CONSTRUCTION Accounting ARTICLE -
What Should You Expect From Your Surety?

Target Audience: Construction Industry Professionals, General Contractors, Construction Accountants

As of this writing, the surety market remains tight in most areas of the country. Although there are still hopes that the 2009 Stimulus Act will finally deliver its big boost to construction companies nationwide and allow sureties to ease up a bit, those funds have been slow to materialize.

If you intend to secure a surety bond for your construction company this year, what should you expect? In a couple of words: strict standards. Of course, that doesn’t mean you can’t navigate the situation and get the bonding you need.

A little debt

One of the first things surety companies want to know is that you’re able to ride out economic storms. Anything you can do to remain profitable — from reducing your own indebtedness to improving your collections — will be particularly valuable in periods of economic uncertainty.

Your working capital and tangible net worth will likely sit near the top of any surety’s list of critical attributes, as will receivables and debt. Obviously, you want to increase working capital and tangible net worth, while decreasing tardy receivables and debt.

A little debt will go a long way in influencing your surety’s view of you. You need to show a healthy relationship between liquidity and debt, as sureties aren’t comfortable with a contractor who’s so heavily leveraged that virtually all revenue is going to pay off debt. To improve your standing, consider debt reduction strategies such as equipment sale and leaseback arrangements.

Consistency and solvency

Of course, sureties look for consistency as well as solvency. If you’ve had significant swings in monthly performance, try to eliminate them and be prepared to explain them. Your surety is likely to look at how you fund delays and retainage, as well as how you handle change orders.

If you recognize major revenue immediately after a sizable change order, you’re risking profit fade if an owner disputes the charge. Don’t perform work on a change order until that order is signed and approved by the owners. Then the revenue will stay in place.

In addition, though a surety wants to know you can finish a job, it also wants to know you have assets it can seize if you don’t. Excessive prepaid expenses, shareholder receivables and inventory will count against you. Having a strong cash flow, solid current receivables and a reasonable amount of inventory will work in your favor. Sureties are less enamored of property and equipment that aren’t liquid — particularly if you have too much capital tied up in them.

Beyond the numbers

Another important consideration for bonding capacity is work in progress. Sureties aren’t looking for expert builders; they’re looking for expert business people. They want some assurance that you use accurate estimates and consistent approaches, and that you can still complete what you’re doing if you add more work to the schedule.

If you have multiple projects open, you may want to close a few to improve your bonding capacity. Also, review your charges. If you billed one owner $150 per hour for a backhoe and another owner $200 for the same piece of equipment, be prepared to explain why. If you’re undercharging on some jobs, the surety may think you’re undervaluing your work in progress.

Sureties look beyond the numbers, too. They want to see a history of successful projects and work experience, an organizational leadership depth chart that demonstrates your ability to stay in business if a key leader leaves unexpectedly, a history of banking relationships and a business plan that indicates you know where you’re going and what you’re doing.

In good standing

Although you’re certainly free to hope that surety markets will loosen up to the relatively freer standards of past years, not much has changed in the here and now. Stay in close contact with your bonding agent regarding current and upcoming projects, and be ready to provide the information your surety requires to get and keep you in good standing.

Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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