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 the construction contracts. To define it specifically, the performance bond works to give advantages to the project owner, and the contractors’ performance of the entire contract. The payment bond secures the contractors’ obligation to pay the suppliers and provides an added advantage for the suppliers as well as the subcontractors. Furthermore, both the performance and the payment bonds have terms and conditions which have to be included.
One of the most frustrating parts of being a contract surety bonds writer is having to reject the bonding ability to 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 important moments for any contractor to prove their skills to meet all the different contract commitments. All the preliminary to the surety should be detailed and complete 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.
One of the most important 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. This is required so that the contractor picks only the projects that they know they will be able to complete. Bidding on the jobs which are significantly larger in the scope and complexity and/or lie outside of the contractor’s main work specialty become one of the leading causes of the contract surety bonds being declined. Most of the time, location distance from what the contractor considers typically to be 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 all of 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 or/and emails to both the project owner and contractor. The smaller contract requests do not require as much attention as the larger ones do. 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 difficult to budget. As the project values increase, all writers should be able to trust the precision of the working capital, efficiency, 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 bigger bond requests. Offering a formal statement also gives the writer a clear indication of the contractors’ financial maturity, along with the understanding of all of the various basic principles of the credit applications. A contractor’s reluctance to quickly deliver the demanded financial information organized to the appropriate standards is a huge red flag.
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