Surety Bonds – Prepare Now for 2016

The Construction industry is now seeing expansion with an increase in public sector and a boost in private sector funding; the outlook for 2016 is very positive.

While 2012 & 2013 saw many of the well known surety providers move to reduce their exposure or exit the Irish market altogether and banks still reluctant to provide bonds for contractors the last year has been a prime opportunity for new entrants to the market. If you’re a contractor who has bonding requirements then 2016 whether small or large there will be ample capacity available.

Surety bonds provide financial security and construction assurance on building and construction projects by assuring project owners that contractors are capable of performing the work and will pay certain subcontractors, labourers, and material suppliers. If a contractor was to think of bonding as if the surety company was sitting at the negotiation table alongside them and saying “Go ahead and feel confident in dealing with this contractor. If something does go wrong I’ll take care of it, I’ll make things right or getting the building finished will be my problem not yours”. So when a government or private entity awards a contract to the lowest bidder, it knows that the surety bond company stands behind the contractor’s promise to complete the job according to the owner’s specifications and terms of the contract. In short the surety is lending its good name and reputation to the contractor.

Bonding needs to be deemed as a strategic product by contractors, they should engage with a surety with the intention of building a long-term relationship, one that is similar to their banking relationship. 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.

The company should engage someone within the company or a bonding broker who can organise their 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 bonding capacity often a specialist broker can suggest creative ways to increase capacity like personal guarantees, set-aside funds or joint ventures. The bottom-line is that contractors will get bonds based on how much liquid assets they maintain in their company. The more you have, the larger your bonding capacity will grow.

What should contractors do?

Firstly they must understand that if they are going to be assessed on an in-depth basis including their credit score, financials, experience, banking relationships etc , to be successful they will prepare for this examination.

Take steps to do the following:

  Have your audited accounts completed early preferably within 90 days of year end, do not wait until September/October

  Keep up to date management accounts

  Improve your balance sheet, keep liquidity in the business

  Increase your share capital – may seem like a small thing to do but shows your vested interest

  Purchase credit insurance, you need to know you can get paid

  Engage with credit rating agencies to try to improve your score

  Building relationships with surety providers, credit insurers and credit rating agencies must be seen as a priority and part of the overall businesses strategy

Once the above has been achieved it will be easier for contractors to maximise relationships with their clients and providers.

It is my opinion that surety bonds is a completely underutilised form of protection in Ireland and if used in the correct manner could help secure contracts for Irish companies giving them a competitive advantage over other bidders. By utilising a surety over a bank guarantee or letter of credit they are also freeing up their credit lines, this allows for better use of financial resources elsewhere.

In conclusion the message from the sureties is for contractors to prepare their finances early, keep management accounts, proactively provide updates and meet with underwriters where possible. Contractors who want to be ahead of the game and have a competitive advantage need to be prepared in order to reap the rewards in the long term.

Surety Bonds, Insurance House,

Main Street,

Carrick on Shannon,

Co. Leitrim.