Construction work needs bonding in larger projects, and you don’t want your electrical business to miss out on big business opportunities. It’s important to fully understand bonds so that you can prepare your business to earn a surety company’s approval.
First of all, it’s important to note that a bond is not an insurance policy. It provides assurance that the work will be completed in a satisfactory matter that was outlined in the contract. A bond won’t pay for any property damage or personal injury that could potentially result from your work.
“If you’re going to work for the public entities, they’re going to require bonding,” says Jonathan Graham, president of Horus Construction, based in St. Petersburg, Florida. “And the majority of work is public entity.”
Different Types of Bonds
- A bid bond is a debt secured by a bidder for a job that guarantees the project owner the bidder will take the job if chosen and also provides assurance to the owner that the bidder can financially accept the job based on the price quoted in the bid.
- A performance bond guarantees the project owner that the contractor will meet all the obligations set out in the contract. If the obligations are not met, the owner is compensated for any monetary loss.
- A payment bond guarantees payments to all subcontractors, laborers and suppliers in the event that the contractor defaults.
- An ancillary bond guarantees a variety of other factors considered essential to the contract performance.
Tips for Getting Bonded
Because it’s very difficult for small businesses to get bonding, Graham says it’s important to position yourself in the best way possible. If you’re a new business, you don’t have much history as evidence that you run your business efficiently and profitably. To convince the surety company of this, Graham highly recommends having your accounting in order because many companies don’t keep their books organized.
He also says it’s important to show that you’re putting money back into your company, such as investing in newer equipment or forming a human resources program. He says surety companies also appreciate a business that shows strong character. One way to do this, Graham says, is to give back to your community by sponsoring local events or volunteering services to local charities.
“They look at what your knowledge is as well as what you’ve done for your staff and community,” Graham says. “They don’t want to just see short-term involvements but long-term commitments.”
How the U.S. Small Business Administration (SBA) Can Help
Competition is tough in the construction industry. But there are many entities, such as the SBA, that offer support to help your small business. One big boost came in March 2009, when the American Recovery and Reinvestment Act enabled SBA’s Surety Bond Guarantee program to raise the ceiling for the maximum value of bonds it can guarantee from $2 million to $5 million. The program partners with the surety industry to help small businesses by providing a guarantee to participating surety companies of between 70 to 90 percent of the bond amount.
By providing government-backed guarantees as enticements for surety companies, Frank Lalumiere, head of the SBA Office of Surety Guarantees, says there is much more opportunity for small or emerging businesses to get bonding.
“Some new and emerging small businesses may have experienced difficulty getting bonded in the past, [because] of being viewed by surety companies as not strong enough financially,” Lalumiere says. “The SBA guarantee helps to change that outlook and enables surety companies to take on a little more risk. This program encourages the surety companies to provide bonds to otherwise solid small businesses and help them grow and prosper.”
Lalumiere also adds that this increase is great news not only for small business owners who want to get the bigger contracts, but also for the economy, which benefits from the commerce increase.
“Small businesses are so important to the recovery effort because they employ many Americans,” Lalumiere says. “There’s a tremendous need and appetite for small businesses to help.”
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