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QUALIFICATION PROCESS |
FIRST BOND - THE QUALIFICATION PROCESS
In today's highly competitive construction industry, more and more contractors are required to provide surety bonds to guarantee their performance on construction projects. This is true of both general contractors and subcontractors, as more owners and lenders require the protection of surety bonds from general contractors and more general contractors and their sureties require the same protection from their subs. Generally there are three types of bonds you may encounter:
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The first, the bid bond, guarantees that the bidder will actually enter into the contract at the price bid and provide the required performance and payment bonds.
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The performance bond protects the owner from financial loss caused by failure of the contractor to build the project in accordance with the terms and conditions of the contract.
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The payment bond guarantees that the contractor will pay all of the labor and material bills associated with the project.
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How, then, do you go about qualifying for construction surety bonds? Your first step is to engage the services of a professional surety bond agent. He or she will guide you through the qualification process and help you present your case to surety bond underwriters and select a surety company that is a good match for the personality and needs of you company. The professional agent knows the surety marketplace and the type of information needed to do a thorough evaluation of your company.
Let's take a look at the process and the information you will need to provide to your agent.
- Organization chart showing key employees and areas of responsibility.
- Detailed résumés of key people, including yourself.
- A business plan outlining the type of work you do, how you obtain your jobs, geographic area of operation, growth objectives, profit objectives, etc.
- Track record of five or six of your largest completed projects indicating the name and address of the owner, date completed, and gross profit earned.
- A continuity plan outlining how the business will continue in the event of an untimely death or disablement of a key individual or owner.
- Cost record information is extremely important in that without a good cost recording and bookkeeping system, a contractor does not know where he stands financially. Because of the risks inherent in the construction business, it behooves every contractor, large or small, to have cost and bookkeeping systems adequate to account for the financial status of his jobs. Without these systems, the contractor is not really in control and is subject to failure because of the inability to spot and rectify problems before they become to severe to correct.
- Trade references of subs and suppliers listing name, address and telephone number of persons to contact.
- A line of bank credit should be established and a copy provided. In this regard, it is important to point out that sureties are generally looking for an unsecured line of credit that can be used for working capital purposes. Equipment financing is not necessarily what a surety is seeking and financing based on an assignment of accounts receivable will not generally be looked upon favorably by a surety. Receivable financing tends to pit the surety against the bank in a default situation because of what many on both sides consider to be legal ambiguities created by the Uniform Commercial Code.Your agent can be helpful in referring you to bankers interested in working with contractors.
- Financial statements are vital to any credit-granting entity and particularly sureties. The balance sheet shows where a contractor stands financially and the profit and loss statement shows how this was achieved. The additional information in the form of various schedules, which is generally included, is helpful, indeed essential, to a proper interpretation and analysis of what is contained in the balance sheet and the profit and loss statement.
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