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The three Cs (and more): What contractors can do now to get bonding later

December 13, 2018 / 4 min read

Traditionally, bonding companies have looked at character, capacity, and capital to qualify contractors for surety capacity. But, communication and collaboration are just as critical.

 Building

Bonding is a three-way relationship between an owner, a contractor, and a surety (a company that issues a bond).

For certain construction projects, especially governmental, quasi-governmental, and larger commercial jobs, bonding is a necessity; however, there’s no guarantee that a contractor will be able to secure it. A contractor must convince a surety that it meets certain requirements, some of which can take time to get in order. That’s why construction company owners and managers need to think about bonding now rather than later when a project that requires a bond it is about to bid or construction is supposed to start.

Fortunately, well-run companies are likely to be very close to meeting the requirements. There are several specifics that bonding companies and their agents look for, and several ways companies can position themselves most favorably.

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The three Cs

Traditionally, bonding companies have looked closely at the “three Cs:” character, capacity, and capital to qualify contractors for surety capacity.

Ultimately, bonding companies want to know that a contractor will do the job they were hired to do and honor their various business obligations, including repaying debts.

Two additional Cs, communication and collaboration, are highly important as well:

Next steps

Securing adequate bonding capacity takes time and effort and requires building a strong relationship with a professional bond agent and surety company. Contractors need to meet with their agents throughout the year to establish or further develop such relationships. Contractors should be prepared to provide internal financials and contract schedules throughout the year; disclose potential or actual transactions that could impact their capital; and be proactive about communicating operational issues, such as job problems or losses.

Securing adequate bonding capacity takes time and effort and requires building a strong relationship with a professional bond agent and surety company.

Contractors should also focus on strengthening the company’s balance sheet by staying ahead on billings whenever possible to minimize financing the project for the owner. Other smart moves include being diligent with collecting receivables, including project retainage, and with any potential new debt and equity transactions. Construction company owners should determine a reasonable amount of equity to have in the company based on the relative size of the balance sheet and income statement by working collaboratively with their bonding agents, CPAs, bankers, and attorneys throughout the year.

Build trust

The relationship between a contractor and surety is built on trust. Construction companies can do many things to proactively build that trust and increase their bonding capacity. Because building trust takes time, contractors should take steps now to get their companies’ financials and other factors in order and share this information regularly with their bond agents, CPAs, and other service providers. This approach can help contractors avoid a last-minute scramble to secure bonding higher limits of surety capacity for their future success.

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