Rancho Mesa's Alyssa Burley and Matt Gaynor, Director of Surety with Rancho Mesa discuss surety prequalification letters and how they are different from bid bonds.
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Host: Alyssa Burley
Guest: Matt Gaynor
Editor: Alyssa Burley
Music: "Home" by JHS Pedals, “News Room News” by Spence
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Transcript
Alyssa Burley: Hi, this is Alyssa Burley with Rancho Mesa's Media Communications and Client Services Department. Thank you for listening to today's top Rancho Mesa news, brought to you by our Safety and Risk Management Network, StudioOne.
Welcome back, everyone. My guest is Matt Gaynor, Director of Surety with Rancho Mesa. Today, we’re going to talk about surety prequalification letters.
Matt, welcome to the show.
Matt Gaynor: Thanks, Alyssa. Enjoy being back in the studio.
AB: Well, we're happy that you're here. So, why might a subcontractor be asked to provide a surety prequalification letter?
MG: Well, in advance of a project bid, some owners and general contractors will want to pre-qualify the subcontractor 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.
It provides confidence that a third party, the surety company, has reviewed the contractor's financial information and is willing to recommend the contractor for the project.
AB: Alright now, this sounds similar to a bid bond. What’s the difference between a bid bond and prequalification letter?
MG: There is a pretty significant difference. When we issue a bid bond, that carries a 10% penalty if the contract is awarded and the sub-contractor does not provide the final bond. On the other hand, a surety prequalification letter (also known as a bondability letter) is less formal and does not carry any guarantee. But at the same time, it provides the owner or general contractor that a bond program is in place.
AB: Ok, that’s an important distinction. So, what is typically included in the bondability letter?
MG: So there's several different types of letters, but they'll typically include some of these or all these elements.
First, the name and AM Best rating of the bond company that issues the bonds for this account. Then, 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.
The next paragraph would be a single and aggregate bonding limit for that 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. 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.
An example would be we have a client that typically does $2 million projects. Well, if I list $2 million and the bond is $5 million, then I need to up it to $6 or $7 million to show that they have enough capacity.
There might be a paragraph where the surety agent recommends their particular contractor client for this project noting that they have not had any problems with past projects - schedules, budget, and workmanship are all very good.
The letter may also 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, and this is where it's different than the bid bond, we'll 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.
AB: Yeah, I understand that. And, so the letter isn't anything binding, but it’s more like a professional reference.
MG: Professional reference is a great way to describe the bondability letter.
AB: Alright. So, Matt, if listeners have questions about bondability letters, what's the best way to get in touch with you?
MG: I can be reached at (619) 937-0165 or mgaynor@ranchomesa.com.
AB: Alright well, Matt, thank you for joining me in StudioOne™.
MG: Appreciate the time, Alyssa.
AB: This is Alyssa Burley with Rancho Mesa. Thanks for tuning in to our latest episode produced by StudioOne. For more information, visit us at RanchoMesa.com and subscribe to our weekly newsletter.
