As the name implies, a contract bond guarantees the performance of a contract. It involves three parties: the project owner (obligee) who enters a contract with the contractor (principal) to fulfill the terms of conditions of the contract. The third party is the surety agency, that issues a contract bond to the contractor.
If the principal fails to perform their contractual duties, the obligee can file a claim. Once a claim is proven, the surety agency can hire a temporary contractor to complete the contract or reimburse the project owner for any financial loss sustained.
The contract bond application can vary among surety companies. However, surety agencies use a number of factors for assessing candidate’s application. These factors include the candidate’s credit score, their financial records, etc.
Even if a contractor successfully clears the initial assessment process, there are some circumstances that can raise red flags for a surety agency.
If you are applying for a contract bond, here are some scenarios that can prevent you from getting it:
If you have an existing claim with a surety agency, try resolving it as quickly as possible. No surety agency will approve your contract bond request if you have any outstanding claims.
Project Outside A Contractor’s Specialty
How does a contract bond underwriter determine if a contractor can successfully perform their duties? One of the most important things they look for is how much experience a contractor has in the field. Not having adequate experience can be an issue.
If you are taking on a project that is outside your specialty, your underwriter may ask how you will successfully complete the project. Perhaps, you have you hired new employees who have the necessary skills and know how to manage risks and complete the project.
Excessively Large Project
If you are signing up for a construction project that is much larger than what you’ve managed in the past, it is a major concern for an underwriter. There is a great chance that you might not be able to handle it.
In this situation, submit an action plan to the underwriter that highlights how you will complete the project successfully.
Project Outside A Contractor’s Location
A project outside the regular geographic territory of a contractor can be a problem. This is because due to the extra costs involved, such as equipment, labor, and more. Also, the market conditions can differ from one location to another location.
If you are taking on a project that is outside your normal territory, inform the underwriter why you are choosing a new location and what kind of resources you have to deal with the increased risk.
No CPA-Prepared Financial Statements
Last but not least, your financial statements must be prepared by a Certified Public Accountant (CPA). CPA-prepared financial statements are verified and more reliable than internally prepared financial reports.
To apply for a contract bond in your state, contact us.