How does a contractor’s existing workforce and recruitment, training and retention programs impact its ability to obtain bonding?
Dennis Ferretti
Vice President, Contract Surety
Philadelphia Insurance Companies
Ben Franklin said, “An investment in knowledge pays the best interest.” I believe an investment in people pays the best interest when it comes to bonding.
All surety underwriters are trained to evaluate contractors using the three C model: character, capacity and capital. The quality of a contractor’s existing workforce and recruitment, training and retention programs will reveal itself to the underwriter during the three C review and will directly impact its ability to obtain bonding.
It’s often argued that there is no need to assess capacity and capital if a surety underwriter is not confident in the character of a construction company’s ownership. The owners of a construction company that deploy financial and people resources for training new and existing employees, that recruit with purpose and vision based upon the company’s short and long-term strategic goals, and that include a high retention rate of its people as an indicator and measure of them and their company’s success will be recognized by surety underwriters as owners of high character. This recognition will lead to obtaining bonding capacity.
Capacity and capital evaluation can be tied together. Capacity evaluation is, in large part, the evaluation of project performance over time. A positive or negative project performance will translate to a stronger or weaker capital/financial position for the contractor. Positive or negative project performance trends and the resulting capital/financial positions directly tie into a construction company’s investment, or lack thereof, in training and retention programs. The same goes for its ability and willingness to recruit and hire the best and brightest at all levels. Positive capacity and capital evaluation will also lead to obtaining bonding capacity.
Can regular communications with surety providers help construction firms access larger bonding capacity and more favorable terms?
Mark DeVito
VP, Underwriting
IAT Surety, a division of IAT Insurance Group
Regular communication between construction companies and their surety underwriters is critical to expanding a program and securing best-in-class pricing. Contractors may worry that increased communication and information sharing could lead to more underwriting questions. On the contrary, proactive correspondence reduces the chances of interruptions in the surety process. A high level of transparency and clarity builds a foundation of trust—not only trust but also shared accountability among all partners—which helps prevent unforeseen issues.
For example, in the case of problem projects, ongoing interaction can influence how the surety underwriter responds to potential financial setbacks. Similarly, in recent years, contractors have navigated various unexpected risks—such as price escalation, inflation, labor shortages and rising interest rates. The combination of these factors has led to a dramatic increase in contract sizes, and surety bond sizes and work programs have followed suit. Contractors who provided clear reasoning and expectations saw surety underwriters adapt more readily, responding with larger bonds and elevated capacity.
Our partner agents and brokers facilitate the flow of information between clients and sureties, driving consideration for the best available terms. Repetitive, meaningful communication helps sureties better understand a contractor’s character, determination and resilience. As a result, surety underwriters are more willing to tailor and stretch bond programs to best support a contractor’s vision, objectives and business plan.
Does a surety bond protect a general contractor from subcontractors filing liens?
Rebecca Peisker
Senior Vice President, Director of Construction Surety
Chubb
A payment bond guarantees that a contractor will pay laborers, subcontractors and suppliers for work performed and materials supplied on a project, per the bond’s terms, related contracts and applicable law. Surety bonds can help to add a layer of protection for general contractors, but lien laws and bonding laws vary by jurisdiction, so it is imperative that contractors consult with qualified counsel to understand any implications a payment bond may have on the lien rights of any particular party under applicable law.
Payment bonds can serve as a risk mitigation tool to protect project owners by allowing subcontractors, suppliers and laborers of the contractor to make a claim on the payment bond in the event of nonpayment by the contractor. Additional risk mitigation strategies general contractors can implement include:
Thorough Subcontractor and Supplier Prequalification: Fully vet financial results, financial performance and reputation.Establish Clear Contracts: Include clear payment terms, dispute resolution procedures, an obligation to bond liens, and obtain lien waivers in the amount of the payment upon receipt of the payment.Incorporate Appropriate Default Provisions in Subcontracts: Include the failure to pay undisputed payments to subcontractors, suppliers and laborers as an event of default. This type of provision is often in prime contracts. The general contractor can mitigate risk to itself by passing obligations downstream to its subcontractors and suppliers. The general contractor may have additional recourse in connection with a subcontractor default of this nature if it has obtained a performance bond from its subcontractor.
By implementing these strategies, general contractors can help reduce project-related risks associated with subcontractors, suppliers and laborers.
What are some ways to implement tech to reduce insurance costs and mitigate risk?
Brock Masterson
COO—Surety Division
Crum & Forster
Successful surety underwriting involves, among other things, assessing a contractor’s ability to identify and manage project risk. Key factors considered include appropriate contractual provisions, accurate pricing and estimation, efficient project execution and subcontractor management.
Advancements in technology have given companies new tools to supplement internal controls and proactively manage many common risk factors. For example, generative AI-based software can help identify, summarize and modify contractual provisions. Most of these tools can summarize dense provisions, giving the reader a high-level understanding of the contract and offering alternative language to achieve simplicity or other contracting objectives. Users should understand confidentiality obligations and limitations of these tools before using them.
Estimating tools provide real-time and predictive pricing data for key materials and costs. These capabilities are particularly useful during inflation or tariff volatility, when recent experience can differ significantly from the future, to ensure the best likelihood of profitability.
Subcontractor prequalification software allows prime contractors to analyze financial statements and work-in-progress schedules, offering feedback on financial health and guidelines for potential workloads the subcontractor could effectively manage.
To improve jobsite communication, earbuds can translate languages in real time via a mobile app, fostering greater connection among contractors on a jobsite.
While none of these tools replace trusted advisors such as attorneys, CPAs, surety producers or surety companies, they offer accessible feedback in real time to help ensure contractors have the information needed to identify and manage risk effectively.
With an increasing number of small and medium-sized enterprises entering the construction market, what advice do you have for firms seeking their first surety bond?
Jeff Cose
SVP, Head of National Bond Center
Nationwide Surety
Being prepared can help you successfully navigate the surety bonding process, especially if it’s new to you. Because bonds are due at the bid letting or when a contract is signed, it’s important to start early since it can take time to gather the necessary documentation and go through the application review with your underwriter. Before you begin, make sure your personal and business credit are in good standing. This information will be reviewed when you apply for a bond, especially when you’re working with smaller bond programs. Be aware that they will take a close look at your individual and business payment history and any liens, judgements or bankruptcy proceedings. It’s also critical to assemble a strong support team with the expertise you need to achieve a positive outcome. Partner with an experienced surety professional agent or broker to ensure you’re matched with the market that meets your specific surety program needs. You’ll also want to work with a CPA to help you with the annual financial statements, an attorney to review contracts and provide legal guidance, and a banker who can help you establish deposit accounts, loans and an operating line of credit. Having experts by your side can help streamline the application process and bring you peace of mind as you undergo the process for the first time. By giving yourself time to prepare and working with experienced professionals, you’ll increase your chances of success and ensure you’re ready for any bond opportunities that come your way.
How are advanced technologies like blockchain and AI transforming the process of evaluating a contractor’s bond worthiness?
David Hewett
Chief Underwriting Officer
Merchants Bonding Company
As artificial intelligence and automation become increasingly integrated into the construction industry, surety will be more important than ever in mitigating new and complex risks. AI is revolutionizing construction through predictive analytics, automated design, robotics and smart project management, enhancing efficiency and reducing human error. However, AI-driven models can fail. Automated processes can malfunction, and data-driven decision-making can introduce unforeseen liabilities. Surety bonds provide a safety net in this evolving landscape, ensuring that construction projects utilizing AI remain accountable and financially protected. Projects integrated with AI will need surety to guarantee performance and compliance with evolving regulations.
On the other side of the coin, AI is revolutionizing how surety companies assess a contractor’s bond- worthiness, making the process faster, more accurate and data-driven. AI can hyper-personalize risk assessment, using data to apply common sense underwriting at an unprecedented level. Automated document processing, and the use of AI to quickly verify financial and work experience information allows an underwriter to give the contractor and their agent faster bond approvals with less administrative burden. AI can give the surety the ability to assess real-time performance as well as historical financials, detecting potential risks before they escalate, allowing sureties to intervene to mitigate losses.
In an industry where AI adoption is accelerating alongside project complexity, the role of surety as the foundation of trust and risk management remains as vital as ever.
With an increasing number of small and medium-sized enterprises entering the construction market, what advice do you have for firms seeking their first surety bond?
Michael T. Roberts
Vice President, Surety
Arch Insurance
Always remember the surety relationship is based on trust. If enterprises seeking their first surety bond focus on committing to a detailed business plan, establishing financial and operational stability and emphasizing transparency, then they will set the stage for a strong, long-term relationship with their carrier.
Having a comprehensive and achievable business plan is one of the best ways for contractors to build trust with the surety underwriting community. Sureties bet on people, and their trust in contractors’ ability to complete their projects goes a long way. To that end, it’s important to have reasonable expectations on initial bond support. Enterprises can sabotage themselves by taking on too many projects or projects that are too large or too complicated at the outset. Instead, they should seek to understand their own capabilities and ability to execute on projects. Based on that understanding, they can develop a detailed business plan with an emphasis on their goals and objectives over the next several years.
Establishing the financial and operational stability that will help you to execute your business plan is essential. Consider obtaining a bank line of credit for emergency purposes, and work toward increasing it over time. A solid financial foundation, along with a strong back office, accounting and field departments, will drive increased interest from the surety community and give contractors the best opportunity for future success.
Finally, transparency is key to growing trust in a new surety relationship. Be proactive in communicating expectations, asking questions and sharing any challenges you encounter. Quick reporting and transparency when issues arise help to strengthen trust with the surety, which can significantly improve your chances of securing future bonds.
Can regular communications with surety providers help construction firms access larger bonding capacity and more favorable terms?
Hank Nozko Jr.
President
ACSTAR Insurance Company
Contractors that regularly communicate with surety providers will in all likelihood gain greater bonding capacity and more favorable terms for bonding. A contractor should regularly communicate with its surety broker, but should also communicate directly with the surety. The recommendation of your agent or broker plays an important role in determining a contractor’s bonding program; however, the ultimate decision about capacity and terms flow from the surety. If you are a contractor, ask your agent or broker to invite your surety to join in on updates, at least a few times per year. Providing quarterly or even monthly financial statements is a cornerstone of a good surety relationship. Making a brief presentation with an explanation about statement changes and events that might affect the financial statements is a very valuable means of demonstrating proficiency and building trust in a surety relationship. Providing advance notice of difficulties denotes responsibility, integrity and character which are essential for an enduring surety relationship. A big negative surprise without advance disclosure will weaken or possibly end a surety relationship.
You know your company best. Participating in discussions with your surety will improve your chances for more favorable terms and greater capacity. Communicating directly with your surety will nourish a closer relationship. Declining support is less likely to happen with a well-informed surety. Your surety relationship should be similar to a banking relationship that involves a line of credit or term loan. If you have such a banking relationship, do you talk with that bank?
SEE ALSO: SURETY TRENDS TO KEEP A EYE ON IN THE CONSTRUCTION INDUSTRY
