To provide an expert opinion on construction payment and performance bonds, I sat down with Ellen Neylan, the owner of Surety Bond Associates, a WBE bond agency and consulting firm that provides specialized bonding services to women. small, minority and veteran contractors.
Often, submitted projects come with a bonding requirement; many times this is seen as an automatic disqualifier for an unlinked GC. Ellen emphasized the abundance of options that exist and the importance of differentiating all risk reduction instruments from viable alternatives.
Many GCs are working with their insurance agencies to address bonded needs without realizing that bail bond agents are their own specialty adding different and more accurate value. Ellen explained the contrast between a surety bond and Subcontractor Default Insurance (SDI), two concepts that can easily be confused. In almost all cases, SDI is much less than the bond. Bonds exist to protect taxpayer money and the organizational health of a general contractor, while SDI serves to allow a GC to default on subcontractors quickly without payment protection for anyone. High deductibles are associated and, since there is no qualification process to obtain this protection, it is much more of a high risk instrument.
Along with the confusion of bonds and SDIs that seem interchangeable comes a misunderstanding that bonds and insurance are generally comparable. Earlier I heard the phrase “Bonds are not insurance, they are an instrument of credit” and Ellen confirmed that in her Bonds 101 workshop, this is an idea that is represented as fact.
Although insurance companies can provide surety bonds, contractors must qualify for surety, which makes it quite different from insurance. Anyone can buy insurance if they can afford it, however, bonds require an in-depth rating process that fully evaluates a company.
Before my conversation with Ellen, I read that many bonding professionals summed up their assessment of a contractor with the use of “the three c’s: character, ability, and capital,” and I was interested to know if this captured their interpretation of the Scope of the Contract. GC review. She emphasized that those are definitely the main ideas, however the importance of each area is not weighted equally in thirds.
The surety generally places a 70% emphasis on financial strength. For capacity consideration, the contractor’s experience with project management and work portfolio shapes his qualification. Some factors that are evaluated include:
– Staff summaries
– Typical valuation of the project “sweet spot”
– Scope of work
– References with sub-contactors, suppliers and banks
When evaluating the character review, this is a bit more challenging. Ellen rightly mentioned that you don’t realize a contractor’s true colors until a problem arises. Since surety bonds are essentially a partnership between the surety and the contractor, the surety should feel confident that the contractor can help them resolve any issues and keep their promises. The success of the project depends largely on a GC working with the guarantee so that they do not have to present a loss.
So once you’ve taken the steps to become a link, what does it take for a business to take steps to increase that link ability?
Much of the growing linkage capacity involves not accepting jobs that are too large for your company’s bandwidth. Keeping the most cash in the business and managing it strictly along with accurate labor cost accounting systems is key. A good CPA is critical to keeping a business online financially. Surety companies seek detailed financial statements because the accounting needs of construction are so unique to other industries. Assembling that team of a solid CPA, a surety broker, and a bank is a powerful trio.
Performance and payment surety bonds can seem confusing, however, with the guidance of a surety expert, contractors can realize their full potential and don’t have to miss out on missed bond opportunities. There are many resources available to organizations seeking to link, and a “dead end” is far from how a link stipulation should be perceived.
About the interviewee, Ellen Neylan:
Ellen Neylan is the founder and sole owner of Surety Bond Associates. Ellen is a surety veteran with more than 25 years of experience in the surety industry, holding positions with several major surety companies serving a variety of underwriting, management and operations, business and product development roles. Ellen has lectured to various audiences on the principles of surety and underwriting disciplines, and is an active member of the PA and NJ chapters of the Surety and Fidelity Association of America.