Insights From a Contract Bond Underwriter

As the manager of a surety underwriting team and a contract bond underwriter, my role is to offer surety and bonding on behalf of the various companies I represent. You can find many articles and blogs about the three C’s of contract bonds, which are Character, Capital, and Capacity. Each of the three C’s factor into the criteria that is used by underwriters like me to decide whether I will provide terms for a bond.   

Character: In evaluating character, a surety company will assess whether a company is likely to fulfill its obligations under the contract.  

One way of doing this is looking into the principal’s prior projects to see if they show operational integrity and efficiency. This includes how the principal pays its suppliers, how well the contractor communicates, signs of any history of that might raise a red flag in terms of trustworthiness or conflicts.  

Character evaluation also involves how the principal communicates and deals with key stakeholders, such as employees, lenders, surety bond underwriters, and employees. Are they open and transparent? Are they responsive to requests and inquiries? These are questions that need to be assessed by underwriters.
 
Capital: As an underwriter, I must be sure that a principal has financial resilience and support to be able to manage and complete the project and fulfil its obligations under the contract.  

Underwriters are typically trained to look at financial metrics such as the principal's cash, working capital, net worth, and debt. Does the contractor have a bank line? Are their projects historically profitable? 

Capacity: This examines a principal’s ability to complete the project under the contract as well as their capacity to support payment for labor and material.  

Considerations include a look at staffing to indicate if there is sufficient labor and office staff to handle the project and everything it involves.  How many other projects is the organization handling currently? Have they done a project of this size before? 

I have been in the bond business for almost 44 years now.  At JM Wilson, I probably decline 15-20% of the risks I see.  When I worked for the standard markets, that decline rate was probably closer to 80-85%.   

The most common reasons for declinations are due to personal/business credit history, financial statements, and previous experience.  

Back when I first started in the business, financial statements were the most important piece of the underwriting process. but, over the last 15 years, personal and business credit history are even more important than financials, even if just barely.