Underwriting Process for Construction Contract Bonds

The surety industry and its underwriting procedures are unfamiliar to many project owners, design professionals, and contractors. Additionally, the contract bond underwriting process is becoming more sophisticated in the midst of increased uncertainty and complexity in the construction industry. A previous paper by the writer discussed the underwriting process at a macroscopic level and identified major considerations included in the evaluation process. This paper further outlines the significant considerations in the surety underwriting decision process and is the third part of a study focused on this industry. In particular, the underwriting process is characterized by the evaluation of four factors: character, capacity, capital, and continuity. Each factor is described. Since surety bonding is in effect the extension of credit for a fee, sureties expend a large amount of their evaluation effort analyzing a contractor's financial condition. To this end, an extensive description of the financial analysis performed by sureties is given.