Managing surety risk in the construction industry is entirely dependent on the role of industry participants. There is one set of concerns for those that must acquire a surety bond in order to bid (and participate) on a particular project. And at the same time, there’s an entirely different set of concerns for those that need to rely on a surety to come through with the money when a claim is filed. The surety bond may be one “coin,” but this coin definitely has two sides.

Managing Risk When Acquiring a Surety Bond

There are many facets to acquiring a surety bond. All must be managed, but two of the most important are the bond costs and a company’s bond limits. If either one of these is too far out of whack, a company might not be able to bid on certain jobs which can significantly limit growth and may even threaten the company’s viability.

According to Eric Weisbrot of JW Surety Bonds, there are several strategies contractors can take to reduce their surety bond costs. These include:

• understand the basics of credit - the owner’s personal credit is often a factor;
• manage tax liens - a tax lien on a credit report is a killer so removing any tax liens is the number one priority;
• know who owes the company - a clean, accurate balance sheet is a must;
• work with the right surety bond company - price matters, but that’s just the beginning; and
• avoid claims when possible - fulfill contract requirements for each and every customer.

Managing bond limits (also referred to as “bond lines”) is also very important. There are two main types of bond lines -- the single limit (the maximum amount per project that the surety will back you) and the aggregate limit (which is the total amount of bonds a company can get overall). Vic Lance of Lance Surety Bond Associates recommends several steps that contractors can take to increase their bond limits, and not surprisingly, many are very similar to the previous list of strategies aimed at reducing bond costs. Lance concurs that often, an owner’s personal credit is a huge factor. Additionally, he recommends working with a CPA in order to provide a surety with proper financial statements. Finally, Lance stresses that contractors should take the opportunity to highlight their experience and to showcase their successes to a prospective surety partner.

Managing Risk When Making a Bond Claim

On the other side of the coin, there are those in the construction industry that will rely on a surety for an entirely different circumstance -- when they need to make a bond claim. According to zlien Chief Legal Officer Nate Budde, one of the most effective ways that contractors can streamline the bond claim process is to proactively communicate with the surety when a claim is in the offing. Even though the surety is not normally required by law to receive notice of a bond claim, Budde recommends that contractors send a notice of claim to the surety at the very beginning of the bond claim process. This way, both the surety and the general contractor are now fully involved in the process, and both will be equally motivated to resolve the bond claim prior to litigation.

No one in the construction industry likes bond claims. However, this important tool can be a very effective way to make sure that contractors not only perform to the requirements set forth in their contracts, but also (and equally as important), that everyone in the industry gets paid the money they’ve rightfully earned.