Contract surety bonds are three-party agreements during which the first party fortifies the second party’s performance to the third party. Contract surety bonds protect the performance of all construction contracts. The performance bond gives advantages to the project owner and the contractor’s performance of the entire contract to define it precisely. The payment bond secures the contractors’ obligation to pay the suppliers and provides an added advantage for the suppliers and the subcontractors. Furthermore, the performance and the payment bonds have terms and conditions that must be included.
One of the most frustrating parts of being a contract surety bonds writer is having to reject the bonding ability of the contractor, who seems to have all the required experience and skills along with the financial stability needed to carry out the project they have in mind. The qualification process is one of the most critical moments for any contractor to prove their skills to meet all the different contract commitments. All the preliminary steps to the surety should be detailed and completed through presentations to avoid creating a negative first impression. The following three reasons are the most common reasons why contract surety bonds are denied despite the applicant being qualified.
Overextension
One of the most essential parts of the application review is when the surety writers compare complexity along with the size of the project proposed with the various projects that the contractor has completed in the past. It is required so that the contractor picks only the projects that they know they will be able to achieve. Bidding on jobs that are significantly larger in scope and complexity and lie outside the contractor’s primary work specialty becomes one of the leading causes of the contract surety bonds being declined. Most of the time, location distance from what the contractor typically considers the geographic center of operations also becomes a serious condition.
Realistic Lead Time
It is very unreasonable for any contractor who has no previous qualifications for the program bonding capacity to submit their request a day before the ultimate bond is due. The writer should be given sufficient time to digest all of the required biographical information provided to them by the contractor. They need enough time to read and thoroughly understand the contract and get an idea of the nature of this bonded obligation. Time is also required to retrieve and review the credit and financial rating service feedback, along with proper analysis of the contractor’s financial statements and work-in-progress schedules. Throughout this entire review process, numerous concerns might arise that may require further clarification through phone calls and emails to both the project owner and contractor. The more minor contract requests do not require as much attention as the larger ones. Irrespective of what the project size might be, the same underwriting fundamentals are followed.
Inappropriate Financial Presentation
In the effort to present bonding opportunities to all emerging contractors, most of the sureties have developed “quick bonds” or “fast app programs.” It is a known fact that those contractors who are relatively new to the field are highly unlikely to have CPA-prepared financial statements. The cost of formal financial reporting might be challenging to budget. As the project values increase, all writers should be able to trust the precision of the working capital, efficiency, and revenue along with the billing figures, which have been contained in the financial statement. All of the different presentations prepared to review or audit the standards are the absolute prerequisites for more extensive bond requests. Offering a formal statement also gives the writer a clear indication of the contractors’ financial maturity, along with an understanding of the various basic principles of credit applications. A contractor’s reluctance to quickly deliver the demanded financial information organized to the appropriate standards is a huge red flag.
Conclusion
In conclusion, contract surety bonds are essential for protecting construction contract performance and payments. Contractors can face bond denials for typical reasons: overextension, unrealistic lead times, and inappropriate financial presentations. Contractors should select projects within their capabilities, provide ample evaluation time, and present organized financial information to improve approval chances. Understanding these reasons can help contractors navigate the qualification process effectively.
In an industry where trust and reliability are paramount, taking these steps not only improves bonding success but also enhances a contractor’s reputation and credibility. So, as you navigate the complex world of contract surety bonds, remember that these challenges can ultimately lead to growth and success in the construction business.
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