Obtaining Bonding Capacity

The Construction industry is now seeing expansion with an increase in public sector and a boost in private sector funding; there is now a positive long-term outlook.

While many of the well known surety providers moved to reduce their exposure or exited the Irish market altogether during the downturn and banks still reluctant to provide bonds for contractors the last year has been a prime opportunity for new entrants to the market. For small to large contractors there is ample capacity available, the issue for many contractors is “do they qualify”?

For project owners, making the right choice to mitigate and manage risk on construction projects by selecting the most suitable contractor who will ensure timely project completion are imperative to a successful project. Gambling on a contractor or subcontractor whose level of commitment is uncertain, or who could become bankrupt halfway through the job, can be an economically devastating decision and if this is a public procurement contract then it’s the tax payer who loses. Surety bonds offer the optimal solution: they offer outside assurance that the contractor is capable of completing the contract. Mandating the bond requirement not only reduces the likelihood of default, but with a surety bond the project owner has the peace of mind that a sound risk transfer mechanism is in place, the burden of construction risk is shifted from the project owner to the surety company.

Is your Bonding holding you back? Any ideas how you can get more capacity?

As a contractor your bonding capacity is a reflection of your financial strength, financial reporting, management team strength and how it is presented to a bonding company. The first thing you need to do is to find a bonding broker who specialises in providing bonds to contractors. Some insurance brokers offer bonds as an add-on service to their insurance business but are not experts in bonding. An experienced bonding broker will help you organise your financials and present them to bonding companies in the best manner possible. Often, presentation and accuracy are as important as the financial numbers. There are different ways to maximize your bonding capacity for example, personal guarantees, set-aside funds or joint ventures. The bottom-line is that you will get bonds based on how much liquid assets you maintain in your company. The more you have, the larger your bonding capacity will grow.

How can sureties accept the risk?

Sureties are able to accept the risk of contractor failure based on the results of a thorough, rigorous and professional process in which sureties pre-qualify the contractor. The prequalification process is an in-depth look at the contractor’s business operations. Before issuing a bond the surety company must be fully satisfied that the contractor has, among other criteria:

• Good references and reputation

• The ability to meet current and future obligations

• The experience matching the contract requirements

• The financial strength to support the completion

of the  contract

• A good to excellent credit history

• An established bank relationship and line of credit

Bonding Capacity – A key business strategy?

Most business owners would not know that every company in Ireland is listed on at least 10 credit rating agencies and 8 credit insurer databases. A company’s credit rating is their businesses’ most important calling card. If they do not meet surety’s criteria, the meeting is over before it has even started. It is now time for contractors to stop seeing bonds as a commodity insurance product and realise it is a strategic financial product which is built on relationships, and when successful, has many advantages. A bond facility should be deemed as important as a bank loan or overdraft facility. The relationship a business owner has with their bank manager should be mirrored with their bond provider. Contractors should note, that bonds provided by sureties have an huge advantage over bank bonds, because there is no impediment on the company’s ability to obtain further credit or effect existing banking credit lines, this allows for better use of financial resources elsewhere.

While we have seen new entrants to the market providing more than adequate capacity they are not there as provider of last resort, or to provide solutions for overly distressed balance sheets. The days of 1%-3% rates are also gone, new entrants are going to look for an increased rate for taking on risk. Contractors who want to be ahead of the game should embrace the requirements of sureties, it will reap rewards in the medium to long term. Contractors who can obtain bonds have an immediate competitive advantage over other contractors. 

Colm McGrath,

Managing Director,

Surety Bonds

An independent bonding intermediary.

Surety Bonds,

Insurance House,

Main Street,

Carrick on Shannnon,

Co. Leitrim.

T: 071 9623228

E: bonds@suretybonds.ie

www. suretybonds.ie