Surety Bonding: Understanding the Basics

A good bonding program and an established surety relationship are signs that your construction company is moving in the right direction. But how do you get started with surety bonding? This week we’re covering the basics of bonds: why you might need one, the different types of bonds, and how you can start setting yourself up now to qualify for one.

Topics we cover include:

  • What a bond is and why you might need one
  • How to get bonds and why you shouldn’t be intimidated by the process
  • Bid bonds vs. performance bonds
  • The Three C’s of Bond Underwriting
  • How to start preparing to get bonds before you need them

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Rob Williams, Profit Strategist |
Wade Carpenter, CPA, CGMA |
Stephen Brown, Bonding Expert |


[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. Today, we are understanding the basics of surety bonding. On the Contractor Success Forum, we discuss financial strategies for running a more profitable, successful construction business. 

And we have with us Wade Carpenter, Carpenter, and Company, CPAs and Stephen Brown, McDaniel-Whitley bonding and insurance agency.

And we have Rob Williams, me, your profit strategist with IronGate Entrepreneurial Support Systems. So how do we understand the basics of surety bonding? Stephen, what do we need to 

[00:00:48] Stephen Brown: You need to know what they are and where to get them and how you get them. 

[00:00:54] Rob Williams: What are they? 

What a bond is and why you might need one

[00:00:56] Stephen Brown: Right. Well, bonding, first of all, bonding is something that you’re required to do when you’re bidding on municipal or government projects. Sometimes a private owner will require a bond. Sometimes it’s a subcontractor you’ll have to bond back to a general contractor. There’s lots of different bonds, but a bond basically guarantees you’re going to do what you say you’re going to do.

So the basics of bonding is understanding what a bond is, why you need them. Okay, that’s enough about that. 

How to get bonds

[00:01:25] Stephen Brown: The next thing is how to get them and what markets are out there to provide these bonds to contractors. Rob, I bonded you. How did you feel when you were thinking about getting your first bonds?

[00:01:36] Rob Williams: Oh, I was so intimidated. I felt so unworthy. I didn’t know what it was. It’s the locker room beer talk with the contractors, they sound how hard it is and how they got to keep all this cash over somewhere and all this perfect credit. And you gotta just be perfect this and all this experience. And you gotta have backlog and all these things. And with all that talk, I just didn’t think– they just intimidated me about that. I don’t– 

[00:02:03] Stephen Brown: Well, yeah. You toughened up and you call me so I’m proud of you.

[00:02:07] Rob Williams: I don’t know if I, tell you the– you, you know, I don’t even remember how, I mean, I guess, cause I knew you so I guess it was probably over a beer somewhere. I don’t know where we started the conversation. But you made me not think it was so hard. 

And I think part of it is that I had to get those. I should have done it a long time before that, but the economy switching, I had to fill up the factory, I had all kinds of downtime. So I was forced to buck up and get a little bravery in there. Talk about it.

[00:02:37] Stephen Brown: You did a great job. I never had any problems with you, buddy. Getting that first bond can be kind of intimidating and–

[00:02:44] Rob Williams: Yes. Very, very. 

[00:02:46] Stephen Brown: So you go and you Google online and you see all kinds of things, pop up: Guarantee we can get your bond in 30 minutes. Well, the next thing you know, you put in your email address and they’ve asked you for everything because bonding is a financial guarantee.

You’re asking a bond company to guarantee you’re going to finish a project. So do you want to put all that personal information into your computer with a company that you don’t know? I say no. Find a bond agent, find a good bond agent. That’s what I do for a living. I’m a matchmaker. I find the right company for you and your bonds. 

And then the first thing I got to do is kind of figure out where you are to see what’s the best company to get your bond through. There’s simple ways to get bonds. There’s credit scoring bonds. We can move pretty quickly if you have a good personal credit report and credit scoring for your company. 

And then there’s SBA backed bonds. It’s amazing the things you can work out and tough situations up to $6 million with an SBA bond program. And then eventually as you start implementing the things that we keep coaching and talking about on the Contractor Success Forum, you’re getting bonds easily. And you’re dictating the rate you’re getting. And you’re getting the amount of bonding you need. And it’s not stressful at all because you’re supplying those bond underwriters a great product: you. And you look fantastic on paper. And you don’t look good on paper unless you have a good construction oriented CPA, like Wade Carpenter.

Wade, what have you seen?

Bid bonds vs. performance bonds

[00:04:25] Wade Carpenter: Well, I know I’ve seen a lot of things. I know that there’s a lot of confusion sometimes about just the basics. Can you explain to our listeners, what’s the difference in a bid bond versus a performance bond? Now, what are the different types of bonds? Could you can go into that?

[00:04:39] Stephen Brown: Sure. Bid bonds are required for you to bid a job. And they’re usually 5%. On federal jobs it’s 20%. Every now and then you’ll see a 10% bid bond request. But that’s a bid bond that you have to get from a bonding agent from a bonding company, and you have to get it to turn in with your bid. And it used to be in the old days, the bid bonds just simply guaranteed that if they had to rebid that job because you pulled off the job, that it would pay up to 5% of your bid amount to rebid that job. 

And now, a bid bond pretty much guarantees that if you’re the low bidder, you’re going to be able to get what’s called a performance and payment bond. And it’s really two separate bonds, but there’s one charge for it. Performance, payment. So that’s what you have to get if you’re low bidder on the job and you’re awarded the project. 

So at McDaniel-Whitley, we don’t charge for bid bonds. But if you’re low bidder, there’s a performance and payment bond and the rate that you pay for that bond, we get a commission on that. So when you’re successful, we’re successful.

[00:05:47] Rob Williams: You know one question, confusion that I had on the bonds is when you go to a bonded job, you’re talking about performance and the payment. Now on the payment side, what does that guarantee? Does that mean that every time, if you bid a job that you’re going to get paid on time, every time by all these people that you may not know that you’re bidding?

That was one of our big things is we’re going to bid bonds because we didn’t know who these people were that we were bidding these jobs to. Sometimes it kind of came back on us.

[00:06:18] Stephen Brown: Payment bond means you are going to pay all your materials and– 

[00:06:22] Rob Williams: We didn’t quite understand that. We thought that meant we were going to get paid when we went in there.

[00:06:29] Stephen Brown: But if you’re working as a subcontractor to a general contractor not being paid, then you’re offered protection under their payment bond.

[00:06:37] Rob Williams: Yeah. And I guess some of those things is with these out-of-town guys. Well, sometimes we really had to look at that. That could be another subject, but yeah, we ended up one year, getting paid. So it, it didn’t mean that they were a great person, if you get some out of town person on a job. So anyway, that was a big confusion I had when I did start the bonds. We’re talking about some of my fears, some of my fears were getting the jobs that we bid. That was one of my biggest fears. And when a job’s like, what job is this? Who bid this? And what the heck is that job? Are we going to get paid? We don’t know who these people are.

[00:07:16] Stephen Brown: Right. Well, greasing the wheels toward moving projects to completion, financing as part of it. Bonds or risk financing. You can buy an insurance policy. That’s another form of risk control. But that’s what I do. So finding a bond for you as a bond agent is what I do for living.

[00:07:34] Rob Williams: I remember just thinking about this, if there was just some way that I could have had one resource to know about what bonds were. Like maybe in 60 to a hundred pages, if somebody would just write a book about that, Stephen.

[00:07:49] Wade Carpenter: That’d be great. 

[00:07:50] Rob Williams: I mean, that would be the most, I, I feel– 

[00:07:52] Stephen Brown: Wait, wait, wait, wait 

[00:07:53] Rob Williams: What? 

[00:07:55] Stephen Brown: Guys. I just finished the Contractor’s Bonding Playbook.

[00:07:59] Rob Williams: What!

Impossible. That’s the answer to all our questions!

The Three C’s of Bond Underwriting

[00:08:04] Stephen Brown: Well, you know, it started with one of my contractors who’s an engineer. And he wanted to know the rules. What are the rules? I want to play this game. I want to know what the rules are. And so I wrote this book from a contractor’s perspective. There’s lots of books explaining what a bond is. I mean, there’s a lot of stuff out there for bond underwriters on how to analyze whether you’re writing a good contractor or not. And I used to be a bond underwriter, and we were trained in how to look at those underwriters. And I’ve been playing this bonding game for a long time and all the fundamentals are still there. It changes though about what companies have different appetites. But basically everybody underwrites on the three C’s: cash, character and capacity.

Do you have cash to finance the job until you get paid? Do you have the capacity to do the project? Do you have the ability and capacity and then character. Do you do what you say you’re going to do? And all that as measured by these bond underwriters. And your head coach is your bonding agent. So feel free to call me if you have any questions or need to get a bond. Also, you’re in a situation where your bonding underwriter, your current bonding company, is pulling back and not giving you the feedback that you need. We always say good contractors, I tell underwriters all the time, you don’t get a good contractor right off the bat unless there’s a little hair on something.

[00:09:31] Wade Carpenter: Yeah. 

Right. Good. 

[00:09:34] Stephen Brown: That’s what they have to do. They have to come up with creative solutions and you’d be amazed at what can be done out there for you.

[00:09:41] Rob Williams: Yeah.

Yeah, that does remind me the creative solutions. That is kind of how I came to you because I thought I was not as strong as I had been previously. That’s one of the reasons why I was so nervous because I didn’t come to you for bid bondings until we, we were in a decline. And I think that was one reason why I was so nervous about that thing. But our history y’all did look so much on the history.

I don’t really know what you looked at. But I guess that was one reason why I was nervous because I know we were going down. I don’t even know if we were profitable that year, but we had a long history of profits because we had–

[00:10:16] Stephen Brown: Oh, Rob and I go to church together. I knew about your character.

[00:10:20] Rob Williams: Yeah, and you bonded me anyway! 

[00:10:21] Stephen Brown: I know about your capacity. So two of those three C’s I already knew.

Start preparing to get bonds before you need them

[00:10:27] Wade Carpenter: Stephen, I see somewhat here exactly what Rob’s subcontractors are afraid to even go down the road. But I also have these other ones that they go and bid a job, never having bonded anything. And then they call me in a panic. Oh, I got this job, now I’ve got to figure out how to get a bond.

And so they’re in panic mode. From your perspective, what do they do? I mean, I know what I counsel people to do. First time I pick up a contractor, especially if they’re new is like, do you do bonded jobs? And if you don’t now, do you ever plan to? Should you, maybe start doing a reviewed financial statement year one, just so that you have some financial history?

So can you talk to some people about developing a relationship before with the bond agent?

[00:11:12] Stephen Brown: Right. You know that, you’ve heard that expression that if you have to look in the yellow pages for a good attorney, it’s too late. Yellow pages, Google. Okay. There’s no such thing as yellow pages, I’m showing my age.

[00:11:25] Rob Williams: Just talked to somebody yesterday that’s canceling his Yellow Pages thing in a Profit First meeting. I’m like, yeah, I guess you could cancel Yellow Pages. I didn’t know they even existed anymore.

[00:11:35] Stephen Brown: Well, my point is, develop those relationships. Find a bond underwriter. If you need a bond underwriter, you can call me. I’ll be happy to talk to you. You can reach me at McDaniel-Whitley Agency. Just look me up, call me on the phone. 

But the main thing is, like you said, Wade, you’ve got someone that’s bid a job and they were acquiring a bond. So did you bid the cost of the price of that bond in? Anywhere from one to three, three and a half percent, depending on the market is the cost of the bond. 

And then the second thing is, do you have cash, character and capacity? And Wade, you as a CPA have to help get me some information that shows that you’ve got that. What about the projects you’ve done in the past? Have they been profitable? Do you have any cash in the bank? We talk about cash being king, but it’s important. And then also your character. Do you have a good track record? Is this job that you need a bond for right down your alley, and why? That’s something you need to tell your bond agent. And then your bond agent communicates that as they find a good market for you.

I mean, even if I was a Yenta trying to find one of y’all a mate, I would have to know about you before I went and sold you to women to say, hey, Rob’s a great catch, which your wife knows already, but. But you have to know a little bit about you. So don’t be afraid to talk and develop a relationship. Talk to bond agents. If you don’t like them, or they’re brushing you off, if they don’t ever want you to meet with the bond underwriter, they’re not your agent. You want an agent that will take the time to listen and find and hear your story. And hopefully if they’re convinced that it’s a good story and that there’ll be a happy ending of that story as the job is being completed by you and all materials and supplies are paid and subs are paid, that’s what you do every day. So just getting a bond is nothing to be scared of.

[00:13:33] Rob Williams: I would like to encourage those people that you’ve heard from your buddies or, somebody like me, I was working for bonded people. Some big bonded people. Don’t listen to what they’re telling you. Just get the real facts, have a conversation. I think one of the big things that I’ve even learned on this podcast that I didn’t realize is all the factors that, it’s a lot of working capital versus cash. I don’t think I quite understood that because I had, I thought it was really bad that I had all these receivables in inventory. I didn’t, I think when I talked to you, Stephen, I probably didn’t have as much cash as I had had in the back, but I had tons of inventory and I had tons of receivables, those kinds of things. But I was having to manage them, which in the years earlier, I was not having to manage that. But that’s actually, I was probably very normal and where I was beforehand was probably abnormal. Because we had sold our company and I thought everybody was in that position.

So when I became normal, which was very stressful for me, that’s probably what most of the people looked like. So there’s something in there. Forget the head trash, just call and find out where you are. Talk to somebody. And I don’t know whether you, Wade, they can probably talk to you, somebody like that too, and figure this out. It doesn’t have to be the bonding agent.

[00:14:53] Stephen Brown: Yeah. Anybody on your financial board of directors, which I always tell you is your construction oriented, CPA your lawyer, your banker, your bonding agent, and your insurance. Those are your five financial board of directors. And they’re a great resource to you and you want to get the best you can find. So if you were doing business with someone and you were financially guaranteeing them doing something, wouldn’t you want to know them personally? 

[00:15:22] Wade Carpenter: Yeah.

[00:15:23] Stephen Brown: So there’s only so much you can do with credit scores and a smaller project. And when you get out of that and you have a good established surety relationship, then other surety companies want you as well, and they offer better rates and better terms. So you’ve got that going for you. The most important thing, guys, about the basics of surety bonding, is if you have a good bonding program in place, that means all these other things that we’ve been preaching about are also moving in the right direction. They may not be there yet, or they may be there, but the end goal is that all these things come together and make your construction company look good. And Also get your bond.

Get your financials together now

[00:16:00] Wade Carpenter: I’d like to go back to the being proactive, knowing somebody that is in the industry long before you need to have a bond. But the other part is, when somebody’s first kicking off and trying to get a bond for the first time, and they’ve never had job cost records. And we’re supposed to create them out of thin air. It’s impossible. So I would counsel somebody if you’re starting a construction company today, or if you’ve been in business five or 20 years and you don’t have the stuff in place, that’s the best way I can tell you to manage your company is to, by managing your jobs by managing and knowing where your costs are. And not waiting until April to find out how you did for last year.

[00:16:43] Stephen Brown: Yes. And please remember that that fiscal year end financial statement that you get your construction oriented CPA to do for your company is the number one tool I need to get your bonds for the next year. So please try to hurry up. And here it is in January, we haven’t gotten any statements in yet Wade, but they’ll come trickling in February or March. But if we get the bonding underwriters their year-end statement in July and August, September for the previous year, we’re getting close to being dead in the water, if not already. Please do your bond agent a favor and get them those statements. Good, bad or ugly. A good bond agent will have some idea how your year-end will look before we get Wade’s statement. Right, Wade?

[00:17:30] Wade Carpenter: Yep. I know. I mean, construction CPAs know the bond agents need them in February, March.

[00:17:37] Rob Williams: Yeah. 

[00:17:38] Wade Carpenter: And so–

[00:17:39] Rob Williams: It’s a great accountability for your business. When you get really busy, it’s nice to have that accountability, which sort of forces you. I mean, you might look at it as a pain in the ass, but on the other hand, it’s, it’s really good for not just getting behind because a lot of these guys delay and delay and delay and let things get months and months behind and then have to catch up, which is really stressful. But having the bonding, and having these reminders helps you have a healthy business and keeps you from going down in there. So it’s not just about reporting the numbers. It’s about making the numbers be where they’re gonna be and giving you some accountability to stay healthy going forward and not lose track of that. 

And I know in the residential, I see a lot more of those guys because there’s not much accountability and usually don’t even have banking. Those guys tend to snowball when it gets busy and there’s nobody there to put on the brakes or have any warning signs, things like that.

So it’s actually can be really healthy for your business. Just the fact that you’re having to supply these things.

[00:18:43] Stephen Brown: Hey, I love bonds. You call me Bond Brown. I’ve got a customer that calls me. And I remember doing a seminar once on bonding and I wrote up on the on the chalk board, whatever you call it, I said James Bond Brown. Because that’s my name, James Stephen Brown.

[00:19:04] Rob Williams: Yeah. Most people don’t know that it is James– 

[00:19:06] Stephen Brown: And I said– 

[00:19:07] Rob Williams: –you dance though? That’s the question?

[00:19:09] Stephen Brown: Well, I erased the Brown. I said, you can think of me as James Bond.

[00:19:14] Rob Williams: Yeah. 

[00:19:15] Stephen Brown: And they looked at me for awhile. And then I erased James and I wrote Brown back and they started nodding their head. I still have some friends from that seminar to call me Bond Brown. Hey, Bond Brown.

[00:19:28] Rob Williams: All 

[00:19:28] Stephen Brown: Anyway, I’ve been doing it all my life. I love it. Knocking on wood, never had a midlife crisis where I wished I was doing something else. Always something different. There’s always solutions to problems. So, that’s the basics of surety bonding.

[00:19:44] Rob Williams: Don’t be afraid. Don’t be afraid to do this. Don’t be chicken like I was chicken. So don’t be afraid. Just talk to the people. They’re not going to bite your head off to talk to them, so.

[00:19:55] Stephen Brown: We want to get your bonds approved or we don’t get paid.

[00:19:58] Rob Williams: That’s right. They want to talk to you. And that’s what we tell them on the Contractor Success Forum, right? All right. And with us, we have Wade Carpenter, Carpenter CPAs, and we have James Bond Brown with McDaniel-Whitley bonding and insurance agency, and I’m Rob Williams, IronGate Entrepreneurial Support Systems.

And we are the Contractor Success Forum. Come back and listen to us.