When a contractor pursues a surety program, bonding companies look beyond the numbers. They base their evaluation of the construction company through a framework known as the Three C’s of Underwriting. Each “C” represents a key factor in assessing strength and determining bonding capacity.
1. Character
- Character speaks to the integrity and trustworthiness of the company and its owners.
- Sureties evaluate available history, industry references, and how obligations have historically been handled.
- Integrity, open communication, and a history of honoring commitments demonstrate strong character.
- Personal Credit Scores are a big factor in surety underwriting.
- Over 700 is considered “standard”.
2. Capacity
- Capacity refers to the contractor’s ability to successfully perform the work on hand.
- Underwriters assess project experience, technical expertise, management, workforce, and resources.
- A strong track record of performing on projects of similar size and scope is invaluable.
- Think of this as “operational capacity” — Can we demonstrate our proficiency in building projects within the same or similar concept?
- Similar size/scope may mean a comparable dollar value and similar type of project. Surety companies can be agreeable to +/- 2x the largest successfully completed project.
3. Capital
- Capital refers to the financial strength of the company and its owners.
- Sureties review financial statements for the following measures: Equity, Working Capital, low debt usage, and cash flow management.
- A well-capitalized business is more durable to the “unstable” cashflow common on projects. This allows a construction company to sustain operations while projects progress.
- When construction companies experience difficulty, it is commonly because they have run out of cash. They may still have equity, but working capital (specifically cash) is crucial to finance operations.
- Surety analysis as a general guideline can begin with a 10x equity or 10x working capital, depending on the surety company and the type of project being pursued. Debt load, experience, and financial stability make a significant impact on these guidelines.
Why it matters:
The Three C’s form the foundation of surety underwriting. Contractors who can demonstrate strong character, operational capacity, and sufficient capital not only improve their ability to qualify for bonding but also strengthen their business for long-term growth.
As your surety partner, we focus on showcasing your company’s strengths and making sure the surety understands your goals. If you’d like to take a deeper dive into this process, reach out to a member of our team.