A surety is the third party in every construction bond. The contractor is the principal, the owner (or GC, for a sub bond) is the obligee, and the surety guarantees the principal’s obligation to the obligee. Most sureties are insurance companies or their subsidiaries, and in the US, sureties on federal work must be listed in Treasury Circular 570.
Surety is underwritten more like credit than insurance. The surety expects no losses, because if it pays a claim it recovers from the contractor and its owners under a general indemnity agreement. So underwriters look hard at the “three Cs”: character, capacity and capital. In practice that means CPA-prepared financial statements (reviewed or audited at higher bond lines), working capital, equity, the WIP schedule, backlog and track record.
Why it matters
The surety sets your bonding capacity, which caps how much public and bonded private work you can carry. Underwriters read your WIP schedule closely. Margin fade, large under billings or unexplained over billings all show up in the capacity they offer.
Common mistakes
- Treating the surety as an insurer that absorbs losses. It doesn’t; the indemnitors do.
- Sending a WIP schedule to the surety that doesn’t tie to the financial statements.
- Surprising the surety with bad news late instead of explaining a fading job early.
- Not involving the surety when a big sub is struggling and a claim is likely.
How os.construction handles it
We’re building WIP, backlog and job cost on one data model so the schedule a surety reviews ties to the general ledger instead of a hand-built spreadsheet. It’s in development.