Bondability Letters – Surety Prequalification for Owners and General Contractors

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

In the normal process of bidding a construction project, our contractor clients are required to post a 10% bid bond to guarantee that they will execute and deliver a signed contract along with 100% performance and payment bonds, if they are awarded the referenced project. While this is a requirement for public projects, bid bonds have also become more prevalent for certain private projects. By approving the required bid bond, the surety company provides their stamp of approval that they have reviewed the bidding documents and are willing to support the contractor for the specific project.

On certain occasions, the owners and general contractors will require a less formal surety prequalification in the form of a letter of bondability. Although the owner/general contractor requesting the letter does not have the 10% guarantee provided by a bid bond, the letter of bondability can be issued rather quickly to let the owner know that a bond program is in place for the bidding contractor. If this contractor is deemed to be the low and responsible bidder by the general contractor, they know in advance that the contractor has been through a third-party prequalification by the surety company.

This document is normally issued by the bonding agent and contains the following:

• Name of the current surety carrier, A.M. Best Rating, treasury listing, and length of relationship.

• Approved single and aggregate program bonding amounts.

The other key wording contained in a typical bondability letter that differs from a bid bond is as follows:

“The issuance of surety credit is a matter between the principal (contractor) and surety… We assume no liability to you or any other third party if for any reason we do not execute said bonds.”

This wording is important because unlike a bid bond, the surety company does not have an obligation to provide final bonds if their principal is awarded a contract. While this rarely happens, the bond company will need to review additional information (i.e., contractual or financial) before they agree to provide performance and payment bonds in support of a project. For example, the contract or bond form may contain onerous wording that the surety company is not willing to support.

For more information on letters of bondability and how they affect your business, please contact me at 619-937-0165 or mgaynor@ranchomesa.com.

What is a Surety Bondability Letter?

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

When an owner or general contractor is looking to pre-qualify a contractor for a specific project, they will often request the contractor to submit a bondability letter from their bond agent. The bondability letter provides the owner with an assurance that the contractor has been underwritten and approved by a surety company for support of a specific project. The bondability letter is issued for no cost (it is regarded as a standard service provided by the bond agent).

The typical bondability letter contains the following information:

a.) How long the bond company has been providing bonding for the contractor,

b.) The A.M. Best rating of the bond company (typically required to be “A” or above),

c.) Confirms that the bond company is on the U.S. Treasury approved list, and that the bond company is licensed in the state where the work is to be performed,

d.) Provides the single and aggregate bond limits that the bond company will support the contractor,

e.) Includes contact information of the bond agent for follow-up if the owner or general contractor has additional questions.

Although the bondability letter is non-binding and does not provide the same assurance that a bid, performance, or payment bond would provide, it is still a useful pre-qualification tool that does not require the contractor to spend any money.

If you are looking for an inexpensive way to pre-qualify your company with an owner, work with a Rancho Mesa Insurance for assistance with a bond program.