To provide an expert opinion on construction payment and performance bonding, I sat down with Ellen Neylan, owner of Surety Bond Associates, a WBE bonding agency and consulting firm providing specialist bonding services to contractors. children, minority women and veterans.
Projects submitted are often accompanied by a link requirement; Too often this is seen as an automatic disqualification for an unlinked GC. Ellen highlighted the abundance of options out there and the importance of differentiating all risk reduction tools from viable alternatives.
Many GCs are working with their insurance agencies to address bail bond needs without realizing that bail bond agents are their own specialty adding a different, more accurate value. Ellen explained to me the contrast between a surety bond and subcontractor default insurance (SDI), two concepts that can be easily confused. In almost all cases, SDI is much less than bail. Surety bonds exist to protect taxpayer money and the organizational health of a general contractor, while SDI serves to allow a GC to default on subcontractors quickly with no post payment protection for anyone. High deductibles are associated with it, and since there is no qualifying process to obtain this protection, it is much more of a high-risk instrument.
Along with the confusion that bonds and SDI appear interchangeable comes a misconception that bonds and insurance in general are comparable. I’ve heard the phrase “Bonds aren’t safe, they’re a credit instrument” before, and Ellen confirmed that in her Bond 101 workshop, this is an idea that is represented as fact.
Although insurance companies can provide bonds, contractors must qualify for the bond, which makes it quite different from insurance. Anyone can buy insurance if they can afford it, however bonds require an in-depth qualification process that fully vets a company.
Prior to my conversation with Ellen, I read that many bail bond professionals summarize their evaluation of a contractor using “the three C’s: character, ability, and capital,” and I was interested to know if this captured their interpretation of the Scope of Review of GC. He stressed that those are definitely the main ideas, however, the importance of each area is not equally weighted in thirds.
The guarantee typically places a 70% emphasis on financial strength. For capability consideration, the contractor’s project management experience and portfolio of work shape the contractor’s rating. Some factors that are evaluated include:
– Staff resumes
– Typical project valuation “sweet spot”
– Scope of work
– References with subcontractors, suppliers and banks
When evaluating character revision, this is a bit more challenging. Ellen rightly mentioned that one doesn’t realize a contractor’s true colors until a problem arises. Since bail bonds are essentially a partnership between the bail bondsman and the contractor, the bail bondsman should feel comfortable that the contractor can help them resolve any issues and keep their promises. The success of the project is largely tied to a GC working with collateral so they don’t have to file a loss.
So once you’ve taken the steps to link, what does it take for a business to take steps to increase that linkability?
Much of increasing bonding capacity involves not taking on jobs that are too large for your company’s bandwidth. Keeping as much cash in the company as possible and managing it strictly along with accurate labor cost accounting systems is key. A good CPA is critical to keeping a business online financially. Surety companies look for detailed financial statements because the accounting needs of construction are very particular to other industries. Building that team of a solid CPA, a bail bondsman, and a bank is a powerful trio.
Performance and payment surety bonds can seem confusing; however, with the guidance of a bonding expert, contractors can realize their full potential and not have to miss out on opportunities due to lack of bonds. There are many resources available to organizations seeking to link, and a “dead end” is far from being perceived as a linking stipulation.
About the interviewee, Ellen Neylan:
Ellen Neylan is the founder and sole owner of Surety Bond Associates. Ellen is a bail bond veteran with over twenty-five years of experience in the bail bond industry, holding positions with several major bail bond companies and serving in a variety of underwriting, management and operations, business, and product development roles. Ellen has lectured to various audiences on collateral principles and underwriting disciplines, and is an active member of the Pennsylvania and New Jersey chapters of the Guarantee and Fidelity Association of America.