How Construction Bonds Work Part 2
The success of a project depends greatly on the owner’s ability to mitigate and manage construction risks. They must make fiscally sound decisions to ensure that their projects are completed successfully. Our Sarasota construction attorneys are well versed in lien and bond claims and know that contractor and subcontractor selection is a key component of this decision-making. Surety bonds are used as a means of financial security and to prove that a contractor is capable of meeting agreed upon obligations. Part one discusses the different types of bonds used. This section will cover why some may have trouble getting bonded and the factors that influence a bond approval.
Why Some Have Trouble Getting Bonded
Some contractors may struggle to get approved for a bond for a number of reasons. This is true even if they have previously been bonded. Also, their disqualification may not be their own fault. The surety company will vigorously prequalify contractors because they are tasked with protecting the project owner as well as providing assurance to anyone else involved in a project with the contractor. If a contractor cannot show they have a solid track record, working capital, and the capacity to handle a project they will have trouble getting bonded.
How Do Underwriters Qualify a Contractor?
Pre-qualification is a normal practice for bonding. Before issuing a bond, a surety will evaluate a contractor based on references, their ability to meet project obligations, whether they match contract requirements, and if they have the required equipment to complete the work. Additionally, a surety will look at the size of the contractor’s previous projects. The surety will also assess the contractor’s financial health.
Financial Strength Matters
When assessing financial strength, they will look at things such as credit history and an established relationship with a bank. The surety will calculate the contractor’s net worth and working capital. Although the contractor may meet the experience factor and their working capital looks great, they could be declined if their financial presentation (format and reporting) is lacking. Financials are reviewed to determine how obligations are handled and if a larger bond can be handled. Contractors are advised to contact a certified public accountant to ensure their financials are in order.
In part three we will discuss bonding misconceptions, building a strong foundation, and increasing your approval rate. Do not hesitate to contact a Sarasota construction lawyer if you need legal assistance with bonds.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.