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How to Reduce Surety Bond Costs

Heating and plumbing contractors have steps they can take to reduce the cost of a surety bond.

By Eric Weisbrot

In the heating and plumbing industry, licensed professionals are often required to post a surety bond. This state or local requirement ensures that customers working with heating and plumbing contractors, as well as any municipality hiring a contractor for a public project, has some recourse if work is not completed or fraudulent activity occurs. A surety bond may come in the form of a bid bond or a performance bond, or it may fall under a construction bond for certain contractors. Regardless of its name, it represents a necessary cost of doing business.

Fortunately, heating and plumbing contractors can take steps to reduce the cost of a surety bond.

First, Focus on Personal Credit

Surety bonds for heating and plumbing contractors are made available by surety companies that review bond application from licensed professionals. A significant portion of the application review process is evaluating personal credit history and score. This is because a surety bond is a form of credit extended to a bondholder to cover potential claims. If a customer files a claim against a bond, be it an individual customer or the state, the surety company pays for this claim amount initially. However, the heating or plumbing contractor is responsible for repaying this claim over time.

Because of the structure of surety bonds and claims repayment, a bondholder with a low credit score is perceived as a higher risk to the surety company. Bad credit, due to missed payments, bankruptcy, liens, or civil judgments, does not mean a bond cannot be approved, but it does mean the cost of the bond is far higher compared to someone with a high credit score and clean credit history.

To lower the cost of a surety bond, heating and plumbing professionals can work to improve their personal credit by removing errors, creating an on-time payment history with creditors, and managing credit accounts responsibly over time.

Get Business Finances in Order

In addition to reviewing personal credit, surety companies may also take a look at the finances of the business. Having disorganized or out-of-date business financial documents may be a red flag to the bond provider, and that may lead to a higher cost for the bond. Heating and plumbing professionals should take the time to gather accurate business financials before applying for a surety bond.

Documents which may be helpful in the application process include the balance sheet, highlighting assets and liabilities, an income statement, which shows profit and loss, and a cash flow statement. If a contractor does not feel confident in putting these documents together, hiring an outside professional, such as an accountant or a bookkeeper, can be well worth the investment to reduce surety bond costs.

Work with the Right Surety

Although there are many surety companies offering to bond heating and plumbing professionals, it is crucial to work with a bond provider that understands the industry as well as offers options for bad credit bonds. A strong surety company will also make the application process straightforward, and provide pricing for the bond quickly.

Contractors in heating and plumbing should also ask questions of the surety company before moving forward with a bond, including confirming that they work with several different bond providers behind the scenes and they can offer assistance in handling claims if and when they arise. These attributes make the possibility of obtaining an affordable bond more of a reality for contractors.

Keep Claims to a Minimum

Finally, heating and plumbing professionals can keep the cost of a surety bond low by minimizing claims from customers or the state. The best way to maintain a clean claims history is to complete each project as agreed upon in a contract. Most contractors have both the skill and experience to meet this task, but a common issue is taking on too much work at one time. Avoiding bond claims means focusing on time management and only bidding on projects that can realistically be completed with quality work.

If a claim does arise, don’t ignore it. Instead, work with the surety company to see what remedies are available, and communicate openly and honestly with customers along the way.

A surety bond is priced based on the percentage of the total bond amount required, ranging from 1 to 15% depending on the type of bond and the location of the contractor. Following the steps mentioned above will help bring down the cost of a surety bond, making the requirement less of a financial burden for licensed heating and plumbing professionals.

Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.

 

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