Masonry Magazine April 1993 Page. 44
Sureties Offer Credit, Not Insurance
The function of a surety is to prequalify a contractor, guaranteeing that he will be able to fulfill his responsibilities under a construction contract.
By SHEILA WIRTZ
Berkshire Consulting Group
Surety companies offering bonds to construction contractors are really offering credit similar to bank credit, not insurance. With a bond, a surety company and applicant join together to guarantee financial protection of the assets of a third party; the bond doesn't protect the applicant's assets, as insurance would. Further, in writing a surety bond, no loss is expected; with insurance, the premiums from any insured parties provide a reserve to pay for some expected losses.
H. Donald Peterson, an agent specializing in surety bonding and insurance for contractors, said that the function of a surety is to prequalify a contractor, guaranteeing that the contractor will be able to fulfill his responsibilities under a construction contract. He spoke at the Construction Contractor Conference sponsored by the Illinois CPA Society.
To obtain bonding, a contractor must provide sound financial income to the surety, Peterson said. "A credit-worthy contractor can be turned down if the documentation is sloppy," he said. It's important to choose a professional bonding agent who will not "shop" the contractor's account and a construction-oriented accountant who will provide the information in the format expected by the surety. Sureties also like to see contractors use banks that are experienced in construction.
It's important to develop a relationship with a solid surety. The U.S. Government Treasury Department offers a list that rates bonding companies on their financial strength. The Best Guide is another source of information on sureties.
The contractor's presentation for the surety should include an aging of accounts receivable and accounts payable; information from the contractor's bank; fiscal year-end financial.
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