July 25, 2007

Large or small

Surety bonds available to qualified contractors

By Steven Ness

(SPECIAL)

We hear it time and time again. An owner or design professional who is about to let a small job out for tender will call the office of the Surety Association of Canada with what appears to be a dilemma.

Even though the job may be small, the owner is wisely looking to protect their investment and is exploring the idea of requiring surety bonds from the tendering contractors.

Unfortunately, they’ve received calls from one or more potential bidders telling them that they are unable to obtain bonding because they are “too small”.

This notion that small contractors can not obtain bonds is a long standing myth that has dogged the surety industry for decades.

Indeed, bonding companies have been accused of being a “barrier” to small contractors that effectively prevent them from participating in the construction market. It simply isn’t true, yet the myth endures largely because of a fundamental misunderstanding of bonds and how they work.

No contractor needs reminding that construction is a very hazardous class of business with a high ratio of failures to business starts.

Surety companies are painfully aware of this as well and must be diligent in their risk selection, or risk losing enormous sums of money.

When presented with a request for a bond by a potential bidder, a bonding company carefully examines that contractor’s operations, experience, financial strength and background.

If this in-depth review leads the bonding company to conclude that the contractor does not have the qualifications to carry out the job in question, the bond will not be issued.

It is a fact of construction life that not every contractor is qualified to undertake every job and by acting as the gatekeeper in this manner, bonds act as a barrier to unqualified contractors.

It follows then, that small and inexperienced contractors will have difficulty obtaining a bond for larger and more complex work which they may not have the expertise and organizational strength to carry out.

This is as it should be. Not only does this prequalification protect the construction buyer, it protects qualified contractors from less deserving competition and lends stability to what can be a very volatile industry.

Unfortunately, this prequalification process is often misunderstood as being unfairly discriminating against small or startup contractors.

Not so.

Across Canada thousands of contractors, large and small, have active bond facilities in place with member companies of the Surety Association of Canada.

Here are a few tips to assist small construction firms in obtaining that first bond:

— Get a professional surety broker: The broker’s job is to review a contractor client’s information and place their program with the company that is the best match for that business.

Unfortunately surety is a specialty line and some brokers are more knowledgeable about the surety process than others.

Having a surety specialist broker in your corner will greatly enhance your chances of securing that bond facility you need to bid that attractive job. Most surety specialist brokers are members of The Surety Association of Canada (www.surety-canada.com) and SAC will gladly provide a list of qualified brokers in your area.

— Give yourself enough time: Before a bonding company issues a bond, it must satisfy itself that you and your company are indeed qualified to see the job through to completion and deal with any problems that you may encounter along the way.

This can not be done “while you wait” and can take days or even weeks.

Probably the most often-cited reason for an unbonded contractor’s failure to obtain bonding has nothing to do with their qualifications. It’s simply that they haven’t given the bonding company sufficient time to do their job.

— Be persistent: Amazingly, many contractors who have had their requests for bonds declined proceed to throw up their hands without exploring any alternatives.

If you have received a declination from a bonding company, find out why. Bonding companies will typically be forthcoming about the reasons for their reluctance and sometimes these problems are surmountable.

If not, remember that the surety marketplace remains competitive and a declination from one firm does not brand a contractor as “unbondable”.

A number of bonding companies specialize in providing facilities to small contractors.

Still others have established small contractor divisions to handle this sector of the marketplace.

Qualified contractors can usually find a bonding company if they’re persistent enough.

As the challenges continue in the construction industry, more and more construction purchasers will look to protect themselves by asking for bonds from contractors.

Arranging a surety facility does not have to be an exercise in frustration and if approached methodically and professionally, it can greatly expand your potential for success.

Steven D. Ness is president of the Surety Association of Canada.

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