By Jon Fosburg – Reed Surety
Contractors face widespread bonding requirements today. Contractors performing work for federal, state, county or municipal entities will be required to post a bond. With tighter budgets governing projects everywhere, owners want stronger protection against contractor default.
Some construction companies face the challenge of establishing a surety line from scratch, while others seek to maintain or increase their limits. Regardless, every contractor should be aware of the critical factors that affect whether or not you get bond credit.
CPA prepared financial statements – To secure or increase your bond capacity rests primarily on the results posted in your company’s financial statements and these statements must be prepared on an accrual, percentage of completion basis. Surety companies take a hard look at a contractor’s net worth and working capital. They generally discount assets that are not easily converted to cash such as aged receivables older than 90 days and inventory. Sureties also look at how assets are allocated. A contractor may show a strong bottom line, but if its working capital consists almost entirely of equipment and fixed assets, can it really fund a job? If such a company’s cash and credit line were to dry up, it couldn’t simply sell equipment to pay wages and other job costs, because then it couldn’t do the job at all. That’s why a surety company likes to see contractors with strong working capital (defined as current assets minus current liabilities). Current assets include cash, receivables under 90 days and some inventory, assets that can likely be turned into cash within a year as opposed to property, plant, equipment and other long-term resources. Working capital gauges a firm’s ability to finance its operations and indicates the level of protection creditors and surety companies can expect when they underwrite the firm’s operations.
Company information – What’s the largest job your company has completed, has there ever been a claim, what accounting system do you use, resumes of your team, who’s your CPA? These are just several questions that are covered on a contractor’s questionnaire. The more complete your information is to the surety underwriter, the fewer roadblocks you’ll encounter in securing bond credit.
Banking – Sureties will look for good banking relationships and balances. A bank line of credit is always helpful and it is becoming more of a requirement for larger programs. Have a bank reference letter ready to submit in the underwriting package.
Work in Progress (WIP) – The importance of a WIP report cannot be overemphasized. Typically a WIP is included in the year-end financial statement, however consistent reporting of a WIP to the surety will produce benefits. The WIP report is perhaps the most important report a contractor has to manage the profitability of the jobs it has in the backlog. In securing and maintaining your bond program, sureties will closely examine your WIP report.
For more information or assistance with your surety bonding needs, please contact Jon Fosburg of Reed Surety.
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