BY CHRIS DARDARIAN, SINCLAIR-COCKBURN FINANACIAL GROUP

In the construction business, there comes a time when every contractor runs into the “S” word, or what is formally known as surety. Initially, a contractor will have many questions. What is a surety bond? When and why do I need it? Who requires it? And most importantly, how much does it cost? These are all important questions. Contract surety is a form of insurance, however, it is insurance for the clients rather than the contractor. It is really more like credit for the contractor. For this reason it is much more involved than insurance, and unfortunately, not everyone will qualify.

WHAT IS A SURETY BOND?

A surety bond is usually requested by the property owners and written by a third party (usually an insurance company). It is generally only for government, public sector work, but sometimes private sector owners will ask that a surety bond be included in the bid. The bond is written on behalf of a contractor and either guarantees the contractors’ bid or the performance of a contract, or the payment of a supplier or subcontractor.

DIFFERENT TYPES OF BONDS

There are different types of bonds. The “bid bond,” which is required during the bid stage, is usually 10 per cent of the tender amount. This amount covers the difference between the lowest and second-lowest bidder, should the lowest bidder not sign the contract once awarded. An agreement to bond is also required during the bid stage and commits the surety company to provide performance and labour and material bonds, should the contractor be the lowest bidder. The performance bond guarantees performance of the contract, while the labour and material bond guarantees that the subcontractors and suppliers will be paid. A typical bond facility will have an annual administration fee of $2,500 and bond premiums will typically be one per cent of the contract amount. These costs may vary depending on risk. It is important to note that these costs should always be carried in your estimates.

HOW TO APPLY FOR A BOND

A surety facility or operation can be obtained by calling a surety bond expert who also acts as an insurance broker. Not all insurance brokers are surety specialists, so it is important to have someone represent you who knows and understands the market. You will need a surety bond facility if you will be bidding on municipal or other government-level work. Some commercial jobs may also require bonding. The bond company will have a list of questions on the type and size of work you are pricing, your company’s history and experience, financial condition of the company and business plan. Specifically, the bond company will require a questionnaire, large job references, a bank terms and conditions letter, work in progress schedules, personal net worth statements and financial statements for the operating and affiliated companies. Financial statements are the most important part and must be prepared by a chartered accountant. Without the statements, it is extremely difficult to secure a bond facility. There are also certain capital requirements, as well as minimum cash flows, that must be maintained. Once this information is obtained, clarification may be required and a meeting with the bond company may be organized. This is always a good idea so that both parties can get to know each other. Surety relationships should be viewed as long term and it is important that your surety company knows you and is comfortable with you.

This may sound like a lot of time and effort; however, once the facility is in place, it is simply a matter of maintaining information. With the help of a knowledgeable broker, it is a painless process. The surety facility will also allow you to eliminate a lot of competition, and bid on larger, more complex projects. Being able to say you have a surety facility is also a great marketing tool as it infers that your firm meets a certain standard. If growth in the public sector is your goal, then it is important you look into a surety bond facility to know what is required to qualify, because the “S” word could become one of the most important parts of your company’s success. LT

Reprinted from Horticulture Review, December 2006.