PREDICTING CONTRACT SURETY BOND CLAIMS USING CONTRACTOR FINANCIAL DATA

This paper describes the results of a study to predict contract bond c laims based upon contractor financial data. Financial statements of 87 contractors (36 claim and 51 nonclaim) were obtained from four compan ies underwriting construction-contract surety bonds. A claim contracto r was defined as one that defaulted on a bond, many times requiring th e surety to pay a loss. A nonclaim contractor was defined as one that has not defaulted on a surety bond. A predictive model was developed u sing discrete choice modeling. Variables identified in the model are c ost monitoring, underbillings/sales, total current liabilities/sales, retained earnings/sales, and net income before taxes/sales. This model predicts the probability of experiencing a claim in the accounting pe riod following the period in which the financial statement was prepare d. Considering each variable, recommendations are presented for reduci ng the probability of claim. Additionally, questions related to the va riables have been developed for consideration by the management of con struction companies. The model can assist construction-industry profes sionals by providing them with a quantitative tool to evaluate contrac tors.