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Performance Bond Underwriting – The Three C’s




We get calls almost every day with the simple questions on performance bonds, “What do you guys look for” or “How do I increase my bonding.”  While bonding can get complicated on different levels, the simplest answer is that performance/payment bonding credit is based on the surety industry accepted three “C’s.” They are Character, Capacity, and Capital.  Each characteristic has several factors.  Here are some for each:

Character – When analyzing character, the underwriter will consider personal credit, including that of the principal’s spouse, business credit, bill pay history, management experience, past judgments and/or liens, standing in the community, among others.  Essentially, if you are lacking in any character issues it doesn’t mean you won’t get a bond, but it does factor into the decision making process.  How to maintain and improve?

  • Pay bills on time, every time.
  • Pay off any old bills.
  • Keep credit lines available but unused.
  • Consult with your bond agent for any major financial events, good or bad.
  • Explain past due items and acknowledge mistakes.
  • Keep an updated resume.

Capacity – This is essentially the contractor’s capability to complete the work.  The underwriter will examine company staff, estimating team, supervisory skills, project management, internal controls, management, among others.  This is a critical element to the picture.  Having superior capacity to help manage the complex nature of construction will help qualify a contractor. How to maintain and improve?

  •  Set up strong internal controls
  • Estimating and project management systems
  • Quality internal financials with Work-In-Progress reporting
  • Timely internal reporting.
  • Hire good people.
  • Keep up to date resumes on your key employees.
  • Track job profitability.

Capital – This is the money and financial resources a construction firm possesses – and at the end of the day, is the most important “C.”  Profitability, working capital, cash, credit lines, debt to equity ratios, equity, personal financial strength, all factor into the capital assessment of a company.  The old saying “cash is king” holds true in many ways with bonding. How to maintain and improve?

  • Beefing up Capacity should lead to profitability.
  • Reinvest in the company – most contractors consult with their CPA at year end but savvy contractors that understand the value of bonding also consult with their bond agent.
  • Restructure debt accordingly
  • Converting short term debt to long term can instantly increase your bonding.  Recapitalization vs shareholder loan.

Bonding can be complicated but if a contractor keeps the three “C’s” in the back of his mind when making decisions on behalf of his company, it will lead to an increase in bonding.  Contact Surety1 at 877-654-2327 or by email at contract@surety1.com for a consultation of your bonding program.  We can help build your three “C’s.”

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