Commercial Contractors Can Use Their Bonding Capacity as a Marketing Tool
Apr 19, 2010 Topics: marketing tips
Craig Noble
Upcoming Events about Bonding Capacity
Bondable construction companies are those that a surety company has evaluated their financial strength and track record for the successful completion of construction contracts in their past – and are therefore willing to “bond” that company’s performance on future projects. Meaning, a GC or subcontractor will pursue a surety company to commit to being their “bonding” company. So if construction project owners demand a “bond” from their GC, and all of the individual subs on their project – they are essentially requiring an “insurance policy” that the company will perform the work that they were contracted to do. And if that company fails to perform the work as promised (for whatever reason), then the bonding company steps in and give the project owner the money to go out and hire a replacement. So in that sense, a bond works like an insurance policy on the payment and performance of the contractor’s work.
Project owners require contractors to be “bondable” on their projects MUCH more often in the public sector than in the private sector.
Each company will try to secure a surety/bonding agent to give them a bonding capacity. The more successful and financially strong the company has been, with an excellent track record throughout the years, the more likely that company will be to receive the bonding they desire. Construction bonding capacity generally come in 2 levels – they get bonded to a $ amount for any given single project (say a limit of $10,000,000 per project) and then they are usually capped for a total bonding capacity for ALL of the projects that they may have under bond. For example, Moss and Associates has a single project bond limit of $250,000,000 and a total not to exceed limit of $750,000,000.
Again, depending upon the company’s financial strength and track record, the cost of purchasing the bond will vary. If they are a really strong construction company with a great track record, the cost of the bond will go down (say 1-2% of the total project cost). If the surety company deems them to be a higher risk of performance, they will charge the company a higher bond rate of 3-4%, etc. Or, if a surety company deems you to be too risky at all, they will simply decline to bond you at all – which means that company is deemed to be NOT BONDABLE. Just like in the world of insurance – the worse risk you pose the higher the cost, or less likely you are to get coverage.
Construction companies can use their bonding capacity and bond rate as a selling tool. It is a credential that could help them get work that requires a bond, especially in the current economy, because many companies are losing their bonding capacities or paying higher bond rates. The companies that remain in good standing with their bonding surety and a have low bond rate are often looked upon as healthier and more trust-worthy. Even when a project owner does not require their GC and subs to purchase performance bonds for their project, they often ask the GC and the subs for their bonding capacities and rates – as an indicator of their past performance and track record for sound financials, cash position, and trustworthiness.
Your bonding agent will usually request to review your audited financial 1x/year – and they will evaluate the bonding limits and rates to you based upon their evaluation. If they deem your situation to have changed dramatically (for the worse), they could reduce your capacities or raise your rates – or drop you entirely. Conversely, if they like what they see, they could increase your capacities or lower your rates (because they deem you to be less risky). So, unlike insurance policies that expire, bonding is more like a long term relationship that is monitored over time (a minimum of 1x/year), and adjusted by the surety company based on what they find.
When a construction company has EXCELLENT track records and financials, they will shop around for the best possible surety company and seek the lowest possible bond rates – in order to use it as a selling tool for how financially strong they are.
Click here to learn why you should showcase you construction company’s bonding capacity online.
Tags: bond rate, Bondable construction companies, bonding company, commercial contractors, construction bonding capacity, construction project owners, construction projects, single project bond limit, surety company
