Surety bond ensures job is completed

Q How can my contracting business get a security bond to do government contracting?

A. The question will be answered with information available from the Small Business Administration. The federal government requires surety bonds for construction or service projects valued at $100,000 or more. Many states, counties, municipalities, school districts and other governmental entities also require bonding. Bonding usually is not required for private sector projects because the bond cost normally is passed through by the contractor to the owner and private owners elect to avoid the extra cost.

A surety bond is a three-way agreement between the surety company, contractor and the project owner. The general contractor also may require a surety bond be provided by subcontractors to protect the general contractor. If the contractor fails to comply with the contract terms, the surety company assumes responsibility and ensures the contract’s completion.

Surety bonds include bid, payment and performance. Bid protection guarantees the bidder will enter a contract and furnish required payment and performance bonds if selected to do the project. Payment protection guarantees payment from the contractor to other parties who furnish labor, materials, equipment and supplies for the project. Performance protection guarantees the contractor will fulfill the contract according to its terms.

Surety bonds are obtained through surety bond producers whose function is similar to an independent insurance broker. The producer has a business relationship with several surety companies which enables the producer to match the contractor’s needs with the surety company best able to meet those needs.

The producer assists the contractor in getting surety bonds, provides business advice, management consulting and technical expertise. The contractor should treat the producer as an integral part of the contractor’s advisory team along with the contractor’s attorney, lender and CPA. By using their specialized knowledge of the construction industry, the producer helps the contractor prepare for the surety company’s rigorous pre-qualification process. Contact information for producers can be obtained from the National Association of Surety Bond Producers at phone 202-686-3700 or www.nasbp.org.

Surety companies must be licensed by the insurance department of one or more states in which the surety conducts business. In addition, sureties that bond federal projects must be approved by the U.S. Treasury Department. The surety selected should have a good financial rating by A.M. Best Company or another rating company.

The surety may choose to obtain an SBA guarantee for the bond, which will result in a fee for the contractor and surety. The surety company conducts a thorough prequalification process to reduce contractor default risk. Prequalification probes the contractor’s entire business operation including credit history, financial strength, experience, equipment, work in progress and management ability.

If a contractor has difficulty on the project, the surety company will assist the contractor to head off default. If the owner declares the contractor in default, the surety will investigate the claim, analyze all options and choose the best course to remedy the problem. The surety may help the contractor complete the project, arrange for a new contractor to complete the project, rebid the job or pay the owner the cost of completion. The contractor should maintain a close business relationship with the surety company.

Information about surety companies can be obtained from the Surety Association of America by phone 202-463-0600 or www.surety.org.

Ralph Coker, a retired refinery manager, volunteers with the local chapter of SCORE, counselors to small business. Contact SCORE at 879-0017, ext. 22, or mail to:score221@sbcglobal.net. Also visit www.score-corpus-christi.org