“Prior Experience” There may be nothing more important when it comes to Bid and Performance Bonds. Let’s talk about why this is the case and how to develop this critical element of a bonding application.
In a real sense, the evaluation of a contractor’s prior experience is at the heart of surety underwriting. Remember, surety bonds are not insurance, and sureties do not expect to have claims or losses. A surety intends to provide bonds for proven applicants.
“In the last two years we built three projects of similar size and nature – all profitably completed and to the customer’s satisfaction.”
Surety questionnaires always ask about the large prior jobs so they can be compared to the upcoming bond opportunities. However, there is more to the process than just comparing the contract amounts.
Size, Nature, Location
Surety underwriters compare the new project size to the largest similar contract previously completed. Conventional wisdom is to not increase more than 100% over prior experience.
The prior job must be a single contract, not a series of assignments for the same owner and … must actually be completed to count. The difficulty of the work must match. Even if the dollar value was the same, underwriters would not bond a five story building if all the prior experience was on one story structures.
Location can help or hurt. A job located “in our back yard” offers a special advantage regarding ease of supervision and performance.
On the other hand, there can be unique challenges when contractors roam beyond their normal turf. Labor unions are different as is weather, ground conditions, labor productivity rates and other factors. Supervision of the work can be more difficult. Logistics for material delivery may be harder. You also have to ask yourself, on competitively bid work, how can our contractor perform the work more efficiently (cheaper) than the companies located there?
All these factors enter into determining if prior experience qualifies the contractor for the new project.
Here are some ideas that may help when contractors are “stretching” for larger projects.
- Best Foot Forward – Don’t skimp on the details when describing prior completed jobs. If the contract had addendums and the amount increased, the final contract amount is used for reference purposes. Include technical details such as major aspects of the work and any special accomplishments (completed ahead of schedule, received an award or other recognition.) Satisfied customers should be solicited for “good guy letters” upon completion. Such letters can be forwarded to the surety with the application.
- Inflation – A large job completed years ago would be worth more in today’s dollars. This analysis can be particularly helpful on larger projects.
- Prior experience of individuals – Key people may have strategic experience from their prior employment. Be sure to describe their actual responsibility.
- Directly Related Experience – The contractor may have worked for this owner or architect before. They may have performed the “exact same job” but in a lower dollar amount.
- Special Skills or Equipment – Staff members may have special training that uniquely qualifies them for the large project. The company could have behemoth or high-tech equipment that will facilitate the new contract.
- Ease of Performance – Is the contract actually a series of assignments to be performed sequentially – no one of which is beyond the contractor’s capabilities?
- Buddy up – A mentor, Joint Venture partner, or even a subcontractor can provide additional expertise for the new project.
- Analyze the Costs – Higher costs do not automatically mean greater difficulty. The labor portion of a contract is viewed as a greater risk than materials or equipment. An hour of labor can be performed inefficiently or incorrectly but a brick is a brick. When new projects include expensive materials, it can increase the contract price even though the difficulty may be no greater than prior projects.
The point is that the underwriting has to make sense. The management staff of the construction company knows their limitations better than anyone, and they have already decided the new project is a good opportunity with a reasonable risk. When presenting the file, you must explain why this is the case.
A special note from the author: Steve Golia
I am an Independent Broker and Surety Bond Specialist. If you wish to co-broker bond business, together we will deliver the best in bonding expertise for your clients. I have a broad range of markets available and often can solve problems even when others have failed.
Call me now (856-304-7348) or email: Steven.Golia@gmail.com