3 Key Factors for Surety Bond Approval
What’s a surety bond? It’s defined as a three-party agreement binding together a principal who needs the bond, an obligee who requires the bond and a surety company that provides the bond.
It guarantees the principal will perform its contractual obligation and if that principal fails to perform in that manner, a bond will cover the resulting damages or losses. In construction, a bond is often required on public projects to protect against an adverse event causing disruption or the failure to complete a project while protecting public funds. This includes insolvency of the builder or the inability to meet contract specifications.
The process of securing a surety bond can be overwhelming. Contractors complete a series of forms and include detailed information on the company, provide follow-up pieces and then answer a few more questions. While a contractor may be confident in his ability to perform the work and remain optimistic he will qualify for the bond, he may also be unsure of the whole underwriting process. What happens if the surety declines to issue the bond? After spending hours on a bid – not to mention thousands of dollars – the declination is frustrating to say the least.
So, what’s actually happening behind closed doors? How do underwriters decide if a contractor qualifies for a surety bond? Understanding the underwriting process and knowing the potential outcome up front will help in prequalifying which projects to actively pursue, saving time and thousands of dollars.
Although there are a lot of variables that go into each case, it’s a pretty straightforward process that keys in on three determining factors: experience, financial strength and financial presentation.
Learn more about these three financial factors in my latest article for Construction Executive magazine.
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