Construction is heating up and there may be way more federal work on the way. We're hoping Eglin, Hurlburt Field, Duke Field, and Tyndall get to see some of that money. Many federal jobs require bonds and the GCs who land the big contracts are often required to provide a bond and make sure their subcontractors are bonded as well. Whether you are the experienced GC or the novice Subcontractor, here are some common things bond companies ask for before giving you a bond.
Personal credit is your foot in the door. A lot of smaller bonds can be approved simply on a good credit score from the business owners. Many types of bonds, such as license and permit, fiduciary, and court bonds are approved this way. Contract bonds, which guarantee the payment and performance of a specific project, are usually available with nothing more than a good credit score up to $400,000 for any single job and $1,000,000 for total bonded work in progress.
The terms are set by bond companies, called Sureties, which are specialized companies with underwriters dedicated to this profession. Since it is a niche, most insurance agents have little or no experience with bonding so check around for an agent with a background in surety. Terms and prices vary from company to company so it is worth checking around.
If your personal credit isn't so good, there are alternative markets that will typically just charge you a higher price for the bond. Worst case scenario is if they require collateral, which is uncommon.
Once bonds start getting bigger than $400,000 the bond companies start digging a little deeper. They are basically signing their name on the line under yours, so they want to know who they are partnering with. You are the experienced one, confident you can succeed in this project, so this is your chance to brag and prove it to the Surety.
Your bond agent plays a huge role in setting you up for success here. He/She keeps relationships with the Surety underwriters and builds trust. If the underwriter trusts him, they are more likely to trust his opinion of you. They say nothing can take the place of a strong recommendation, but your relationship with your agent isn't free either. Take time to understand each other and work together to show the Surety you are qualified to complete this project and display high quality character.
Projects over $1million start becoming more of an academic exercise. I was an underwriter for a few years and spent all day every day analyzing financial statements, work in progress schedules, tax returns, and projecting trends. They are looking for patterns, direction, and good practices. You can hide a poor business in one or two successful years but a five year financial history tells the full story. They will ask for a lot of information, like a LOT, so be prepared. It's like getting a loan but with no way out other than completion of the project, so they want to be sure.
Your agent can help bridge the gap on a borderline case. Most surety companies will issue bonds up to 10-20 times the equity of the business. It's called the Backlog to Working Capital ratio. For example, if you have $100,000 in working capital (if you need help figuring yours out, call me) you can expect approval on bonds totaling $1,000,000-$2,000,000. 10 times is the preferred rate, so plan on the lower end of that scale.
$50,000 equity = $500,000 bond
$100,000 equity = $1million bond
$500,000 equity = $5million bond
There are many other factors so don’t rely on this figure when seeking bonding. If there are other strong selling points, like a wealthy business owner or other available liquid assets, we can work with that. Here are some things the Surety will ask for:
- Last 3 years of financial statements, Compiled, Reviewed, or Audited
- Balance Sheet
- Income Statements
- Work in Progress Schedule
- Personal financial statements
- Maybe a few tax returns
- Bank line of credit
How much does it cost?
Smaller bonds for licenses, permits, or other annual items are typically a flat fee in the $100-2000 range. It depends on many factors and not everyone is eligible, so ask for a quote and expect a pretty quick response.
Bid Bonds are usually free for existing bond accounts, it's possible a Surety will charge for a one-off but that doesn't happen often.
Payment and Performance bonds are usually issued together and priced individually based on all the info gathered above. It usually starts around 3% of the contract amount for new accounts and can go down below 1% for established ones, but a well qualified account could expect to start under 2%. Getting your foot in the door can be the hardest part, once you have a relationship going it can become one of the most important connections in your business.
Norton Insurance of Florida has been in bonding around 50 years and have written bonds all across the country for projects big and small. If you want the touch of a local agent with bonding experience, give us a try and we'll do our best to help seize the opportunity when it arises!
The views expressed here are the opinion of the author and do not attempt to make any recommendation for insurance coverage. Eligibility is determined by the insurance carrier and not all applicants will qualify. Please contact your licensed insurance agent regarding your area's coverage and eligibility.