Dustin SanVido | Sr. Account Executive – Surety at Ai Insurance Organization

Steps to Overcome Bond Request Declines

In the Canadian construction industry, surety bonds are essential tools guaranteeing a contractor will fulfill their contractual obligations. However, securing these bonds is not always straightforward. Contractors sometimes face challenges when their bond requests are declined by sureties.

In this article, our bonding expert, Dustin SanVido explains that understanding the reasons behind these rejections and knowing the steps to overcome bond request declines is crucial for maintaining a successful construction business.

Reasons for Bond Request Declines

Inadequate Financial Health

One of the primary reasons a surety may decline a bond request is the contractor’s financial situation. Sureties carefully monitor financial statements to assess a contractor’s liquidity, profitability, and capital base. Poor financial health, reflected through weak balance sheets, low working capital, or high debt ratios, can signal risk to the surety.

Limited or Problematic Project History

A contractor’s track record plays a significant role. A history of incomplete projects, disputes, or consistent underperformance can make sureties hesitant. They prefer contractors with a proven track record of successful project completions, including reference letters and substantial completion certificates.

Inadequate Experience for the Project’s Scope

If the scope of the project far exceeds the contractor’s demonstrated experience, bonded or unbonded, sureties may view it as a red flag. Taking on projects that align with the team’s expertise and experience is crucial.

Poor Relationships with Previous Clients or Subcontractors

Strong professional relationships and a good reputation in the industry matter. Disputes, litigation, or a history of strained relationships can impact a contractor’s ability to secure bonds.

Lack of Adequate Insurance Coverage

Sureties often require contractors to have sufficient insurance coverage. Inadequate coverage can be a sign of poor risk management, leading to bond denials. It’s always wise to employ one broker for all business insurance lines to ensure coverages are always adequate.

Short-Term Steps to Overcome Bond Request Declines

Improve Financial Documentation

Ensuring that financial records are accurate, updated, and professionally presented is vital. Immediate actions like clearing up any discrepancies and updating financial statements can help in the short term. Retaining and using a Chartered professional Accountant (CPA) is a must for bonding.

Seek Smaller Projects

If declined for a large project, focus on securing and successfully completing smaller projects that align with your current capacity.

Resolve Disputes Efficiently

Address any ongoing disputes or litigations promptly and amicably. Demonstrating the ability to resolve conflicts can improve trustworthiness.

Consult a Specialized Surety Broker

Engage with a surety broker who specializes in the construction industry, like me! We can provide insights into why a bond was declined and offer guidance on addressing the specific concerns and overcoming these declines.

Long-Term Strategies to Prevent Bond Request Declines

Strengthen Financial Health

In the long run, focus on improving your company’s financial standing. Strategies may include reducing debt, increasing working capital, and steadily improving profit margins. Diversifying revenue streams can also provide financial stability.

Build a Strong Track Record

Consistently deliver quality work on time and within budget. Building a portfolio of successful projects can enhance your reputation and reliability in the eyes of sureties.

Invest in Your Team’s Development

Enhance the skills and capabilities of your team. Regular training and professional development can prepare your workforce for more complex projects, thus expanding your company’s potential project scope. Hiring the right people and growing/advancing their roles is such an undervalued company trait in the construction industry.

Maintain Strong Industry Relationships

Cultivate and maintain positive relationships with clients, suppliers, and subcontractors. Positive referrals and a strong network can be influential when applying for bonds.

Regularly Review and Update Insurance Policies

Ensure that your insurance coverage is comprehensive and up to date. Regularly reviewing and adjusting your policies can demonstrate a commitment to risk management.

Transparent and Open Communication

Maintain clear and open lines of communication with your surety. Inform them about the progress of ongoing projects, any potential risks, and steps taken to mitigate them.

Adopt Technology and Modern Practices

Embrace modern construction practices and technologies. Utilizing tools like project management software and adopting sustainable construction practices can showcase your company’s commitment to staying current and efficient.

Regular Financial Reviews and Audits

Conducting regular financial reviews and audits can help identify and rectify issues before they become problematic. This proactive approach demonstrates fiscal responsibility to sureties.

Develop a Long-Term Surety Relationship

Work towards building a long-term relationship with a surety company. Consistency and a track record of fulfilling bond obligations can make future bond acquisitions smoother. This can also be accomplished by opening a bonding facility and keeping it active and renewed, even if there is no current appetite or request for bonding. This will demonstrate commitment to the surety and the Surety will 100% take note of this in all considerations.

Industry Engagement and Continuous Learning

Stay engaged with industry trends, regulatory changes, and best practices. This continuous learning approach shows that your company is adaptable and forward-thinking.

Being declined by a surety can be a setback, but it’s not the end of the road. By understanding the reasons behind these declines and implementing