Capacity is one of the “three C’s” of surety underwriting (Capital, Character, and Capacity). Many contractors get hung up on capacity. Capacity is the contractor’s ability to complete the particular job. To that end one part of analyzing capacity includes qualification of the obligee (owner).
In the event of a claim the surety is responsible for all terms of the contract. They stand in the shoes of the contractor. Bad owners or bad contract terms can have a direct impact on the surety. In that case the underwriter’s analysis is really for the benefit of the contractor. Yet, many contractors get upset when underwriting refuses to approve a bond due to capacity issues.
Let me explain. A couple of years ago a long time client of ours requested a final bond for a project where the owner was a non-profit organization. Underwriters do not worry too much about the financial wherewithal of public entities (though in this market maybe they should) but non-profits or notorious for being under funded. In this case underwriting approved the bond on the condition that the project funding be verified. The surety wanted the financials and funding verification of the non-profit. Our client was extremely agitated by this and accused the surety of being unreasonable. The obligee must have felt the same way so they waived the bonds. I always say that if a job is bad for the surety it is bad for the contractor. Low and behold a year later I noticed several lien filings on this job. Apparently the job was going to be funded as the project progressed through donations. The contractor did not get paid and was hung with a very large receivable. His reputation is damaged. Credit from his suppliers has been cut off. It is likely that the contractor will have to shut his doors.
We take no pleasure in being right about this but it is food for thought.