Prequalification
Surety Companies perform a professional and rigorous prequalification review of the contractor. Their in-depth prequalification process includes a complete review of financial statements, the contractor’s capacity to perform, the organizational structure, management, credit history, and banking relationships. Before a Surety Company issues a bid bond or performance and payment bonds, it must be satisfied that the contractor runs a well-managed profitable business, and performs its contractual obligations as agreed. This process takes into account the contractor’s current and future commitments.
Preventing contractor default is the Surety Company’s main objective. Surety Producers and Underwriters are experts at assessing the strength of a construction firm based on predicted profits on uncompleted projects and analysis of their financial data, job cost systems, timeliness of completion, and the likelihood of profitability.
Once Bonds have been executed
If the Surety Company has provided a bid bond as security for their contractor to bid a job, but the contractor fails to sign the contract or provide the required performance and payment bonds, the Surety Company will be asked to respond. The Surety’s specific obligation is set forth in the bid bond itself. Typically, however, the Surety is obligated to pay the owner the cost of having to repeat the bidding process or the difference between the lowest and second lowest bids should the awarded contractor be unable or unwilling to perform. The Surety’s liability is generally limited to the amount or penal sum of the bond–somewhere in the range of 5 to 20 percent of the estimated contract price.
If the Surety Company has provided performance and payment bonds, they are guaranteeing the contractor will perform their obligations, including finishing the project on time, staying within budget, and paying suppliers and subcontractors for labor and materials as set forth in the contract. Should a contractor fail despite the rigorous underwriting, the surety company responds given the terms and conditions of the performance and payment bonds they executed.
Kathryn A. Dircz, V.P. Surety-Kraus-Anderson Insurance
The National Association of Surety Bond Producers (NASBP) is an international organization of professional surety agents and brokers of which Kraus-Anderson Insurance is a member. NASBP provides an in-depth FAQ Article that does an excellent job of explaining the “What and Why” of Surety. Their Article is attached hereunder as a reference.