By Steven Golia
Bid and Performance Bonds are routinely needed by construction companies that seek to perform public works projects such as federal, state or local municipality work. Students of the industry are familiar with the "3Cs of Bonding" which are intended to describe the key elements of decision making in surety bond underwriting:
- Character: Does the Principal (bond applicant) have a credit record and other history suggesting good character and that they will be faithful to their obligations?
- Capacity: Does the Principal have the skill, experience, knowledge, staff, plant and equipment necessary to perform their contracts?
- Capital: Do they have the financial wherewithal to finance the new project as well as other current obligations and address any problems that arise?
To understand why these are relevant, let's take a step back and review the premise under which surety bonds, such as Performance Bonds for construction contracts, are given.
If you read our previous issues of "Secrets of Bonding," you will recall that bonds are not insurance and sureties do not anticipate claims or losses the way insurers do. Therefore, the underwriting process is intended to reveal if the bond applicant is likely to succeed without involving the surety.
Surety underwriters dig deep, ask questions, and require proof. As far as humanly possible, their goal is to have certainty that the Principal can fulfill the obligations that are covered by the bond.
At the end of the underwriting process, the underwriter should arrive at what I'll call the "4th C of Bonding." It is the most important one of all because no applicant has ever gotten a bond without it.
It is CONFIDENCE. When the 3 Cs are evaluated, if the underwriter is confident in the principal's ability to perform, the bond is approved and issued.
With this in mind, applicants must work through a sometimes arduous underwriting process where information must be gathered, submitted and sometimes re-submitted. Banking records, references, and supporting documents may be requested. It can go on for weeks. If you like paperwork, raise your hand!
The 3Cs are all important. But now you know about the critical 4th C. Without it, no bond was ever written.
Steve Golia is an experienced surety bond underwriter and bond counselor. He can be reached at 856-304-7348.
Article Source: http://EzineArticles.com/?expert=Steven_Golia
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