Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
In advance of a project bid, some owners and general contractors will want to pre-qualify the subcontractors to ensure they can handle a project of a certain size. A simple and efficient way to accomplish this would be to have the surety agent that supports the contractor’s bonding program prepare a surety prequalification letter.
As opposed to a bid bond, which carries a 10% penalty if the contract is awarded and the subcontractor does not provide the final bond, a surety prequalification letter (also known as a bondability letter) is less formal and does not carry any guarantee.
The letter will typically include some or all of the following items:
The name and A.M. Best rating of the bond company that issues bonds for the account. It will also confirm that the bond company is included in the U.S. Treasury List of Certified Companies and licensed in the state where the project will take place. The letter may include a reference to how long the contractor has been supported by this particular bond company.
Single and aggregate bonding limits for the contractor to determine if they have ample surety credit to qualify for the particular project. The letter may also include information regarding the amount of surety credit currently available within the program limits. It is important that the surety agent and contractor discuss the project size in advance to ensure the letter conveys that the contractor has sufficient available capacity for the particular project.
A paragraph where the surety agent recommends their particular contractor client for this project noting that they have not had any problems with past bonded projects schedules, budget, and workmanship.
The letter may sometimes include the premium rates for the client contractor if that information has been requested by the owner/general contractor that requested the letter.
The final paragraph of the letter will have wording that notes “this is issued as a bonding reference letter” and should not be considered as a bid or performance bond. Additional underwriting of the contractor may be needed if the owner desires a more formal document such as a bid bond.
If you would like more information, or to discuss the client-broker-carrier relationship, please contact me at (619) 937-0165 or mgaynor@ranchomesa.edu.