Despite the benefits of pre-qualification services, contract completion protection and payment protection, misconceptions persist about
performance and payment bonds. A proactive approach to communication and a cooperative approach to claims are critical to realizing how bonds can function as successful risk transfer mechanisms. While companies that issue insurance policies and surety bonds are regulated by state insurance departments, the two products function in very different manners. Sureties issue bonds to construction firms that the surety determines to be able to perform the contract successfully. Before issuing a bond, the surety conducts a thorough underwriting analysis, also called prequalification, to determine whether the contractor (the principal) is capable of performing the bonded contract. It also indemnifies the surety against any loss sustained from issuing the bonds. In the same way that bankers do not loan money to borrowers that are incapable of repaying them, sureties do not issue bonds on behalf of contractors and subcontractors believed to be incapable of fulfilling their obligations. Typically, the
surety’s prequalification process includes a credit analysis, financial statement review, workload analysis and business plan review. The ProSure Group offers Performance and Payment bonds to the construction industry.
