Comprehensive List of Items Needed to Establish a Surety Relationship

Establishing a surety relationship is not something that primarily happens overnight. During the initial phase of underwriting, a surety company will require an extraordinary amount of information from the construction company and its owners. Teaming with an experienced bonding agent can alleviate many headaches, as the agent will assist in collecting and reviewing the required documents before submitting them to a surety carrier. Below is a list of the documents and information, and how they should be presented, that surety companies typically require in order to begin the underwriting of any company for a surety bond program. Although this may seem over the top and at times very private, rest assured knowing that these requirements are standard industry practice.

Corporate Financial Statements

Surety companies will require the fiscal year-end corporate financial statements for the last three years as well as copies of the most recent in-house statements. It is important to provide statements that are prepared by an independent Certified Public Accountant (CPA) using Generally Accepted Accounting Principles (GAAP). GAAP prescribes the use of the percentage-of-completion method of accounting for construction contracts. Sureties require this method of accounting and prefer these statements to be prepared in the form of an audit (ideal) or a review, as this provides some level of assurance on an organization’s financial statements. The statements needed include the balance sheet, the income statement (also known as a profit and loss statement), the statement of cash flows, and the statement of retained earnings.

Balance Sheet - A statement that presents everything a company owns, or its assets, and how the company pays for those assets, either by borrowing money (liabilities) and/or by acquiring it from investors (shareholders’ equity). The two sides of this statement must balance. Total Assets = Total Liabilities + Shareholders’ Equity. The balance sheet is a single snapshot in time and can, therefore, be different from one day to the next. This is the most important document not only when it comes to underwriting a certain company’s overall bondability but also when it comes time to determine a company’s current and future bond capacity.

Income Statement - This document can also be called a statement of revenue and expense or a profit and loss statement. The statement details how a business incurs its revenues and expenses through both operating and non-operating activities. It starts with sales figures (revenues) and ends with the company’s overall net income (profit or loss) for the given accounting period. Unlike the balance sheet, the income statement provides performance information about a specific accounting period.

Statement of Cash Flows - A statement that records the amount of cash and cash equivalents entering and leaving a company during a certain period of time. The cash flow statement is broken down into the incoming and outgoing cash for three different components: operations, investing, and financing.

Statement of Retained Earnings - A statement that outlines the changes in retained earnings for a certain period of time. Sometimes this information is included on the balance sheet or the income statement. The statement begins with the retained earnings from the prior accounting period, adds (hopefully) the net income from the current period, and then subtracts any dividends paid to shareholders for the current period to give a final retained earnings figure. The document is also sometimes called a statement of shareholders’ equity, a statement of owner’s equity, or an equity statement.

Personal Financial Statements

A surety company will require a document or form, sometimes presented on a spreadsheet, that outlines an individual’s and, if married, their spouse’s financial position. The most current information is required. The spreadsheet or form will list all of the personal assets and personal liabilities of the individual or individuals. It will then provide room for detailed information about each asset and liability. Details involving sources of income such as salary, investments, real estate income, etc. are needed. There is also room on the form to explain any contingent liabilities such as securities you have endorsed or co-signed, legal claims & judgments, provisions for federal income tax, and other special debts.

Assets include cash on hand and in banks, savings accounts, IRAs or other retirement accounts, accounts & notes receivable, life insurance - cash surrender value only, stocks and bonds, real estate, automobiles - present value, other personal property, and other assets.

Liabilities include accounts payable, notes payable to banks and others, installment accounts (auto), installment accounts (other), loans on life insurance, mortgages on real estate, unpaid taxes, and other liabilities.

Work In Progress Schedule and Backlog

In order to comply with GAAP, the percentage of completion method of accounting includes the use of a work in progress schedule, WIP for short, and sometimes called a status of contracts report. The surety company will require the most recent WIP schedule available. This document should be prepared on a monthly basis. The figures from the WIP schedule should tie directly into the balance sheet and income statement.

The report is used to track the progress and financial performance of projects currently in progress, completed, and under contract to begin during a certain accounting period. Among many things, the report should include at a minimum for each project the current contract amount, the current estimated total cost, the cost to date, the amount billed to date, the start date, and the estimated completion date. Other important areas of interest include estimated gross profits, estimated costs to complete, under billings, and over billings.

Company Ownership Information

A surety bond company will require a document that lists and describes all of the owners and/or stockholders of a company as well as general company information and operational details. Ownership information includes names, titles, ownership percentages, addresses, phone numbers, email addresses, social security numbers, dates of birth and, if married, spouses’ names, social security numbers, and dates of birth. Details about past changes in ownership, parent/subsidiary/holding/affiliate companies, and continuity plans/transfers of ownership are required. Ownership will be asked to provide the Federal Tax ID#, the type of organization (ex. S-corp, C-corp, LLC, etc.), the date the business was formed, the date the business was incorporated, and the fiscal year-end date. Sometimes a surety may ask to see the corporation’s articles of incorporation.

General company and operational information that's needed includes descriptions about the class or type of construction work the business generally specializes in, the geographic area of operation, prior bonding history (for the company and its subcontractors, if applicable), future work and profit expectations, and if the company or any owner has ever defaulted on a contract, experienced bankruptcy, been in receivership, or has had a lien filed against them by a taxing authority.

Resumes

Generally, sureties will ask for the resumes of all of the company’s owners as well as those of the key operating personnel. The surety is looking for each individual's position in the company and the responsibilities each of them hold. Sureties want to know the amount of time each person has held the position and the time and experience they have in the industry.

Project Owner References

A list of at least three to five project references is usually required by most sureties. Ideally, they would like to see the company’s 5 largest completed projects in the last 5 years. The details surety companies are looking for pertaining to these projects includes the Owner or General Contractor’s name, contact name, phone number, project name, contract amount, gross profit, and whether or not a bond was required.

Credit References

A surety company will usually ask for a list of the principal suppliers and subcontractors that the company conducts business with. The name of the firm, a contact name, a phone number, and the type of material or service provided should be sufficient.

Banking Information and References

Sureties will require details and information related to any bank the construction company currently conducts business with. This information includes the name of the bank, the address, the phone number, the account manager’s name, the bank account number, and the date the banking relationship was established. The surety will also need information pertaining to depository balances, lines of credit, and loan experience.

Depository balance information includes the date the account was opened, the three-month average balance, the current balance, and how the account is handled. If there are any current lines of credit the surety will need to know the terms and conditions including the amount of the credit line and the amount of the line that is in use, the effective date of the line, how the credit line is secured (ex. Corporate signature, inventory, etc.), the rate of the credit line, and the credit line payment details as well as the expiration date. Loan experience information should include the date the loan was opened, the high credit amount, how the loan is secured, the accounting rating, and if there are any other comments worth noting.

Reference Letters

Although not required, these are a good supplement to a company’s submission package. Providing any additional references from general contractors the business has provided work for, subcontractors and suppliers that have been used, industry professionals, trade associations, or even community leaders can be beneficial.

Certificate of Insurance Coverage

A current certificate of insurance which reflects all of the company’s insurance coverages is required to be provided. This includes commercial general liability, automobile liability, umbrella liability, excess liability, and workers compensation and employers’ liability coverages.

Signed General Indemnity Agreement (GIA)

All sureties require some form of indemnity. Most will require full corporate and personal indemnity of all of the owners and their spouses. However, in certain situations, although rare, the specific terms can be negotiated. Sureties will sometimes allow for certain assets to be excluded from the indemnity such as jewelry, family heirlooms, and other unconventional types of assets. Some surety companies may even allow a limit on the personal indemnity to a certain degree, again this is very rare. A partial indemnity waiver is only permitted in the circumstance that the company has sufficient assets in place to back the surety's’ obligations, and even then it may not be a possibility. There is a zero percent chance of a surety fully or even significantly waiving personal and/or corporate indemnity. Indemnity agreements are required because they obligate the principal (you) to repay the surety for any losses the surety pays out on the bond. The surety has a lot on the line when they write a bond, they need to know that the owners running the construction company also have some skin in the game.

Accounting Information

Although most of this information is addressed in the accountant's review report that precedes the financial statements, it is best to provide the surety and bond agent with the company’s accounting information. This would include the name of the CPA firm, their address, phone number, and contact person as well as details on what basis taxes are paid, the level of assurance the financial statements are prepared, how often the financials are prepared, and if your company also uses a full-time accountant on staff.

If you have any questions or would like some clarification about any of the above requirements, please don’t hesitate to reach out to a specialist at The ProSure Group by calling us at our toll-free number 1-800-480-3883.

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