Obtaining and Maintaining Surety Credit

By | April 8, 2011

By Randy C. Emery


Bonding, better known as surety credit, is just that, credit.  It’s a credit-driven product provided by the surety divisions of various insurance companies.  It’s considered a special product that requires a much different underwriting process than insurance.



Suretyship exists when one party becomes obligated to another party for the debt, obligation or default of a third party.  Perhaps the most common example of individual suretyship today is when someone co-signs for another to buy an automobile.  If the purchaser makes all the monthly payments on time and fulfills the contract terms, the co-signer (the surety) has no obligation.  However, if the purchaser fails to pay, the co-signer (surety) is called upon to bring all payments current, and also faces liability for any collection costs, including attorney fees, incurred by the lender.


Contract Surety:

Contract surety is a similar process.  The contractor enters into an obligation to complete a construction project and is obligated to the owner or general contractor to complete the work per the plans and specifications, and to pay all subs, suppliers, laborers, etc, such that the finished product is a lien free project.  In the event of failure on the part of the contractor, the surety, i.e. the bonding company is obligated to complete the contract and pay all subs, suppliers, laborers, etc.



As earlier indicated, surety or bonding is a credit product and is, therefore, underwritten much like that of any other credit.  Imagine going to your bank and requesting a $1,000,000 unsecured loan.  All those underwriting questions about re-payment, financial condition, and documentation they would request, the bonding company would request as well.  Also much like the bank, the more complete the information provided, the more accurate, more current, and the better quality of information provided, the more likely the credit will be approved.  This is a critical key in the surety or bonding process.  It is absolutely critical that you, as a contractor seeking surety credit, be in a position to provide as much underwriting detail as necessary, in as timely a fashion as possible.  These are the tools of the trade.


The reality is that the poorer the material, the poorer the process and the weaker the outcome; it’s that simple.  Imagine requesting your labor force to complete a job without the proper or adequate tools.  Would you prefer to lift the shingles onto the roof by hand or with a boom lift?  Dig a basement with a shovel or a track hoe?  It really does come down to this.


What is needed:

Maintaining an active bond program with any surety requires an up-to-date file.   Bond requests are much like any other extension of financial credit and providing the bonding company with current financial and company documentation is paramount in the approval process.  The more current the information, the quicker the bonding company can respond to bond requests.  Equally important:  The better the quality and accuracy of the details the better the bond program and the more aggressive the bonding companies will be with individual bond requests.


Here is a list of basic underwriting data that should be maintained in a quality bond file, and the frequency of collection:


Annual: (at about 60 – 120 days after the fiscal year end)

  • Year End CPA Reviewed or Audited Consolidated financial statements, prepared on a percentage of completion bases.
  • Completed and In-Process job schedule showing over and under billings and estimated costs to complete.  Should be dated the same date as the financial statement.
  • A/R & A/P Aging Report as of the same date as the financial statement.
  • Owner(s)/Indemnitor(s) personal financial statement, including balance sheet & income sources.
  • Related/affiliated company financial statements that are not consolidated into the year end statement.
  • A bank letter showing credit history and current borrowing capacity.
  • Client’s explanation to adverse items on the business and personal credit reports.


Quarterly (at about 20-30 days after the quarter end)

  • In-house consolidated interim financial statements, prepared on a percentage of completion bases.
  • A corresponding work on hand report showing both completed projects and current in-process projects.  This report needs to also show the current over and under billings as well as estimated costs to complete on each job and reconcile with the company balance sheet.
  • A/R & A/P Aging Report as the same date as the financial statement.


As Requested by the surety:

  • Ownership / Management succession plan
  • Company business plan
  • Company Organization Chart and resumes on key management and other employees


More often than we would like, the lack of up-to-date financial information or adequate time will cause the bonding company to decline bond requests, particularly when these requests are large enough that they require home office approval.


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