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With more projects requiring surety bonds these days, mechanical contractors without bonding could be limiting their company’s growth.
The recession took its toll in the form of contractor defaults and missteps. Now cautious project owners, looking to reduce their risk, are increasing their requests for bonds and insisting that general contractors require their subcontractors to obtain surety bonds as well. By obtaining bonding, you can expand your opportunities for work and let prime contractors know that you have the capability and capacity to take on their projects.
Bond availability and criteria
Despite the continual pressures felt by contractors in an economy that is still recovering, the future for surety bonds holds promise. Bonds are expected to be available for construction companies that can demonstrate a well-run business.
Mechanical contractors who are bonded are those who provide the type of information that underwriters need to clearly assess and verify business finances. David Pesce, vice president, surety lead at AXIS Insurance, emphasizes timeliness and accuracy.
“Two contractors can look identical on CPA statements, but that doesn’t mean they will be looked at equally by a surety,” Pesce said. “A surety will first choose the contractor who can provide recent reports such as closed monthly statements, work in progress, and aging receivables. But it’s important that you can trust the accuracy. It goes beyond financials and sound documentation — it’s also about showing how well you run your business. The more information you can provide, the more likely you are to getting the bond.”
Although a contractor’s business relationship and communications are primarily through a surety agent, the insurance company is the one that provides the money and carries the risk. The insurance company needs to know it can explicitly trust the contractor’s operations, and general practices can reveal a lot about a business. Insurance companies will want to hear about operational details such as how a contractor chooses its suppliers or what type of systems and procedures are used to manage the finances.
When asked how software systems may factor into a decision, David Pesce commented, “I pay a lot of attention to contractor software in the market — what they [these systems] can and can’t do, like a work-in-progress schedule. Your entire internal system’s capabilities are critical and can easily make the difference to getting a bond versus not getting a bond.”
Five key areas for best capacity, rates
Numbers are going to drive decisions, but surety companies look to confirm that there are strong company bones behind the financial reports. The following are five key recommendations for building a strong and well-presented business:
1) Maintain consistent financial reports
Demonstrating that you have well-established financial processes and reports shows your business is disciplined and on top of your company’s performance. Sureties assume you have standard reporting for tax and general business assessment but will pay special attention to reports with more specific information such as under billings, over billings, and work in progress.
2) Manage cash flow
Sureties carefully evaluate cash flow by looking at your ongoing business practices in combination with your financial reports. So in addition to cash flow reports, make sure you provide information that illustrates your sound accounting practices and how tightly you manage your projects, procurement, regulatory issues, and contract terms. As David Pesce commented, “The degree you trust a contractor’s cash flow is based on the track record and accuracy of everything else the contractor has provided. Net worth has never stopped a contractor from going broke. It’s cash flow that can cause someone to go bankrupt.”
3) Manage your suppliers
Selecting and managing your suppliers to assure timely delivery of materials and overall job quality helps reduce your risk. And it is another important business aspect sureties will be interested in. If you also subcontract some of your work, make sure you show how you systematically monitor and manage lien waivers, certified reports, permits, punch list completions, insurance renewals, and other areas that can expose you to financial loss.
4) Set up proactive alerts and reports
Identifying potential issues before they need to be escalated or turn into a crisis is critical to a successfully run projects and a great way to show sureties how you proactively manage and reduce risk on your jobs. Examples of critical reports or alerts you can put into place and discuss with your surety include overdue invoices, backlogged change requests, and projects that are underperforming or under-billed.
5) Put your best foot forward
When you apply for a bond, make sure your reports are professionally formatted, easy to read, and contain relevant and accurate data that shows a recognizable financial pattern over time. Be prepared to interpret your company’s data, bringing out your personal character, honesty, and integrity — attributes highly valued by sureties. Also, when assembling reports for a surety, keep in mind that the four qualitative characteristics of financial accounting do matter — these are: understandability, relevance, reliability, and comparability.
Once you’ve obtained bonding, it’s important to maintain a strong working relationship with your surety. Today’s sureties want to be more integrated into a contractor’s decision making and are requiring new levels of regular reporting. Contractors who proactively provide that reporting and work closely with their surety to improve their risk profile will find it easier to obtain additional bonding capacity when they need it.
It’s also imperative for you to understand a surety’s business philosophy and what it provides. While the surety will do a background check on you, you also need to do a background check on it. Is the surety experienced in construction and contract bonding? Is it licensed in the locations where you do business? Does it have a good reputation and strong financial results over time? Just like the relationships you have created with your customers and suppliers, a productive surety partnership is built on working with the right people.
Sage keeps projects moving with solutions for construction and real estate. Additional information is available on Sage Construction and Real Estate solutions at www.sagecre.com.
Dennis Stejskal has over 30 years of experience developing, supporting and selling software and technology to construction and real estate companies. His product knowledge and understanding of customer and market needs propelled him into his current role as vice president of product management for Sage Construction and Real Estate. Stejskal has been a member and co-chair on the CFMA Technology Committee and often speaks at industry events, including CFMA, AGC and NAHB meetings and conferences. He graduated from the business school at the University of Wisconsin, Madison.