Q: My company has been subcontracting to another cable company, which in turn, has contracts with rcn, MediaOne, and other large companies. We have been doing big jobs such as installing new cable and telephone systems into 100- to 500-unit commercial buildings. My company is extremely well-organized and efficient. The company we contract to is the opposite, and we often lose money and suffer from their "dropping the ball." We have been offered an opportunity for our own subcontract that requires being bonded for $5 million. What is the difference between a bond and insurance?
A: A surety bond is an agreement under which one party (the surety) guarantees another (the owner or obligee) that a third party (the contractor or principal) will perform a contract according to the contract documents. In the case of a subcontract, the general contractor is the obligee, and the subcontractor is the principal.
There are three types of contract surety bonds. The bid bond provides financial assurance that the bid has been submitted in good faith and that the contractor intends to enter into the contract at the price bid and provide the required performance and payment bonds. The performance bond protects the obligee from financial loss should the contractor fail to perform the contract in accordance with the terms and conditions of the contract documents. The payment bond guarantees that the contractor will pay certain subcontractor, labor, and material bills associated with the project.
Even though most surety companies are also large insurance companies, qualifying for bonds is more like obtaining bank credit than purchasing insurance. Like your bank, a surety company will want to know you and your company very well before committing its assets.
The surety underwriting process focuses on prequalifying the contractor. It takes time to develop and present data, address questions the surety may have, and verify information. In short, the surety wants to be satisfied that the contractor is a well-managed, profitable enterprise that keeps promises, deals fairly, and fulfills obligations in a timely manner.
To prepare your case for bonds you will need:
- a chart that shows your key employees and their responsibilities
- resumes of yourself and key employees
- a business plan outlining the type of work you do, how you obtain your jobs, the geographic area, and your growth and profit objectives
- a description of some of your largest completed jobs, including the name and address of the owner, the contract price, the date completed, and the gross profit earned
- a plan outlining how the business will continue in the event of your death or disablement, or that of a key employee
- subcontractor and supplier references, including names, addresses, and telephone numbers of persons to contact
- evidence of a line of credit
- letters of recommendation from owners, architects, and engineers.
Depending on how long your firm has been in business, the surety will want to see fiscal year-end statements for the last three to five years. Once your file is completed by your surety producer, it will be submitted to a surety company for review. The company`s underwriter may ask to meet with you and your key people to discuss all aspects of your company`s current operations and future plans.
After the bonds are written, the surety will continuously reevaluate the overall performance and financial position of the contractor.
While this covers the type of information surety companies may require for a first bond, each surety has its own underwriting standards and may require additional information. Furthermore, there is no guarantee that, even if you submit all of the information requested, your application will be approved.
Rates for surety bonds vary from one surety to another, ranging from 1% to 3% of the contract price.
Pre-qualifying for a surety bond is not a walk in the park. To find an agent who is a specialist in contractors` surety bonding and insurance, contact the National Association of Surety Bond Producers at www.nasbp.org.
Donna Ballast is a communications analyst at The University of Texas at Austin and a BICSI registered communications distribution designer (RCDD). Questions can be sent to her at
Cabling Installation & Maintenance or at PO Drawer 7580,
The University of Texas, Austin, TX 78713;
tel: (512) 471-0112, fax: (512) 471-8883,