In contract bonding (mainly construction bonds) the most common term used for a broker or producer is an “agent” or “bonding agent.” When it comes to developing a bonding program for your company, the bonding agent that you choose is one of the most key decisions you will make. This person plays an instrumental role in you obtaining a bond and also growing your bonding capabilities to larger levels, ensuring the longevity of your company over time. As such, it is important to fully understand what is entailed in the scope of the bonding agent’s responsibilities.
The most important role a bonding agent plays is in matching the surety company’s desires to the contractor’s needs. The surety bonding industry has many different carriers, each with its own standards and practices when it comes to underwriting. Additionally, they also have preferences when it comes to a type of market, geographical areas, and company cultures for which they want to issue bonds. If a contractor and an underwriter have philosophical differences or a difference in appetite for a particular type of market, this will most definitely have an effect on one’s bonding capability.
A bonding agent with industry knowledge is a must, but one that has experience as a contractor who has “lived it” is even better. Why might you ask? It’s simple: a bonding agent has to perform a number of duties in order to give underwriting the information they need to issue a bond. This process is all the better when you have a bonding agent that understands contracting. Below is a description of some of the responsibilities of a bonding agent which are key reasons for choosing an agent with a contractor background:
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They can explain and advise the contractor about the process to acquire a bond.
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They serve as an objective observer of the contractor’s management practices, lending expertise and advice with sound business management principles.
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They will review and analyze the company’s financials in respect to current revenue as compared to past revenue trends, financial stability, and most importantly working capital.
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They will review works in progress (WIP) reports in order to decipher consistencies or inconsistencies in the profitability of current projects versus historical data.
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They will perform a review of current contracts as well as bids that have already been issued, discussing with the contractor the likelihood of obtaining those contracts. This tends to lead to a conversation of capacity and capability in respect to financial stability.
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They will review capacity and capability with respect to personnel, by reviewing resumes of key personnel, management, and on-site provisions.
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After such analysis, the bonding agent will match the contractor to a surety company that is best suited to helping the contractor achieve his goals.
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Depending on the size of the bonding program, the agent will help the contractor to either put together a formal or informal presentation to the surety company.
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Once the bonding program is underway, the agent will be actively involved with periodically obtaining and reviewing financial reports with the contractor to help ensure they are still heading down a successful path and update the surety company of the progress.
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The will also make site visits and meet at the contractor’s office so the bonding agent will be able to maintain excellent communication with the contractor. In doing so, the bonding agent and contractor can better plan for growth or adversities as they arise.
A contractor should look for the following qualities and attributes in an agent:
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Knowledge of or, even better, actual experience in construction estimating, project management, budgeting and cost accounting processes and controls
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Integrity and a strong level of respect in the industry
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Ability to build relationships with underwriters, bank officers, attorneys and CPAs
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Ability to analyze financial statements and work in progress reports in order to determine cash flow and working capital
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Ability to review and understand construction contracts and construction law
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A track record of successfully advising contractors through strategic planning and management systems
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A pulse on the local, regional, and national markets
A bonding agent is a key factor in a contractor’s ability to successfully establish a bonding program that is scalable and sustainable. If you’d like to learn more about how bonding might help your company grow, please reach out to Tysen Manross, our resident surety expert here by filling out the short form below.