Better Roads Digital Magazine
Issue link: http://read.dmtmag.com/i/165348
When you need a bond Most projects involving public tax dollars, including school, municipal, state and federal work, require the contractor secure bonding. But many private owners also demand bonds, as well as prime contractors of their subcontractors. A surety bond assures the project owner that the contractor will perform as stated in the contract documents, prevents a loss and prequalifies the contractor based on financial strength and experience completing similar work. Three types of bonds exist and work together: bid, performance and payment. The bid bond confirms that the bid was submitted in good faith; the performance bond that the contractor will fulfill the work as specified and if the contractor defaults, the surety company will be obligated to finish the work; and the payment bond that the contractor will pay the subcontractors and the suppliers. "What you need depends on what type of work," says Eric Goodman, senior manager with accounting firm Barnes Denning in Cincinnati. "It doesn't take all three for every contract." Carl Dohn, account executive at Dohn & Maher Associates in Palatine, Illinois, says the owner typically will require a bid bond that ensures the contractor will enter into a contract if it is the lowest bidder. "If you qualify for a bid bond, the underwriter is expecting to write the performance and pay- 22 ment bond if you are the lone successful bidder," Dohn says. "They do not write bid bonds unless they are prepared to write the final bonds." Surety companies typically sell bonds through agents or brokers, called surety bond producers, who will select a suitable a surety company. A good suggestion would be to contact the National Association of Surety Bond Producers to find a bond producer near you. Coyne adds that the independent agent can coach the contractor through the application and how to make a good impression. A surety firm experienced with construction eases the process, suggests Marquet. The bond producer will submit the prequalification application to a number of bonding companies. Going after your first bond "It's not a difficult process, but you have to have your financial house in order," says Tony Stagliano, national managing director of A/E/C Industry Services at the accounting provider CBIZ MHM in Philadelphia. On the other hand, Mark Johnson, a partner in the Environmental and Land Use Group of the law firm Alston & Bird in Los Angeles, reports bonds are harder " It's not a difficult process, but you have to have your financial house in order. " to obtain in today's market, particularly for a smaller company with financial struggles during the recession. "If you have cash flow problems, you will have trouble finding a bond," Johnson says. "That will take you out of the public market and larger private projects." The process begins with a prequalification application. Underwriting is a rigorous and thorough process. MBDI helps contractors prepare. Cayemitte suggests starting before having a specific job in mind, so as to avoid scrambling during a bid preparation. "It's a great advantage to go through the process and be ready," Cayemitte says. The contractor should be prepared to produce an organizational chart; resumes of key employees; contingency plans; a business plan; a schedule of current jobs; a list of largest jobs completed to date; evidence of a line of credit with a bank; tax returns; three years of financial statements with a third party compilation, review or audit; and letters of recommendation and references. The underwriter will likely call your banker, attorney, suppliers and others familiar with your firm for references, Marquet reports. Therefore, you should inform those people of the pending bond-line application. Dohn adds that you must be able to show experience performing the type of work outlined in the contract, as well as having enough equipment and manpower to complete the job. Ad- September 2013 Better Roads ConstructionU_BR0913.indd 22 8/29/13 1:17 PM