By Andy Knutson, CPA
what is a bonding agent in the construction
In the commercial construction industry, it’s common practice for project owners (typically public entities) or general contractors to request a construction surety bond to protect against contractor or subcontractor default. To secure a construction surety bond, the first step is to contact a bonding agent. A bonding agent serves as the middleman between you and the surety provider (i.e., the insurance company) to determine which type of surety will best meet your needs.
But not all bonding agents are created equal. How do you know you’re working with the right one? Here are five questions to help you determine if your bonding agent is a good fit.
Is your bonding agent your advocate?
Your bonding agent should seek the best bond deal possible for you—one that’s appropriate for the circ*mstances of the project as well as your financial situation. This person should work hard to prove to the surety that your company will not fail on the project and to secure the best bond price. A good bonding agent will know what the market price is for the type of surety bond you need.
Also, be sure to find out if your bonding agent is truly independent or tied to certain insurance companies. If it’s the latter, that doesn’t necessarily mean the agent can’t advocate for you, but it’s wise to know this up front.
Does your bonding agent point out red flags on your financials?
To determine whether or not to issue a construction surety bond, an insurance provider will examine a contractor’s working capital (current assets minus current liabilities) and equity. If your financial statements are inaccurate or formatted incorrectly, it could impact your bonding capacity or even your ability to secure a bond. But a knowledgeable bonding agent can help. Your agent should review your financial information and look for potential issues. If there are red flags, your agent should be able to connect you with an accountant who can help you clean up your statements.
Does your bonding agent prevent you from overspending on your financial reporting
Depending on the type of surety you need, your agent may require a compilation, review, or audit of your financial statements. Of course, sureties would love it if every bond applicant was audited, but that’s not realistic! Your bonding agent should accurately match the level of reporting you provide with the level of bond you need.
Is your bonding agent active in the construction industry?
Your bonding agent should not only specialize in construction surety bonds but also be aware of what’s happening within the industry. Look for a bonding agent who is an active member of construction industry associations. Your construction CPA may also be able to give you a referral.
What do your bonding agent’s references say?
Yes, you can ask for references—and a stand-up agent will be more than happy to provide them. And don’t be shy when you call them up. In addition to general questions, be sure to ask if the agent is willing to go to bat for a client. The construction industry is a tough environment; you want a bonding agent who isn’t afraid to fight on your behalf.
While answering these five questions is a good place to start when selecting a bonding agent, there may be other aspects to consider related to insurance, too. Along with your accountant, a knowledgeable commercial insurance agent can help you better understand your options. If you have questions or would like to discuss this topic further, please don’t hesitate to give me a call.
FAQs
Your bonding agent should not only specialize in construction surety bonds but also be aware of what's happening within the industry. Look for a bonding agent who is an active member of construction industry associations.
What is the difference between a bonding agent and a bonding company? ›
What's the difference between a Bonding Company and Bonding Agency. The Bonding Company is the Surety. They are the ones who actually make the guarantees and promises found in the Bid, Performance, and Payment Bonds. The Bonding Agency works with you to find the best fit for the right Bonding Company.
What is the most favorable bond rate for a contractor? ›
The rate paid is typically a percentage of either the contract amount or bond amount. The average rates and costs can range from 1% - 5%. These are only averages, whereas, a highly qualified Contractor may obtain lower bond rates compared to a Contractor with poor credit issues or financial deficiencies.
What are the three types of bonds that can be required from a contractor? ›
The major types of surety bonds are contractor license bonds, bid bonds, performance or contract bonds, and payment bonds. These bonds provide protection for the project owner and for taxpayers or investors in private projects. Usually, a project requires a trio of bid, performance, and payment bonds.
What does bonding do for a company? ›
“Bonded” means that you have purchased a surety bond to protect your business against claims of shoddy, incomplete work, or allegations of theft and fraud. A surety bond has three parties: Principal, which is the business buying the bond. Obligee, which is the client requesting the bond.
What is the best type of bonding agents? ›
4th– and 5th-generation bonding agents use the total-etch technique with phosphoric acid and are recommended for situations where unprepared enamel is present. If there the enamel and dentin have been ground with a bur, then 6th– and 7th-generation bonding agents provide good bond strengths and are easy to use.
What is the strongest bonding agent? ›
In terms of tensile strength the strongest adhesives are epoxy adhesives, specifically single component heat curable epoxy adhesives.
What is a typical bond rate? ›
Surety Bond Fees (Premiums) Explained
The typical price range for Performance & Payment Bonds is . 5% to 4% of the contract price. Usually, the rate is presented as a dollar amount per $1,000 of the contract price. For example, a $250,000 contract might cost $25.00 per $1,000 of the contract price, or 2.5%.
How do you calculate a surety bond? ›
How Surety Bond Pricing is Calculated. Surety bond pricing is based on a percentage of the full bond amount being required (called the premium), which is usually anywhere between 1-10%. The premium is based on your financial strength, e.g. personal credit.
What are the bonding costs? ›
Bonding costs incur when the agent takes action to signal to the principal that they are acting in the best interests of the firm. This can take the form of financial commitments (i.e., posting a bond) or non-financial actions (i.e., signing a contract).
Payment bonds
A payment bond is very common because it acts as a guarantee to your subcontractors and suppliers that you'll pay them in full for all services and/or materials they provide to you.
Which of the following bonds will pay workers on a project if the contractor cannot? ›
A performance bond is a financial guarantee that the terms of a contract will be honored. If one party to a contract cannot complete their obligations, the bond is paid out to the other party to compensate for their damages or costs.
Which bond is mostly used for construction work? ›
Stretcher bonds are commonly used in the steel or reinforced concrete framed structures as the outer facing. These are also used as the outer facing of cavity walls. Other common applications of such walls are the boundary walls, gardens etc.
How do I know if my business needs to be bonded? ›
Some professionals need a bond in order to get a license and conduct business. Professions that require bonds for a license include plumbers, electricians, insurance agents, general contractors, and notaries public. The laws in your state will specify the type of bond and amount needed.
Why does a small business need to be bonded? ›
Getting bond insurance is one of the most important things you can do for your small business. Not only does it protect your company, but it also shows potential customers that you're a reliable business that can be trusted. For example, bond insurance can help if: You're accused of not completing a project.
What employees should be bonded? ›
Individuals who typically must be bonded include union officers (both elected and non-elected), employees such as business agents, trustees, key administrative and professional staff, and clerical personnel. Liquid assets, for purposes of this formula, are those assets that are quickly and easily negotiable.
What are the two types of bonding agents? ›
The main types of bonding agents used in the construction industry are latex emulsions and epoxies. Although good adhesion may be obtained without a bonding agent, generally a bonding layer consisting of cement and sand slurry, cement/latex slurry or epoxy increases bond strength.
What does being a bonded company mean? ›
Being bonded means that an insurance and bonding company has procured funds that are available to the customer contingent upon them filing a claim against the company. If you are a contractor or other type of business owner, you may have good reason to explore what it means to be surety bonded.
What is a bonding agent? ›
A bonding agent serves as the middleman between you and the surety provider (i.e., the insurance company) to determine which type of surety will best meet your needs. But not all bonding agents are created equal. How do you know you're working with the right one?
What are the two types of bonding? ›
There are primarily two forms of bonding that an atom can participate in: Covalent and Ionic. Covalent bonding involves the sharing of electrons between two or more atoms. Ionic bonds form when two or more ions come together and are held together by charge differences.
