There are several reasons why the Letters of Bondability do not satisfy the intent of the owner or obligee. First we must look at the letter from the perspective of the surety. Prequalification of the contractor is one of the major elements of a performance bond. It has the same relationship as lumber has to a carpenter. When project owners ask for prequalification without final bonds later they are in essence stealing the surety product. While many public owners do in fact require the eventual final bonds the majority of the general contractors who request these letters are doing so with the intent to have evidence of prequalification but no intent to actually require the final bonds. In the case of the latter this is no less than theft. The Surety Information Office has promulgated the detail of the prequalification process in their article entitled Contract Surety Bonds: Protecting Your Investment.
Prior to approving a line of surety credit and issuing final bonds the surety companies conduct a rigorous investigation into the contractor’s character, capital, and capacity. Prequalification of a contractor involves extensive reference checks, financial analysis, verification of past work, and specific project analysis. This is done at a significant expense to the surety.
The process of qualifying a contractor for a letter of bond ability presents several issues for the surety. The surety is not afforded the opportunity to truly analyze the specific project. They really cannot practically use valuable recourses that do not result in writing bond premium.
When being asked to write a letter the surety is normally providing a basic review under the most favorable conditions. In other words these letters are being written with the question of whether the bond would be written under any circumstances. It is surface review that creates a problem for both the principal and obligee. For example, Contractor Chuck’s issue with further digging revealed that the request would have been considered if Chuck posted $400,000 in collateral and agreed to third party administration. Onerous bond terms do not equal declination.