Brad Bush, Senior Vice President, HUB International Florida
Surety bonds are a common risk management tool in the construction industry and no less relevant to roofing contractors than other types of contractors and subcontractors. In Florida, roofers must be licensed to do business and have a license bond. A surety bond is an important financial guarantee that a contractor will meet industry standards as well as contractual obligations. The bond amount in Florida is $5,000, compared to Illinois ($10,000) and California and Minnesota (both $15,000). In Texas, the license bond requirement is $100,000. Additionally, roofers may need a surety bonding program for performance and payment bonds assuring owners and clients of the roofing company’s approach to business, capacity to complete work contracted and financial capital. A surety bonding program provides flexibility to the roofing company to know its bonding capacity and be selective on how it is used – bidding on larger projects, maintaining a steady backlog of work and avoiding any last-minute underwriting to secure new bonded projects. Understanding the ins and outs of surety bonds is essential.
A surety bond is a written promise that the requirements of a contract will be met by the contractor or its surety, an insurance company, which compensates for certain losses, if the promise is not met.
In addition to the Florida Statutory license bond of $5,000, roofing contractor often need this bond program which include:
Bid bonds – These are required for some projects in order to submit a bid. They can help a firm pre-qualify for projects, showing it is financially secure and meets underwriting standards.
Performance bonds – This guarantees work will be completed as outlined in a contract, providing recourse for defaults.
Payment bonds – In guaranteeing payment, this ensures the principal will pay subcontractors, laborers and suppliers for work
performed under the contract.
These types of bonds are a legal requirement for public construction projects at the municipal, state and federal levels. Additionally, performance and payment bonds are increasingly being required for private building projects by owners and their lenders as an important protection against contractor default. This is especially true in a post-COVID market seeing high interest rates, inflated construction costs and an ever-increasing shortage of labor at all levels of contracting.
One survey of contractors pointed to several reasons for growing surety use in the private sector:
■ More rigorous owner prequalification and review was cited by 96 percent of respondents.
■ Bonded projects during a slowing economy when defaults increase provides an additional level of protection.
■ Five times as many owners, both public and private, said bonded projects typically finished ahead of schedule compared to non-bonded projects. When defaults do occur, unbonded projects take twice as long to complete compared to bonded projects.
■ There was unanimous agreement among survey respondents that surety companies have a higher level of expertise, tools and resources available in a default situation to complete a project in the most timely and cost-effective way.
Qualifying for surety bond credit requires a contractor to meet the “Three C’s” of the underwriting process: character, capacity and capital. Information requested by the surety should be accurate and current. It includes:
Character – The applicant or principal should show a credit and business history that reflects good character and integrity, with a record of fulfilling obligations. Sureties will examine everything from personal and bank references to business relationships, credit reports and the owner’s personal financial statements.
Capacity – This shows the firm has the wherewithal to fulfill the contract – from skills, experience, knowledge and staff to equipment and facilities. What comes into play are past successful projects, backlog, continuity and succession planning, project management systems and financial controls and contractual language review.
Capital – The principal must show it has the financial strength to finance its operations – new projects, current contractual obligations and unforeseen obstacles. Sureties will require interim in-house financial statements as well as CPA-prepared annual reports. They will also examine internal cost control systems, work-in progress schedules, bank lines of credit and personal financial information.
An experienced surety broker – one who knows the construction industry as well as the ins and outs of the surety industry – will be critical in spotting red flags before the underwriting process begins and addressing them up front. This guidance, understanding
the expectations on the surety and the needs of the contractor, can facilitate the underwriting process and help ensure a positive outcome for all parties. The key to making this contractor/surety relationship work is open communication and transparency.
Brad Bush is a Senior Vice President in the Jacksonville region for HUB International Florida. Brad works throughout the Southeast and specializes in construction, working with contractors on both their surety and insurance needs.
Previous Article
Next Article