Five Proven Ways Construction Subcontractors Can Reduce Surety Bond Costs
By Eric Weisbrot, Construction Executive
Construction subcontractors have ample opportunities to generate a profit from their businesses, but it takes a broad understanding of sound financial management to do so. One of the ways a construction contractor can ease the cost of doing business is to ensure they are getting the best pricing for their surety bond. The cost of a surety bond is an integral aspect of the cash flow of a construction business, no matter how large or small, as bonds are a requirement for many jobs. This means reducing the necessary expense of securing a bond is crucial to ongoing success. Here are a few tried and proven tips for reducing surety bond costs for construction subcontractors.
UNDERSTAND BOND PRICING
First and foremost, construction subcontractors need to understand how bond pricing works. Surety companies, typically backed by insurance companies, offer surety bonds per project to qualified construction contractors. The most qualified applicants for a surety bond are those who have a strong reputation of completing work in line with their state’s regulations and guidelines, and few to no claims against their work in the past. In most cases, construction surety bonds require a payment of 1 to 10 percent of the total bond amount; the less risk a construction contractor poses to a surety bond agency because of their reputation, the lower that percentage cost of securing a surety bond.
RECOGNIZE THE LINK TO PERSONAL CREDIT
In addition to reviewing the business history of a construction subcontractor, surety bond agencies also take a close look at the contractor’s personal financial track record. This means a review of credit history and score, as these details highlight any financial mishaps a contractor may have experienced in the past. A low credit score based on a spotted credit history presents a higher risk to the surety bond agency, which means the percentage required to pay for a bond will be higher.
IMPROVE FINANCIAL STANDING
One of the most practical ways to ensure surety bond pricing is at its lowest is to work toward improving financial standing, both on the business and personal side. From a business perspective, having clean records of revenue, successfully completed projects and other financial details like liabilities and assets puts a surety company’s mind at more ease than when paperwork is a jumbled mess. On the personal side of the line, construction subcontractors can work on removing errors from their credit report (start by checking reports) and then improving credit standing over time. The latter requires making on-time payments to creditors, clearing out collection accounts and managing negative marks like tax liens and judgments as best as possible. Over time, a stronger financial picture of the business and personal history will provide some relief on surety bond pricing.
WORK WITH A STRONG SURETY AGENCY
Not all surety bond agencies are created equal, so it is important to know what constitutes a strong company. Most importantly, a surety bond agency for construction subcontractors will work with many different bond issuers behind the scenes. Having a large pool of providers means the best pricing can be found and secured more easily. Surety bond agencies should also offer resources for construction subcontractors that break down the surety bond process and pricing in easy-to-understand terms. They should also help with claims in the unfortunate event a job isn’t completed as required.
DON’T GIVE UP!
Working as a construction subcontractor is not always an easy task, and worrying about the financial aspects of the business can seem more overwhelming than beneficial in the long run. However, focusing on small changes to reduce the price of surety bonds is a surefire way to be more profitable over time. Start by understanding how bond pricing works and its link to personal credit history, and follow up with improving financial details from both business and personal perspectives. Finally, work with a surety bond agency that understands the challenges and needs of construction subcontractors to ensure the next bond secured is the best fit for the job and the budget.