How Construction Contractors Can Reduce Surety Bond Costs – 5 Proven Tips
Construction contractors have several moving parts to manage on each job, not the least of which is ensuring the surety bond in place is both affordable and in the appropriate amount. A construction surety bond is simply a guarantee between the contractor, the owner of the project, and the company offering the bond, helping to offset some of the risk of not completing the job in full or on time. It may sound like a surety bond for construction contractors is a type of insurance, but in reality, it is more closely linked to a credit line from a financial institution than conventional insurance coverage.
Surety bonds for construction contractors come at a cost, and that expense is determined by several moving factors. To help ensure the construction contractor surety bond is not a costly burden, follow the proven tips below.
Tip #1: Understanding the Basics of Credit
Personal credit is one of the most significant factors in determining the price of a construction contractor bond price, so it is necessary to recognize what goes into building and maintaining strong credit. Start with a review of your personal credit score and history, as this will be the most telling in terms of what work, if any, needs to be done. A free credit report from each of the three major credit bureaus can be pulled online, once per year. Within a credit report, detailed information about payment history, credit availability, and current and past accounts is listed, along with any bankruptcies, repossessions of vehicles, and collection accounts. Review the credit report closely to see if there are any errors listed, and work with the lender or credit agency to get the issues resolved. A strong track record of on-time payments, responsible use of available credit, and no major negative marks all work to improve overall credit history and one’s score.
If you have bad credit or are working to improve it, not all is lost. There are other strategies to reduce construction contractor surety bond costs quickly.
Tip #2: Managing Tax Liens
Every now and again a tax lien – a government’s claim on property as an individual or a business – can creep onto a credit report, wreaking havoc on access to surety bonds. As a construction contractor, a tax lien has a negative impact on the pricing of a surety bond, making it necessary to manage taxes due in a timely fashion. Working directly with the IRS or a state taxing authority to remove the lien once it has been paid in part or in full is necessary to maintain a strong financial track record. Although removing a lien that was placed appropriately does not immediately increase your credit score, it will show the surety company that you are handling your financial business. This will help reduce the overall cost of your construction contractor surety bond.
Tip #3: Know Who Owes You
Managing a business as a construction contractor involves maintaining up-to-date records of what money is owed from the business as well as what’s due to the business. Keeping track of what customers owe in terms of outstanding invoices is helpful when applying for a new surety bond. Every application requires you to provide detailed business financials, including accounts receivable, but if you don’t have accurate or current records, your surety bond price may be negatively impacted. Always have documentation as to what you’re owed and by whom, to give the surety company a complete view of the business. This will ensure your surety bond pricing is as cost-efficient as possible.
Tip #4: Work with the Right Surety Bond Company
Selecting the right surety bond company as a construction contractor is necessary if you want to receive the best pricing available. A bond company with a strong reputation in the business along with a large portfolio of similar customers is a telltale sign that you’re on the right track. Similarly, your surety bond company should be able to provide detailed information about how they determine the price of construction contractor surety bonds, be appropriately licensed to write bonds in the state your business operates, and have the financial strength to meet the requirements of the bond.
Tip#5: Avoid Claims When Possible
The purpose of a surety bond is to cover any claims made against you as the construction contractor on a specific job. However, claims chip away at your ability to get affordable surety bonds in the future. A good surety bond company will explain to you how claims put your personal and business assets at risk, along with strategies to avoid claims in the first place. The easiest thing you can do to ensure your construction contractor surety bond is less expensive is to fulfill the contract requirements for each and every customer consistently. If a claim potential does arise, work with the customer to get it settled before it is an official claim against the bond. This will keep your surety bond prices lower in the future.
This last bit of advice the author gives us aligns perfectly with Levelset’s ultimate goal for our customers: to help you get paid the money you’ve earned on your projects. While bond claims and mechanics liens absolutely work to help contractors and others in the construction business with getting paid, it’s better for everyone when payment issues are resolved before it comes to a claim.
No one ever wants for a payment issue to escalate to the point that a bond claim must be submitted. The key to preventing payment issues from escalating — or even from happening in the first place — is to have better communication between all of the participants on a construction project. That starts with sending notices to all interested parties to promote visibility and collaboration.
Download our Preliminary Notices Best Practices Guide to learn how to make preliminary notices work for you.