A contract bond is a type of guarantee signed between the owner of a project and the contractor. It is meant to protect the project owner from any losses in case the contractor does not meet its obligations. The contract owner can request financial compensation if it becomes apparent that a default will occur.
Contract bonds are popular in the construction industry, but they have also been a key part of several commercial contracts within the supply, service, and technology industries. Even manufacturing firms use contract bonds once in a while.
Generally, any projects of more than $100,000 will need contract bonds. That is because so much will be lost if the projects fail. As a result, the contractor needs to plan for losses and damages, if and when they do occur.
So how can your company access good contract bonds? Read on to find out.
1. Having A Good Working Relationship With the Insurance Broker
The majority of contract bonds are issued through insurance brokers. Consequently, your company must get in touch with an insurance broker. Generally, it’s a good idea to select an insurance broker who works in a similar industry.
For example, if you are operating in the construction industry, it is best to choose an insurance broker who has been working in the construction industry for a while. That broker will have the experience to guide you during your contracting process.
Choosing a professional insurance broker is also the right way to establish a positive relationship with the project owner. Once the project owner realizes that you’re using a qualified insurance broker, they will trust you more.
Most insurance brokers are usually insurance firms. They use the same procedures used when vetting insurance covers. In other words, your company will be exposed to the same process that banks use when determining somebody’s creditworthiness. The insurance broker will conduct a thorough evaluation of your assets before committing to the contract bond.
You will have to undertake several activities to establish a good rapport with the insurance provider. This is a firm that will be protecting your assets if you fail to complete specific projects. Before they can do that, they need to understand your assets, historical performance, and projections. You need to provide this information without a hint of hesitation.
Some of the things the insurance broker will be looking for include verification of your address, current operational data, and historical contract obligations. The entire process can take several weeks, and you will need to answer many questions.
2. Having the Right Experience and Character
Even if the company is certified and you have the equipment and expertise to do the job, the insurance broker may still need to examine your experience and character. Therefore, you need to develop good company habits. It will also be better if you ask the previous contractors for recommendations. Showing that your equipment has successfully fulfilled similar projects can also increase your chances of bagging the contract bond.
3. Having Enough Finances to Complete the Project
Every project requires massive financial commitments. You must have your financial strength to purchase raw materials, pay subcontractors, and meet other project costs. Remember, the insurance broker will go through your financial records to determine your financial capability.
You should keep accurate records of how and when you pay subcontractors. Payments to suppliers should also be prompt because this will show quick financial settlements. It would be best if you also had excellent working relationships with your banking partners, as this will enhance your creditworthiness.
4. Having Good Management Protocols
Once you have put your financial records in order and enumerated your experience, you also need to show that your contracting firm is under the right management. There should be clear and well-established structures. Everybody in the firm should know their responsibilities, and tasks should be assigned based on experience and merit.
For starters, you can create the organization’s chart. The chart will show the duties and responsibilities of each employee. You can take it a step further by including the experience and academic qualifications of key personnel, including yourself.
5. Creating a Business Plan
A detailed business plan can increase your chances of accessing good contract bonds. The business plan should explain your bidding tactics and general business objectives. In particular, it should emphasize how you plan to grow in the next five years.
The business plan won’t be complete without a description of previously completed projects. You need to explain your objectives for those projects and if you were able to meet them. If you set up and fulfilled objectives in the past, the chances are that you can meet future goals.
The business plan should also explain what should be done if you or a key employee dies. There should be contingencies on how to hire replacements so that the project can continue without hiccups.
6. Choosing the Right Type of Contract Bonds
Contract bonds are divided into three categories; labor and material payment bond, performance bond, and bid bond. Each type of bond has specific benefits and requirements.
The bid bond covers the bidding stage. When your company submits this bond, it assures the project owner that you have the necessary expertise and equipment to complete the project. This protects the contract owner from losses if you are unable to fulfill the contract after selection.
You can also choose a performance bond type of contract bond. This one comes into effect when you have been awarded the contract. It protects the obligee from damages and financial catastrophes when the contractor operates outside the agreed terms.
The last type of contract bond is the material and labor bond. Sometimes, you may need to hire a subcontractor to complete the job. It specifies the amount that the subcontractor will be paid and at what stage of the project.
Final Thoughts
To recap, the process of accessing good contract bonds is long, challenging, and daunting. You will need to prepare hundreds of documents before you can be considered for any contract bond. At the end of it all, the most important thing is choosing a qualified insurance broker. If you are looking for that insurance broker, you can contact us today to get started.