bond provider.
HOW TO CHOOSE A SURETY BOND PROVIDER
The importance of choosing the right bond provider (or agency) can’t be overemphasized. Since contractors can’t work with surety companies directly, they must work with an agency to get bonded. Depending on the agency they choose, they will have access to a different set of surety companies and their rates. Not all sureties are alike.
Moreover, the consequences of working with an unreliable surety can be disastrous. If the contractor picks a “bad” surety and encounters difficulties during a project, he may end up having to deal with them alone and assume costs that could shut the project or even the company.
For all of the above reasons, it is important to pay attention to the following things when choosing an agency to work with.
IS THE AGENCY LICENSED?
It is a central requirement that to issue a bond in a certain state, the surety company must be licensed to do so in that particular state. Surety agencies on the other hand, do not need to be licensed in a particular state in order to work with individuals from there. Yet, there are exceptions to this rule, and sometimes agencies, as well as companies, must be licensed for certain bonds to be issued.
When picking an agency, contractors should make sure to check if the companies it works with, as well as the agency itself, have the required licensing to operate in their state.
ARE THE AGENCIES’ SURETY PARTNERS A-RATED AND T-LISTED?
There are two very central criteria that determine the legitimacy of a bond company. One is its rating with A.M. Best Company, the other is whether the company is in the Department of Treasury’s List of Approved Sureties. A.M. Best is a company that rates insurance and surety companies across the country. When speaking to an agency, a contractor should inquire about their surety underwriters’ rating. As a rule, one should only get bonded with companies that have a rating of “A” and upward.
The other important question is whether a company is T-listed. Only companies that are on the Treasury’s list are allowed to issue bonds for federal government projects. If a company is not T-listed, this will limit the type of projects contractors can get bonded for and will only be able to get bonds on state or private projects.
WHAT IS THE AGENCY’S REPUTATION AND TRACK RECORD?
Both the reputation of the agency and bond company are important. Naturally, contractors want to work only with someone who is known for their professionalism and experience. When contacting an agency, it is important to inquire about their track record in securing bonds for their clients, particularly construction bonds. Researching the history of the agency and even whether it has any type of accreditation that signals its trustworthiness and expertise can also be useful.
One such rating is the Better Business Bureau accreditation and rating. Work with agencies with a BBB rating of “A” and upward.
A further way to gain trust in an agency is to ask references to clients they have worked with and who can comment on the quality of their work.
WHAT EXPERIENCE DOES THE BOND COMPANY HAVE IN CONSTRUCTION?
As with the agency, it is important to inquire both about the history and track record of the company that issues a bond. Important questions include:
- Does the company work with both small and big businesses?
- Does the company understand the construction process in detail?
- Does the company have sufficient knowledge and understanding of the accounting procedures in construction projects?
- What percentage of its clients are contractors?
- Can the company issue all types of contract bonds?
These are some of the questions a contractor should ask the company that may issue their bond in order to determine whether it is the right one for them. While companies determine the rate at which contractors can get bonded, they can in turn determine whether a company is suitable for them and their needs.
WHAT ARE THE COMPANY’S SURETY LIMITS?
A surety company’s single and aggregate bond limits are the maximum amounts of bonds that it can write for an applicant. If the company’s limits are below a contractor’s bonding needs, they run the risk of not being able to get bonded for certain projects or to expand their operations to another state.
Before getting bonded with a certain company, one must find what its limits are and if they work for them.
