Here are some useful tips for improving your bonding program:
▣ Appoint a Professional Contract, Bond-only Agent/Broker – The Bond Connection represents the best interests of General Contractors and Subcontractors of all sizes and trades using its direct appointments to numerous surety bond companies, underwriters, and programs. Only by “in-house” execution of all bid, performance, and payment bonds can a contractor receive the service needed to grow revenue and profit. Insurance agents do not have the necessary special and unique experience and only minimal indirect access to 1-2 inferior/inappropriate sources.
Don’t find out the hard way that your agent won’t be the best source of servicing your bond needs!
▣ Improve and Maintain a Good Credit Record – Surety bond companies periodically check a variety of credit reporting sources and question irregularities. Trade payments should be kept current. Pull company ownership credit records regularly. If spotted, report errors for correction immediately.
▣ Improve the Company’s Financial Presentation – The type and method of presenting a company’s financial strengths frequently assist a company’s overall objectives. Larger bonds & lower premium requirements result. Employ a Certified Public Accountant, (CPA), to put together a financial statement for your company. If you already have a CPA financial statement, consider upgrading its quality. In order of sophistication, CPAs compile, review, or audit the financial positions of companies, the latter not needed except by the largest of companies. An active construction company will have significant value in ongoing construction projects. Valuation of that incomplete work is most accurately expressed in the “percentage of completion” method of accounting. By presenting that usually increased valuation on even a mere compiled financial statement, (which is allowed to be calculated separately from more conservative tax methods), a contractor’s bonding capacity will increase. Providing a financial statement, and one at least “compiled” by a CPA, is a less expensive way to increase bonding capacity without breaking your budget.
* Click here to view a sample CPA compilation-quality financial statement prepared on a percentage of completion method of accounting that is bond company-friendly. Although this example may be far more sophisticated than necessary for your company, an exemplary CPA will still find it a welcome template.
A contractor’s CPA using the format in the sample above is recommended compared to the immediate below sample which is acceptable but of inferior quality. That acceptability depends upon a contractor’s individual qualifications and needs.
If your company, however, desires bonding projects larger than $2,000,000 in size or larger, improving your company’s presentation to a quality “review” financial statement to document your company’s financial qualifications is sometimes required by underwriting companies.
You may also benefit from comparing your presentation to this one:
Note: Bond companies most value a contractor’s latest fiscal year-ending financial statement over some more current point in time.
However, before you go to any significant expense and make such an investment, we do recommend you first send us what you have to receive our opinion.
Here is an even more extensive/impressive example:
* Click to here view another sample CPA review-quality financial statement prepared on a percentage of completion method of accounting that is also bond company-friendly. This is another potentially overly sophisticated example, but a good CPA will still welcome these useful, albeit somewhat dated, templates.
Note: Bond companies most value a contractor’s latest fiscal year-ending financial statement over some more current point in time. If significant time has passed since year-end, an update is additionally recommended. Such an update can be made with very minimal confidence by a CPA or even just an “in-house” presentation by the contractor. If significant financial progress has progressed since year-end, then it may be a subjective cost versus benefit equation best determined by discussing in a conference setting (“cost” being what the contractor may choose to spend engaging a CPA to improve a mid-year presentation; the “benefit” being how much additional bonding may result).
▣ Maximize Cash – Cash is king, now more than ever. A contractor with a strong net cash position may be able to fund problems without turning to third parties, e.g., the surety or others. The larger a contractor’s cash position at reporting periods, the more favorably a bond company looks upon that contractor’s qualifications.
▣ Maximize Working Capital at Reporting Periods – This means maximizing available liquid assets while minimizing current liabilities. Restructure any debt if possible.
▣ Maximize Borrowing Capacity and/or Availability with Lending Institutions – “Wine and dine” all banks, bond companies, and other large creditors. The more capabilities available at one, the more others favorably view a contractor.
▣ Place Risk Exposure to the Appropriate Party – Requiring larger subcontractors and suppliers to provide bonds reduces both the contractor and bond company’s exposure, freeing up bonding capacity for another project.
▣ Reduce and/or Eliminate Project Underbillings – Whenever possible, especially at company fiscal year-end and other reporting periods. Surety bond companies would rather contractors utilize payments instead of a contractor’s working capital.
▣ Increase Life Insurance of Owners – Surety bond companies value a properly funded plan that considers every possibility and increases the money available in all possible scenarios.
▣ Letters of Recommendation/Reference Letters – Experience is a key factor and bond companies can only recognize a contractor’s qualifications by verifying successfully completed projects. Get a reference letter on large and/or more complicated jobs.
▣ Individual and Company Resumes – Resumes document all technical knowledge and experience available from owners and key employees. Marketing flyers, pamphlets, pre-qualification statements, record organizational accomplishments, etc.
▣ Additional Capital Investment – Financial resources are an increasingly important factor in the validity of your enterprise. Where a CPA might recommend profit minimization valuing your desires for tax objectives, bond companies advocate the opposite and prefer owners leave as much money in their company as possible.
Why Contractors Fail
The top reasons contractors fail are, in order:
Over Expansion –
Growing too fast, over-extending financial and personnel resources.
Recommendation: Adopt and commit to a written logical rational sustainable business plan.
Volume Obsession –
More profit does not necessarily derive from more revenue.
Recommendation: Do not accept lower profit margins from larger or “filler” jobs.
Single Project Emphasis, Unrealistic Schedules, Unfair or Poorly Drafted Contracts –
A single bad project has the potential to bring down an otherwise healthy concern including timing, selection, and other issues both available and unknown at its inception.
Recommendation: Adopt a strategy for more jobs of smaller size.
Flawed Accounting Systems Leading to Management Errors in Capital Allocation –
Contractors who have yet to adopt, understand, or properly calculate their financial position on a “percentage of completion” method of accounting are unable to understand their own strengths and weaknesses. Often, a major part of a contractor’s value resides in their work in progress.
Recommendation: Adopt a “percentage of completion” method of accounting into all facets of financial reporting systems, and religiously monitor and adjust incomplete job estimates.
Additional reasons: Poor Financial, Marketing, and Management Capabilities; Absence of or Poor Succession Plans; Poor Project Management and Performance; Problem Customers; Market Volatility and Changes.
* Source: FMI, a construction consulting firm based in Raleigh, N.C. in conjunction with the Construction Users Roundtable.
** Samples are for illustration purposes only and may not reflect current legal styles/presentations from a knowledgeable and active certified public account.