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Contract Surety FAQs

 

Why choose Anderson & Catania for my surety bonds?

We are specialists. Bonds are our only line of business. This means that your decisions about bonding are not compromised with your insurance requirements. Relationships with over 20 bond markets allow us to deliver what is best and most efficient for our clients. This is always our goal. We do not focus on what the client is bringing to us, rather what we can bring to our clients. We strive to structure the best possible terms and conditions that are available in this ever-changing bond marketplace. We are about making the surety bond process as easy as possible for you. We understand the markets and what underwriters are looking for, which helps you understand the process of obtaining surety bond credit. We welcome your inquiry and will share with you our references.

 

What type of financial statement do I need?

There are three types of financial statements: a compilation, a review, or a full audit. The vast majority of bond companies require a CPA reviewed financial statement given on a percentage of completion basis. This provides the underwriter with information on how open contracts are progressing as well as data on closed contracts. This type of presentation also shows how much a contractor is overbilled or under-billed. It is important to provide this kind of presentation if a contractor wishes to maximize their surety bond credit. It is also helpful if the CPA is a contractor-oriented accountant who can help the contractor with the appropriate internal cost control systems.

 

What is indemnity?

When a contractor is bonded, an Agreement of Indemnity is executed. This holds the bond company harmless and will indemnify them of any loss or loss expenses if a claim in made against the bond. In the majority of cases, both corporate indemnity and personal indemnity, of owner(s) and the spouse(s) is required. Generally, personal indemnity only comes into play if the corporation has exhausted all possible assets. The bond company must complete all bonded obligations in order to determine the full extent of a shortfall. Realistically, personal indemnity serves to boost confidence in the character of the contractor, to the surety bond underwriter.

 

What is the cost of a bond?

For contract surety, the costs for bonds vary, but generally are one to three percent of the contract amount. These are determined by rates filed by the bond company and a number of factors that include:

  • Type and length of contract
  • Financial strength of contractor
  • Capacity of the bond company. For commercial surety, premium is based on the type of bond obligation.
 

What happens when change orders modify a bonded contract?

This is common. Change orders usually mean an increase in the price of the contract. Upon completion, most bond companies will send a 'contract status inquiry' directly to the owner to determine what the final contract amount was, in addition to other information about the job and contractor to be use for future reference. Assuming the final amount was greater than that for which the bond was written, the bond company can charge an additional premium based on the rates offered.

 

Is a surety bond a kind of insurance?

Although surety bonding is considered a line of insurance, it has many characteristics of bank credit. The surety does not lend the contractor money, but it does allow the surety's financial resources to be used to back the commitment of the contractor, thus enabling the contractor to acquire a contract with an owner. The owner receives guarantees from a financially responsible surety company licensed to transact surety-ship.

 

Does bonding decrease an owner's risk in a contract?

Yes. With a surety bond, the owner can be satisfied that a risk transfer mechanism is in place. The risks of construction, which can be very great, are shifted away from the owner to the surety. If the contractor defaults, the surety may pay for a replacement contractor, finance the existing contractor, or provide technical and/or financial assistance.

 

Who bears the responsibility of acquiring a bond?

To bond a project, the owner simply includes the bonding requirement in the plans and specifications for the project. Obtaining bonds and delivering them to the owner is the responsibility of the contractor who will consult with an independent bonding agency.