What are “Credit Score” Bonds?
One of the more recent methods for contractors to obtain bonds required for public works projects is through a surety company that will provide those bonds based on credit score. One benefit of this method is that the bonds can be obtained without having to provide a complete financial package of information to an underwriter. Here are some frequently asked questions about these programs:
1. What size bonds are available? – Markets vary but generally a single bond limit of $2-300,000 or less is possible, and an aggregate limit of $750,000 or less. The aggregate limit is for all work on hand, NOT just the bonded projects.
2. Whose credit score is used? Again this varies by markets – some run credit score on the owners of the business only, some on the business itself, and some on both the business and its owners.
3. What score are they looking for? Generally a score of 660 or better is required. Bankruptcy, tax liens, and past due amounts, even when small, can drastically impact your credit score.
4. What is the cost of the bonds? About 2.5% of the contract amount.
5. What other limitations are there in these programs? Some sureties will limit the number of performance and payment bonds on an annual basis to 3 before a financial package is required. The size of the job submitted has to be similar in size and nature to a project recently completed by the contractor. If the job submitted is less than 2X the size of a similar project, the bond may be approved, still subject to the required minimum credit score.
6. How do I obtain a bond in this program? An application for the project requested is required, signed by owners and spouses, is submitted to the company. The process can take 48 hours for the first project, but can often be done, once a completed application is received, in less than a day.
Are there things you can do in your business to reduce risk—without buying more insurance? Absolutely. Here are some easy tips that you can implement quickly and without a lot of cost.