Any contractor who has ever tried to land a government construction job knows that such jobs are virtually impossible to get without a surety bond. Public-sector customers want assurances that the work will be completed (even if they need to call in a replacement contractor). What's less well known is that more and more private-sector customers are starting to ask contractors and subcontractors for proof of bonding as well.
In some ways setting up a bonding line is like applying for a bank loan. Ideally, notes Greg Gunn, president of Penn Property and Casualty, an insurance broker in Harrisburg, Pa., bonding companies want you to have plenty of cash and working capital.
If the need for bonding is on your horizon, it makes sense to begin planning. Here are some things to do:
Build a file of reference letters. Part of a bonding company's decision will be based on how you've performed for past customers. So get into the habit of asking those customers to write reference letters describing the extent of the job. Make sure your accountant understands construction. Nothing spooks bonding companies more than financial statements prepared by accountants who don't know the nuances of the construction industry. For instance, reporting needs to be done based on percentage of completion rather than on an accrual basis. "CPAs who don't know this will hurt your credibility," says Gunn.
Find an agent who knows surety bonds. Many insurance brokers say they can line up bonding, too. But most don't know the ins and outs half as well as specialists do, says Colette Nelson, executive director of the American Subcontractors Association, based in Alexandria, Va.
For names of agents, contact the National Association of Surety Bond Producers (phone: 202-686-3700) or the American Subcontractors Association (703-684-3450).