What information will my Surety Broker need?
Insolvency continues to dominate the news headlines, and the Building Cost Information Service (BCIS) data confirms this. Insolvencies rose 9.2% last year and 30.7% compared to 2019. As this rise continues, so does the demand for construction bonds, which are becoming a regular feature of the construction tender process. Kerry London’s Bonds team advises how to work with insurance brokers to explore how bonds can help reduce exposure to financial risk.
What are the benefits of insurance bonds to construction?
Contractors are increasingly being asked to provide a contractual guarantee in the form of a surety bond. Insurance backed construction bonds offer a level of financial security to employers because they protect against a contractor failing to fulfil their contractual requirements. When a contractor fails to deliver the contract, it causes major project disruption and financial problems for the employer. In the event of a contractual default by the contractor (such as insolvency), the bond can be called upon to help cover the cost of finishing the project.
The employer sets out the need for a bond before signing the construction contract. The contractor is then responsible for obtaining the bond from a surety with the employer as the beneficiary.
Surety bonds vs. bank bonds
The biggest benefit to choosing a surety bond over a bank bond is that it diversifies a company’s credit options, improving liquidity and reducing the usage of existing bank credit lines. Additionally, a surety bond can often provide a good risk management perspective on projects or any other underlying contract or obligation risks.
Hannah Sewell-Moore, Surety Manager, Surety and Bonds, Kerry London said, “Construction firms want to continue to support sustainable growth and minimise risk, so selecting the right financial instrument to protect new business ventures is vital. Bonds effectively extend a company’s liquidity, allowing them to continue to access untapped bank lines of credit for loans, investment growth opportunities, or other financial commitments”.
What information will my broker need to secure a bond?
Working with a construction specialist broker is essential because they can walk contractors through the bonds process. Brokers usually outline in advance the documents required to make a formal submission. Preparing these documents in advance will speed up the bonding process. Brokers will request the information needed by the surety underwriters to conduct a full financial risk assessment and bond the risk.
Hannah Sewell-Moore, Surety Manager, Surety and Bonds, Kerry London said, “Absorbing the risks associated with large, complex construction projects is a huge undertaking for surety underwriters, so they need comprehensive information to quote accurately. Construction firms need to factor in the time it takes to go through the bonds administration process. It may seem onerous at the time, but all underwriters require the same information regardless of which broker they work with.”
The following information is required to organise a bond:
- Completed application form with full details of the project/type of contract
- Latest management accounts
- Latest year-end audited accounts
- Accounts of any related group companies
- Bank information form to be completed by the bank (so underwriters can assess banking facilities, cashflow and monthly cash position)
- Copy of the bond wording – there are many types of bond wording, and different wordings attract different rates
- Personal net worth statements for each of the shareholders
- Statement of work in progress
- Certificate(s) of insurance
- A contractor’s questionnaire
- They may ask for details of senior leaders’ credentials in certain circumstances
Based on their assessment, the surety underwriter may ask for further information such as projected cash flow, aged debtor lists, forecast budgets, and details about any existing problem contracts which may affect financial strength in the future. Initially, most brokers will require the contractor’s questionnaire and financial statements to start the process.
Choosing the Right Broker
A construction specialist broker with in-house surety underwriting experience can design a bond wording for the individual risk profile of a company. The cover, pricing, and process will likely be more accurate, resulting in a more streamlined experience. Brokers understand what information is required by a surety underwriter, minimising unnecessary delays. They can analyse financial statements and understand construction-specific accounting and work schedules to ensure the right information is sent across the first time.
Challenges facing construction
The most recent Building Cost Information Service (BCIS) Tender Price Index (TPI) highlights contractors’ concerns about insolvency and taking on new work. It says that some construction firms are bidding for more straightforward projects to mitigate the risks of cash flow exposure. It also states that the increased number of construction insolvencies has reduced the number of firms competing for contracts, resulting in increased tender prices. Undoubtedly, these factors inhibit growth because they will make contractors more cautious about the business they bid for.
This is reflected in the BCIS All-in Tender Price Index (TPI) which shows annual growth of 4%, which has decreased from 9.4% in the previous year. Many cannot offer fixed-price contracts in the current economic climate, which was previously a helpful tool when bidding for new business. The BCIS warns that the combined impact of stagnating construction output and softening of future demand means that construction sector growth will likely feel the effects for the next five years.
Factoring construction bonds into the new business process is an important strategic consideration for the construction sector if they want to continue to take advantage of new business opportunities that may arise.
