Surety and Construction Attorneys’ Perspective: Surety Prequalification Goes Beyond Three Cs
Home / News / Surety and Construction Attorneys’ Perspective: Surety Prequalification Goes Beyond Three Cs
CONSTRUCTION IS INHERENTLY risky, and sureties are calculated risk takers. In order to calculate the risk, sureties undertake a broad, rigorous, and thorough prequalification process to determine whether and to what extent to extend credit to a contractor in the form of a bonding program. In this way, sureties and bond producers are uniquely situated to identify, mitigate, and avoid risks to the various stakeholders in the construction industry. With more than 20 years of collective experience practicing surety and construction law, we have developed a unique perspective on the surety prequalification process. While the surety underwriting process is often summarized with reference to the “three Cs” of bonding—capital, capacity, and character—this phrase falls short of describing the true extent of the robust and complex set of processes, checks, and systems that sureties and surety bond producers have developed over the years to fully assess the potential bond principal and risk the sureties will be assuming.
Owners, general contractors, lenders, sureties, and bond producers alike share in the goal of identifying and either weeding out or appropriately mitigating risky contractors. Doing so ultimately lowers costs, increases profits, and increases the likelihood of completing projects on time. To that end, sureties and bond producers, through decades of practice, have gained significant experience in assessing a potential bond principal. Underwriters and producers have the skill and experience to identify the issues that raise red flags and to know whether these flagged issues are worth the risk they pose.
The surety prequalification process often involves multiple layers of risk assessment. Frequently, bond producers will fully vet a contractor’s prequalification package before presenting it to any surety company, often working closely with the contractor to gather new or different supporting information to ensure that the package presents a full and accurate picture of the contractor. Once the surety receives the prequalification package, the surety underwriter will then undertake his or her own thorough assessment of the contractor. Thus, the surety prequalification process provides a safety net for owners and general contractors, whereby sureties minimize the risk and allow owners and general contractors to focus on completing their projects.
