A surety bond is an agreement between three parties where the surety ensure the obligee (project owner) that the contractor (principal) will make an agreement with respect to the contract documents. When the contractor requires that its subcontractors obtain bonds, then the contractor becomes the obligee and the subcontractor becomes the principal.
The principal is the party that undertakes the obligation under the bond, the obligee is the party receiving the benefit of the surety bond while surety is the party that issues the surety bond guaranteeing the obligation covered under the bond will be performed.
Local and federal state governments require surety bonds for risk management for construction projects and protection of taxpayers money. The bonds can be used by both private and public construction projects. While this information does not fully cover the topic you can go to The OKC Law Arena and read more on the subject.
Steps followed when obtaining surety bonds
Surety bond agent
The first step entails looking for a surety bond agent or broker who specializes in contract surety. A surety bond agent is the one who guides a contractor throughout the bonding process. Understanding the business requirements, the agent adapts the contractor’s submission for the desired needs of the surety firm.
They will then submit the account to the surety company which best matches the contractor’s profile. Therefore, an agent plays an important role as a medium of communication between the contractor and the surety company.
Surety company underwriter
After gathering the information, the agent will forward the information to the surety company’s underwriter. The underwriter will give insight into the operations of the business and ensures its capability for the project.
Before underwriting the bond, the contractor has to go through a careful and thorough process known as pre-qualification. This process takes a lot of time as the producer collects and verifies information, verify necessary equipment available to perform the project and relevant experience with respect to the project. The agent will also review overall management and if the company can meet an obligation on time.
Financial statements and accounting methods
The surety will request that the contractor provides them with the fiscal year-end financial statements depending on how long the contractor has been in the industry. Financial statements of the past three years should be audited by a Certified Public Accountant or CPA in short.
The required financial statements include income statements, balance sheets, statement of cash flows, CPA’s opinion page, and schedules of account receivables and payables. General and administrative expenses, contracts in progress and completed contracts, management letters and necessary explanatory footnotes are also required.
Complete and accurate accounting systems are very important to surety companies as the percentage of accounting completing method determines the real and accurate financial condition during the accounting period.
Contractors are required to prepare a quarterly schedule of the work in progress. The schedule list should include total content price, changed orders, the cost incurred to date and amount billed to date.
The surety company has to perform its contractual obligation under the bond. They at times ask for a demonstration of commitment from the construction company owners through corporate indemnity.
The indemnity agreement protects the surety company from any loss or mishap caused by the contractor’s failure to fulfill the bond’s requirements. This ensures that the contractors will stand firm in case of any issues.