Most public construction projects, and many private projects, require the general contractor to carry a contract bond: a financial guarantee to the project owner from a “surety underwriter” (surety) that the contractor will meet the contract provisions.
Unfortunately, contractors sometimes run into setbacks that can keep them from fulfilling their contract obligations and trigger a bond default – an event that could put them out of business.
Smaller and midsize contractors (those with work backlogs of $5 million to $100 million) are often more vulnerable than their larger counterparts to this risk. The reason: Smaller building projects are usually easier to cancel because the owners are more likely to stick with larger, more complex projects, due to their greater importance and longer planning lead times.
If you’re experiencing, or can reasonably expect, problems in meeting your contract terms – such as excessive overhead, a liquidity squeeze, cost overruns and/or scheduling delays – it makes sense to develop contingency plans that address such concerns.
Just as important, make sure to let your surety know about your situation immediately. After all, the surety has a vested financial interest in avoiding a costly default by working with you and the project owner to work through these difficulties.
Never withhold bad news from your surety. When, not if, the surety learns about your deteriorating financial condition (even if you’re able to meet the terms of the contract), you automatically become a riskier candidate for future bonds. The surety – or any other bond underwriter – will probably limit you to bids on smaller projects with less financial risk, or keep you from bidding on any projects until you can demonstrate financial stability.
