Large Projects Underwriting: The Role of the Surety Bond Broker
September 15, 2022
Article by: American Global
As construction projects grow in size, complexity, and duration, it is important that sureties be engaged early in the procurement process. Detailed project information needs to be developed with ample time given to review and discuss it. 1
The surety broker plays a critical role in this process. In addition to securing project scope detail, the broker should be reviewing and summarizing key contract provisions for underwriter review. Often, the broker will also be tasked with helping negotiate favorable performance security terms with the project owner.
There was a time not long ago when a $500 million project with a 4-year duration was an outlier large project opportunity. With the introduction of alternative project delivery (APD) methods such as design-build (DB), design-build finance (DBF), public-private partnerships (P3), and engineering-procure-construct (EPC) projects, it is not unusual to see projects in excess of $1 billion, even several billion. With that, it is also not unusual for project durations to extend beyond 5 years. It may be the largest and longest-duration project the surety has supported for their client to date.
The size and scope of a large project often lead to contractors forming joint ventures. Teams are often comprised of international and domestic/local companies that bring prior experience, strong balance sheets, and surety capacity to the project. Often these firms have not previously worked together. It may be that the surety knows their client but not their joint venture partners. The surety will need to evaluate partner risk, together with project risk.
All of these complexities require the surety broker to play a very important role of adviser to their client and sureties throughout the complex procurement process. There is a lot of deep underwriting that goes into reaching a decision to extend capacity on large projects.
The Underwriting Process Explained
The large project surety underwriting process formally starts when a project request for qualification (RFQ) is released. However, the contractor-broker-surety discussions around the project pipeline should start much earlier. It is important to have frequent communication among these parties around future large projects. The surety will be reviewing financial and work-in-progress/backlog information to manage capacity offerings. Discussions should start well in advance of the RFQ stage, so that capacity can be lined up to support the project.
Unlike most bid-build projects, a large project procurement process can extend 2–3 years. Once the RFQ process is complete and a shortlist of joint venture teams has been announced, the request for proposal (RFP) documents are released, and the complex proposal process begins. There will be volumes of documents outlining the project scope, contract terms, conditions, and performance security requirements. Although project documents vary by procurement, generally, the surety broker will need to secure, analyze, and summarize key underwriting provisions in the following documents.
- Instruction to proposers
- Signature documents—contract
- General provisions
- Schedules to general provisions
These documents establish everything stakeholders need to know about the project scope, proposal time line, project and payment milestones, budget, contractual obligations, and bond forms.
The surety broker, as a client adviser and surety partner, must be deeply engaged in the proposal process. Initially, they need to review and summarize provisions regarding scope of work, schedule/duration, and warranty and post construction completion obligations requirements. They will then need to review the various performance security provisions and bond forms to determine if they are reasonable. It is not unusual that the first set of owner documents released will include very challenging and potentially unsupportable bond requirements. The surety broker can be instrumental in working with their contractor client and their surety to outline and propose necessary modifications to the owner's documents.
As an example, recently, a very large bond requirement was tied to an entire scope of work (e.g., design, construction, gap to revenue start-up, and post-construction obligations) together with a long-term warranty period. The performance and payment bonds were tied to this 13-year obligation. Through contractor/broker negotiations with the owner, the requirements were modified, allowing for separate bonds covering each phase of work and then a separate warranty bond.
A Lengthy Procurement Process
The large project procurement process will often extend 2-plus years from the initial RFQ to the proposal date. Along the way, proposal teams will submit written requests for clarification on many aspects of the project requirements. They will have one-on-one meetings with the owner to understand the full project scope, requirements, and agreements. Initial project documents are then followed by addendums as terms are negotiated. Through this lengthy process, the contractors will, but not always, reach a point where they feel comfortable submitting a proposal. The owner on a current, very large project in California recently released Addendum #16, 2.5 years out from the initial RFP document release. The surety broker is responsible for staying on top of the updates and sharing meaningful changes with their surety partners.
The broker for the lead joint venture partner plays an additional role in coordinating surety approvals for all joint venture partners. Often, a surety will be participating on more than one partner's surety panel. It is prudent for the lead broker to facilitate a consistent sharing of project information among the various brokers and their sureties.
Another area where a broker can add value is through introductions to prospective partners and/or subcontractors. The project pursuit may involve a familiar scope of work but perhaps in a state outside their current territory. Connecting general contractors to qualified, capable, and bondable local subcontractors to join the team as a partner or dedicated subcontractor may help round out a project team.
Performance Security Requirements
Throughout the surety procurement process, there will be various performance security requirements. Initially, the contractor may need to provide a surety letter with their qualification statement. They may then need to provide a proposal bond with the proposal submission, followed by performance and payment bonds at the time of the award. If the project includes financing, the team may need to provide a commercial close bond, followed by a financial close bond, and then separate performance and payment bonds at interval notice-to-proceed dates. These various forms of bonds will need to be reviewed and may need to be negotiated for modification during the procurement process.
Conclusion
Contractors and sureties should expect their broker to play a critical role in the large project procurement process. The broker needs to engage in project and document review early and throughout the process. They will need to understand and communicate the project scope and project risks and potentially engage in negotiating acceptable performance security requirements and bond forms. The broker helps streamline the bond underwriting process, making it smooth and efficient for their contractor client and sureties.
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