16 CHAPTER TWO
be approved. If the contractor is below the workload limit
and there is nothing unusual about the project, the applica-
tion will be approved quickly. If a contractor’s maximum
bonding capacity is approached, or if the type of construc-
tion is new to the particular contractor or is not conven-
tional, a considerably longer time may be required. The
surety puts the contractor through investigations before giv-
ing a bond for a project to be sure that the contractor is not
overextended.
To be successful, the contractor requires equipment,
working capital, and an organization. None of these should
be spread thin. The surety checks the contractor’s availability
of credit so that, if already overextended, the contractor will
not take on a project that is too big. The surety will want to
know if the contractor has done other work similar to that
about to be bid upon. If so, the surety will want to know the
size of the project. The surety will encourage contractors to
stay with the type of work in which they have the most expe-
rience. The surety may also check progress payments and the
amount of work to be subcontracted. If the surety refuses the
contractor a bond, the contractor must first find out why
and then attempt to demonstrate to the surety that the con-
ditions questioned can be resolved.
The contractor must remember that the surety is in
business to make money and can only do so if the contractor
is successful. The surety is not going to take any unnecessary
chances in the decision to bond a project. At the same time,
some surety companies are more conservative than others. If
contractors believe that their surety company is too conserv-
ative or not responsive enough to their needs, they should
shop around, talk with other sureties, and try to find one
that will work with their organization. If contractors are
approaching a surety for the first time, they should pay par-
ticular attention to what services the company provides.
Some companies provide a reporting service that includes
projects being bid and low bidders. Also, when contractors
are doing public work, the surety company can find out
when the particular contractor can expect to get payment
and what stage the job is in at a given time. Contractors need
to select the company that seems to be the most flexible in its
approach and offers the greatest service.
2–6 Insurance
Contractors must carry insurance for the protection of the
assets of their business, and because it is often required by
the contract documents. The contractor’s selection of an
insurance broker is of utmost importance, because the bro-
ker must be familiar with the risks and problems associated
with construction projects. The broker also must protect the
contractor against the wasteful overlapping of protection,
yet there can be no gaps in the insurance coverage that might
cause the contractor serious financial loss. Copies of the
insurance requirements in the contract documents should
be forwarded immediately to the insurance broker. The bro-
ker should be under strict instructions from the contractor
that all insurance must be supplied in accordance with the
contract documents. The broker will then supply the cost of
the required insurance to the contractor for inclusion in the
bidding proposal.
Insurance is not the same as a bond. With an insurance
policy, the responsibility for specified losses is shouldered
by the insurance company. In contrast, with a bond, the
bonding companies will fulfill the obligations of the bond
and turn to the contractor to reimburse them for all the
money that they expended on their behalf. In addition to
the insurance required by the contract documents, the con-
tractor also has insurance requirements. Certain types of
insurance are required by state statute. For example, some
states require all employers to obtain workers’ compensa-
tion and motor vehicle insurance. In addition, there is
other insurance that is required but provided by govern-
mental agencies. Examples of this type of insurance are
unemployment and social security. Other insurance that is
usually carried includes fire, liability, accident, life, hospi-
talization, and business interruption. No attempt will be
made in this book to describe all of the various types of
insurance that are available. A few of the most common
types are described here.Workers’ Compensation Insurance. A workers’ com-
pensation insurance policy provides benefits to employees
or their families if they are killed or injured during the
course of work. The rates charged for this insurance vary by
state, type of work, and the contractor. The contractor’s
experience rating depends on the company’s work record
with regard to accidents and claims. Contractors with the
fewest claims enjoy lower premiums. Workers should be
classified correctly to keep rates as low as possible. The rate
charged is expressed as a percentage of payroll and will vary
considerably. The rates may range from less than 1 percent to
over 30 percent, depending on the location of the project
and the type of work being performed. The contractor pays
the cost of the policy in full.Builder’s Risk Fire Insurance. Builder’s risk fire insur-
ance protects projects under construction against direct loss
due to fire and lightning. This insurance also covers tempo-
rary structures, sheds, materials, and equipment stored at
the site. The cost usually ranges from $0.40 to $1.05 per $100
of valuation, depending on the project location, type of con-
struction assembly, and the company’s past experience with
a contractor. If desirable, the policy may be extended to all
direct loss causes, including windstorms, hail, explosions,
riots, civil commotion, vandalism, and malicious mischief.
Also available are endorsements that cover earthquakes and
sprinkler leakage. Other policies that fall under the category
of project and property insurance are as follows:- Fire insurance on the contractor’s buildings
- Equipment insurance
- Burglary, theft, and robbery insurance
- Fidelity insurance, which protects the contractor against
loss caused by any dishonesty on the part of employees