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Obtaining surety bonds can be a complicated process for new contractors. After all, how can you be sure the surety will trust you enough to supply the bond you need? Some contractors may have even struggled to get sureties to work with them in the past. Building trust with a surety agency is the key to forming lasting relationships and growing your business. So whether you are a new or experienced contractor, one of the most important things you should ask yourself is how a contractor like you can win the trust of surety agencies.
Surety bonds are designed to protect project owners and investors from financial loss. These bonds assure that the work will be completed on time with the highest quality possible. Most contractors are required to buy surety bonds as a guarantee to the obligee. Obligees are typically government agencies working to regulate industries. Obligees can also be project owners looking to reduce the likelihood of financial loss. You (the principal) are responsible for guaranteeing future work performance and fulfilling your promises to the obligee. The surety is the insurance agency that backs the bond. The surety provides a line of credit in case the principal fails to fulfill the obligation.
Keep in mind surety carriers will be hesitant to back contractors they think will fail. That’s why it’s important to do everything you can to win the trust of surety agencies. You need these bonds to guarantee your work and financial stability to the project owner. As your business grows, you should always keep this advice in mind to build and maintain trust with your surety agency.
Surety agencies look for contractors who have long-term goals, strategic plans, and a dedicated leadership team that will get them there. Typically, surety agencies like to see a company’s growth plan for the next 1-2 years. This plan will tell the surety company what new projects the contractor wants to add and how they plan to manage their available workforce, equipment, project management team, and overall systems.
Surety companies also like to see how you have achieved goals in the past. This is a good indicator that you are capable of delivering profitable results. As a contractor, you should always keep detailed records of your progress toward monthly and annual goals.
Having a strong leadership team and a solid long-term growth plan assures the surety company that you are serious about your business and can withstand the changes that occur during economic fluctuations. During economic upswings, it’s tempting to cut corners to try to accommodate rapid growth beyond your current capacity. However, surety companies are more inclined to trust contractors who are disciplined and stick to their growth plans. Even during economic downturns, discipline and planning are key. Surety companies look for consistency over the long term.
Overall, surety companies will trust a contractor who has consistent plans, a good work history, and a competent, reliable leadership team.
It should come as no surprise that the workforce is aging. As your workers begin to retire, how will you replace them? Will you have enough qualified workers to cover all the new projects you are adding? Surety companies look to see how you are attracting new workers. As your business grows, the surety company wants to make sure you are hiring enough new workers to cover future projects. If you do not have the right labor pool, they may not trust you to complete high-quality projects on time.
Surety companies also look to see that you are actively recruiting laborers from qualified trade schools. You should always have new recruits at the ready as your company grows and as your older workers begin to retire. Additionally, having a good number of qualified workers helps assure that there are no (or very few) costly mistakes later on.
Essentially, you can build trust with surety agencies by continuously hiring enough qualified workers to cover current and future projects.
It can be tempting to take on projects in different geographical regions, especially if work has slowed in your area. However, a lack of familiarity with the local geography, workforce, and regulatory environment could negatively impact the project and cause serious problems for your company’s reputation down the line. If you are seeking to enter a new market outside your regular area, you must take time to learn about the new market.
Surety companies look for contractors who are cautious about entering new markets. Anyone looking to expand outside of their normal geographic region must have solid connections in that area. After all, how will you hire the best subcontractors, source the best materials, or deliver profit on a project if you don’t know the market? Always team up with a connection who has an intimate knowledge of the local market. This will help surety companies see that you are well-prepared to carry out your expansion plans.
Entering new markets ties back to strong leadership and planning skills. Surety companies will only trust contractors who have considered all factors of geographic expansion before jumping into a new region.
In addition to examining your current leadership team and performance, surety companies will closely inspect your work history and past financial performance. From day one, your business should be working toward profitability and dependability. As part of the prequalification process, the surety company will look to see that you have a profitable history and a good reputation for high-quality work. Among the factors they consider are the contractor’s entire work portfolio, past performance, experience, operational efficiency, managerial skills, business plan, and reputation for integrity. Keep in mind different sureties will value some factors more than others. However, almost all sureties will consider the following factors during the prequalification process:
Always keep thorough and accurate records of your work history and financial statements. It will be more difficult for a surety to trust you if you have a spotty performance history or inaccurate financial records. Focus on these records from the beginning so you can save yourself (and the surety) hassle later on.
If you are already working with a surety agency, schedule meetings with them at least once a year to keep everyone up to date with work performance and financial standings. It’s a good idea to hold this meeting shortly after the annual financial statement becomes available. You may also want your CPA and CFO to attend so they can provide the most accurate picture of the company’s financial position.
These annual meetings are a good way for the surety to get an idea of how your growth plan is progressing and how you are managing your projects and personnel. Again, the surety wants to see that you have the right leadership, experience, and workforce to handle current and future projects. Make sure you have a well-thought-out business plan that lays out your goals and strategies for the next 1-2 years. Remember that the surety will use financial statements, business plans, and other information to determine the amount of credit they will extend.
Maintaining a relationship with a surety company requires open and honest communication between all parties. Everyone in the surety relationship must say what they mean, do what they say, and produce results. You may be hesitant to be completely honest with your surety when projects go awry. However, sureties can accept problems on a job because they happen all the time. Profit margins may occasionally shrink and the surety knows this. A surety will only become concerned with your business if your profit margins are consistently shrinking. Shrinking profit margins will impact how much surety credit the company is willing to provide. However, being honest and maintaining open lines of communication will re-establish trust and confidence.
Part of open communication requires you to uphold your accountability. A surety bond legally binds three parties together in an agreement. You must complete the work you promised and be transparent throughout the process. Always prioritize timely reporting, teamwork, and organization to build trust between your party and the surety agency.
Remember that winning the trust of a surety agency takes time and effort. The best thing you can do to build trust and nurture a relationship is to be honest, diligent, and consistent in all your work. Over time, the surety agency will see that you are a sound business owner in addition to an accomplished contractor.
If you have any questions about surety bonds or want additional advice to build trust with a surety agency, call Surety Place at 866-430-3322 or contact us online. We are happy to answer questions so you feel confident when you receive your next surety bond.