7 surety bonding habits of successful contractors

Successful contractors know the importance of keeping their surety bond rates low and their bonding capacity high — but how does one do that, exactly? 

Much of it boils down to the efficient, reliable performance of your construction business.

Surety companies exist to guarantee that the principal (the contractor) will fulfill the obligations set out in a project contract or agreement, which is why they prefer to work with contractors they can trust. Through the bond underwriting process, the surety will ask a lot of questions about your operations and past performance, all with the goal of understanding what your company can reasonably be expected to accomplish. Contractors with question marks about their trustworthiness may face higher premiums and lower bonding limits, impeding their ability to grow (or even sustain) their business. 

Here are seven habits that can positively impact your ability to purchase surety bonds, as practiced by the most successful contractors. 

1. Talk to your surety agent about changes in market or focus

Every contractor develops their own niche or specialty over time, which helps to create a stable, long-lasting business. It’s when contractors work to expand beyond those limits that trouble typically creeps in. Unfamiliar territories, new project owners and different project types all take time to understand. That can impair a contractor’s ability to deliver projects on time and within budget, and have ripple effects throughout the business from bonding capacity to cash flow.

Successful contractors understand the risk of exploring new sectors and territories. They keep their professional team (including their surety agent) informed about all decisions and actions. That ensures they have the most up-to-date advice and help handling the challenges that inevitably pop up on construction projects.

2. Practice good risk management

A contractor’s surety bonding rates and capacity are based on its track record, financial strength and relationship with its surety provider. Set your contracting business up for success by practicing good risk management on site and in the back office, so you can avoid costly claims and defaults.

Some of the best risk control practices for contractors include:

• Identifying potential risks, such as safety hazards, delays, budget overruns or damage to property.
• Developing plans to manage and mitigate those risks.
• Communicating about risk with all stakeholders on a project, including the owner, suppliers and subcontractors.
• Using contracts and insurance to allocate and transfer risk to the appropriate parties.

UFG Risk Control consultants have tips to build out a risk management plan.  

3. Make strong business continuity and succession plans

Risk control isn’t just about avoiding risk — it’s about reducing impact when the worst comes to pass. Successful contractors take the time to build strong business continuity and succession plans, so they’re ready when that big storm hits or their CEO suddenly decides it’s time to retire.

The strongest business continuity plans include:

• Risk assessments in all areas of the business.
• Risk mitigation strategies, including risk avoidance, risk transfer and risk reduction.
• Crisis management plans for worst-case scenarios.
• Succession plans for leadership and other key personnel.
• Guidelines for testing and training employees on business continuity plans.

A well-prepared contractor will enjoy more stability, and by extension, more access to affordable bonding for future projects. If you don’t have a business continuity plan in place, now is the perfect time to create one. If you do have a plan, consider giving it an update.

Read more about business continuity plans here. 

4. Understand your internal controls and how to use them

Successful contracting isn’t just about being on time, on budget and injury free — it also means being efficient with estimation, bidding and invoicing so the business can grow. That requires solid internal controls and software, and managers that understand how to use them.

Some contractors are surprised by the level of detail about internal controls that’s requested as part of the bond underwriting process. A surety agent or underwriter may want to know about your estimating, accounting or even cyber security practices. Successful contractors understand the importance of these functions and build an understanding of how all the pieces work together to build a stable business.

5. Grow smart, not fast

The over-extension of business operations is a leading cause of contractor failure, which is why surety agents and underwriters focus so closely on internal controls and other business processes.

Unfortunately, there’s a lot of temptation for contractors to fill up their backlog with work — even if that means taking on bigger or more complex projects they aren’t necessarily ready for. Taking on bigger projects means more overhead for staff, materials and office space; that can result in more operational growth than balance sheet growth, which is a big warning sign for many surety agents and underwriters.

Successful contractors take a purposeful approach to growth, ensuring that every project and client is the right fit for the business. With more predictability in growth and operations, you may enjoy more reliable surety bond premiums and a bonding capacity that grows with your company.  

6. Know your subcontractors and manage them well

On larger construction projects, subcontractors are the ones performing the actual work on-site, so it’s important to do your due diligence and have solid vetting processes in place. Without them, your risk of project default goes up, whether that’s due to poor workmanship or incomplete work.

Successful contractors make sure they have the following in place when it comes to hiring subcontractors for a project:

• Vetting processes for all subcontractors that include checks of their references, safety record and insurance coverage.
• Prequalification processes for key subcontractors, such as those working on projects worth a certain dollar amount.
• Resources dedicated to supervising subcontractors in the field.
• A subcontractor bonding policy, such as requiring bonding for subcontracts over a certain dollar amount.

7. Build a good relationship with your surety

If your construction business practices the previous six steps, odds are this step will take care of itself. It goes without saying, however, that you must treat your surety agent and company as key members of your business team.

Your surety agent is invested in your business's success, and often becomes a trusted, knowledgeable advisor to the most successful contractors. You won't be able to grow your contracting business without adequate bonding capacity, so it's critical that you continually build a sense of trust and commitment with your surety team. By doing so, they'll feel more confident in your abilities to handle the projects ahead.

If you're ready to improve your bonding and build your contracting business, reach out today to UFG Surety's team of responsive, trusted and knowledgeable professionals. Our expertise as a bonding company with a more than 70-year history can help position your company for success.