Surety: A Little Understanding Goes a Long Way

March 2, 2022
By Federated Insurance

Some plumbing, heating and cooling contractors feel that bonded work is an area that contractors may shy away from because they think it’s too complicated; possibly costing opportunities for profitable jobs. The reality is, contracted work — whether bonded or not — is more predictable because the terms, scope, price, and potential profit are all clear before the work begins. Contract work can actually offer your business potential for profitable growth. Understanding the basics of how bonds work will help remove some of the mystery and open up a new set of opportunities.

A bond is a three-party agreement, in which one party, the surety, guarantees that a second party, the principal (contractor) will fulfill their obligations to a third party, the project owner or general contractor. If the contractor fails to meet its obligations, the project owner or general contractor will recover its losses via the bond.

Types of contract bonds:

  • Bid bond – Guarantees that the bidder will enter into the contract if awarded.
  • Performance bond – Guarantees that the contractor will complete the job per the contract.
  • Payment bond – Guarantees that the contractor will pay the subcontractors and material suppliers involved in the project.
  • Maintenance bond – Guarantees against defects and faults in materials, workmanship, and design that could arise later if the project was finished incorrectly.

Contractors must qualify to be bonded. A surety will look at the character, capacity and capital of the contractor. In that way, qualifying for a bond is akin to being granted a loan from a bank. A bond does expose the business in the event of a default, since the business and its owners indemnify the surety, both professionally and personally, via an indemnity agreement.
Character takes into account a contractor’s history and reputation. Capacity is the ability to perform the work. Previous experience, resumes of key people, and equipment necessary for the job are taken into consideration. Capital is the financial strength behind the business. Personal credit of the owners, working capital, and equity are all important factors.
To start the process, a contractor will fill out a simple questionnaire and provide personal financials, business financials, or tax returns to their surety professional. An initial analysis will include a no obligation discussion about your business and its goals. For more information on how Federated can help you with surety bonding, please contact us to discuss.

 

Federated Mutual Insurance Company is PHCC’s exclusive corporate partner for property and liability, workers compensation and financial protection services. A leading national carrier specializing in the insurance needs of contractors, Federated offers property and casualty, workers compensation, life and disability income, and bonding through Granite Re, a wholly-owned subsidiary. For more information, contact your local Federated marketing representative or call senior national account executive Nate Oland at 1-800-533-0472.

*Bonds are underwritten by Granite Re, Inc, a wholly-owned subsidiary.

*Granite Re, Inc. Dba Granite Surety Insurance Company

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