When a construction company seeks a bond for a project, there are a number of factors examined by the underwriter before the bond is given. These factors help the surety company determine whether or not offering you a surety bond is a wise investment for their organization, as well as whether it would benefit your organization.
When you understand these factors, you can better prepare your organization for the application process and possibly increase the likelihood of it going your way. The various factors examined by underwriters can be divided into three categories, which are referred to as the three Cs of underwriting surety bonds.
1. Capacity
Capacity refers to the company's ability to handle the project scope. There are a number of factors that determine capacity.
For example, has the organization handled a similar project in the past? Is there sufficient staff, including office staff, to handle the project and all it entails? Are the financial aspects of the organization able to manage the surety for the project? How many other projects is the organization handling at this time? These are the types of questions surety companies ask when determining capacity before offering surety for a construction project.
To help ensure that an organization meets the requirements for capacity of a surety, it is necessary to have strong policies and internal controls governing operations, as well as reliable and effective staff to handle operations. An organization that runs smoothly and reports quickly and accurately will show that it is prepared to handle a new project.
As your organization continues to take on new and more complex projects, it will provide you a larger capacity for your organization, which is favorable when seeking surety bonds.
2. Capital
Capital refers to the financial resources of a construction company. From this perspective, an organization needs financial stability. There are financial risks associated with construction projects, even if the organization has handled similar projects in the past.
A surety company needs to know that the construction company can handle the financial burden of the project successfully. This is usually determined by scrutinizing the construction company's financial statements. The statements not only point to available financial resources, but whether the organization makes payments on time, its debts and other financial factors that can impact whether the surety is given for the construction project.
Along with this, the surety company will look at how your organization uses profits. Does the company spend wisely and re-invest in the organization, or is profit spent frivolously? All of these factors work together to determine capital when seeking a surety bond for a construction project. Since a surety bond is a financial component of operations, and often required when doing construction work, the financial aspect of your organization is an important factor examined by the underwriter.
3. Character
Character is probably the most important factor in analysis by underwriters. In fact, character is the factor typically examined first. If the organization doesn't "pass" in this category, other factors are not examined. It is a less tangible factor.
To examine character, the underwriter looks at overall operations, staff and management. In simplest terms, character is about how your organization behaves. This can include some financial aspects, such as paying bills on time and how profits are used, but also includes broader factors in the organization and its operations.
For example, the underwriter will look at your organization's position and reputation in the market, including customer satisfaction and interactions with competitors. Essentially, character helps determine if your organization is a good fit for the surety organization and that the behavior of your organization will not reflect negatively on the surety company or on the industry in general.
Knowing what your organization needs to be approved for a construction surety bond can go a long way toward helping you prepare for the process. You can examine your own organization, including its structures and finances, so that when the underwriter does an assessment, your organization will be in the best possible light.
You have control over how your business operates, as well as how you manage your finances. Making sure you can meet a surety company's requirements for a bond will help ensure you are able to do the work you need to do for your clients successfully.
