provide an expert’s view on construction payment and performance surety
bonds, I sat down with Ellen Neylan, the owner of Surety Bond
Associates, a WBE surety bond agency and consulting firm that provides
specialty surety services to small, minority women and veteran owned
Often projects presented accompany a bonding
requirement – too many times this is seen as an automatic disqualifier
to an unbonded GC. Ellen stressed the abundance of options out there,
and the importance of differentiating all risk reduction instruments
from viable alternatives.
Many GCs are working with their
insurance agencies to tackle bondability needs without realizing surety
agents are their own specialty that add a different, more precise value.
Ellen explained to me the contrast between a surety bond and
subcontractor default insurance (SDI), two concepts that can be easily
confused. In almost all cases, SDI is very inferior to surety bonding.
Surety bonds exist to protect taxpayer dollars and a general
contractor’s organizational health, while SDI serves to allow a GC to
default subcontractors quickly with no payment protection downstream for
anyone. High deductibles are associated with it – and since there is no
qualification process to gain this protection, it is much more of a
Along with the confusion of bonds and SDI
seeming interchangeable, comes a misinterpretation that bonds and
insurance in general are comparable. I’ve previously heard the phrase
that “Bonds are not insurance-they’re a credit instrument” and Ellen
confirmed that in her Bonds 101 workshop, this is an idea that’s
represented as fact.
Even though insurance companies can provide
bonds, contractors have to qualify for bonding, which makes it quite
different than insurance. Anyone can buy insurance if they can afford
it, however bonds require an in-depth qualification process that fully
vets a firm.
Prior to my conversation with Ellen, I read that many
bonding professionals sum up their evaluation of a contractor with the
use of “the three c’s: character, capacity, and capital” – and I was
interested to hear if this captured her interpretation of the GC review
scope. She emphasized that those are definitely the main ideas, however
the importance of each area isn’t quite weighted equally in thirds.
surety typically puts 70% emphasis on financial strength. For the
capacity consideration, the contractor’s experience with project
management and portfolio of work shape their rating. Some factors that
are evaluated include:
– Staff resumes
– Typical project valuation “sweet spot”
– Scope of work
– References with subcontactors, suppliers, and banks
evaluating the character review, this is a bit more challenging. Ellen
rightfully mentioned that you don’t really realize a contractor’s true
colors until there’s an issue. Since surety bonds are essentially a
partnership between the surety and the contractor, the surety has to
feel comfortable that the contractor can help them resolve any problems
and deliver on promises. Project success is largely tied to a GC working
with the surety so that they don’t have to file a loss.
So once you’ve taken the steps to become bonded – what is required for a firm to take steps to grow that bonding capacity?
of growing bonding capacity involves not taking on jobs that are too
large for your company’s bandwidth. Preserving as much cash in the
company and tightly managing it alongside accurate job cost accounting
systems is key. A great CPA is critical to keeping a company in line
financially. Surety companies look for detailed financial statements
because the accounting needs of construction are very unique from other
industries. Building that team of a solid CPA, surety agent, and bank is
a powerful trio.
Payment and performance surety bonds can seem
confusing, however with a bonding expert’s guidance, contractors are
able to realize their full potential and not have to lose out on
opportunities from lack of bonding. There are plenty of resources
available for organizations looking to become bonded, and a “dead end”
is far from how a bonding stipulation should be perceived.
About the Interviewee, Ellen Neylan:
Ellen Neylan is the founder and sole owner of Surety Bond
Associates. Ellen is a surety veteran with over twenty-five years’
experience in the surety industry, holding positions with several major
surety companies fulfilling a variety of underwriting, management, and
operations, business and product development roles. Ellen has lectured
diverse audiences on surety principals and underwriting disciplines, and
is an active member of the PA and NJ Chapters of the Surety and
Fidelity Association of America.