A construction firm’s financial statements form the benchmark by which its surety program’s capacity is quantified and its overall strength defined. Because financial statements are limited to a numerical snapshot of a fiscal year-end or mid-term date, the only tool that can reach beyond these black-and-white borders to appeal to surety underwriters and other relevant stakeholders is a well-crafted business plan.
Roadmap
Effective business plans establish a history of experience and success, convey organizational and managerial infrastructure, identify goals and an action plan for reaching the next level of success, and elicit buy-in from stakeholders—specifically the surety.
The creation of a high-caliber business plan demands a substantial investment of time, resources and the contractor’s steadfast commitment to execution. It also requires partnership among many professional service providers, including an accountant, attorney, financial planner, banker, health and safety consultant, and a surety and insurance agent that specializes in construction.
The contributions of so many specialized experts must be carefully coordinated to avoid the pitfalls of conflicting provisions. When each expert’s piece is smoothly integrated into a cohesive whole, the resulting product can be used to facilitate strategic planning, growth management, employee recruitment and retention, and increased extension of surety and financial credit—yielding a return many times greater than the initial investment.
Teamwork
Business plans are multi-faceted tools, and many aspects that lend them value, especially when geared toward a surety underwriter’s analysis, cannot be successfully implemented without the right team of qualified professionals. Important contributors include:
- Accountants, particularly those who represent a CPA firm that specializes in construction accounting and has a favorable reputation with sureties for accuracy and a clear presentation format, contribute to the highly influential financial statement. Though just one among a number of pieces that come together in a business plan to paint a broad picture of a contractor’s capacity, capital and character, the importance of the CPA’s requisite three-year statement cannot be discounted. Tax planning is another key CPA-driven element of building financial credibility into a business plan.
- Attorneys and financial planners can jointly develop a continuity plan specifically tailored to a contractor’s needs and address the surety’s concerns as a stakeholder in the firm’s continuation. Continuity plans are among sureties’ most common requirements.
- Health and safety consultants help contractors organize safety policies and procedures into manuals that meet Occupational Safety and Health Administration regulations and satisfy surety and insurance requirements.
- Bankers satisfy another prominent surety requirement by extending working capital lines of credit to contractors. These vital business partners lend financial strength and assert fiscal confidence.
- Surety and insurance agents, especially those that concentrate primarily on serving contractors, can assist in generating trend analysis of financial health, insurance losses and corporate growth. They can help a contractor formulate realistic and factually supported projections for future expansion. The right agent also can work with a client’s own internal experts—from the owner to the controller and the head of marketing—to flesh out the plan with an insightful company history segment and description of current and anticipated operations and marketing opportunities.
Perhaps most importantly, a qualified surety and insurance agent with construction experience is best positioned to mitigate conflict among individual components of the plan and coordinate the various constituents’ efforts.
Impact on Surety Program
Skillfully managed business plans have the potential to foster improvements in the following ways, all of which can positively influence a contractor’s surety program:
- Strategic planning, which underpins long-term success by focusing the entire organization on a clear goal for sustainable growth and a top-down strategy for allocating resources to reach that goal within a certain time frame. The analytical work that goes into quantifying a company’s historical trends, projections and opportunities in the course of generating the business plan easily translates into the realm of strategic planning, which can in turn be leveraged to promote an impression of strong management, focused corporate vision and a responsible approach to growth.
- Growth management must consider not only the available opportunities for growth, but also the potential obstacles that could thwart development or ruin an operation that inflates too quickly in one or more areas. Here, too, a strenuous quantification process can be turned inward for self-examination. Pragmatically identifying possible liabilities and consciously charting a course to steer around them evinces a grounded risk management philosophy—an attractive quality in the eyes of a surety considering greater support of a contractor’s program.
- Employee recruitment and retention also stand to benefit from an excellent business plan. Attracting and retaining the best is predicated just as heavily on fostering an image of longevity, stability and opportunity for advancement as it is on any single feature of a compensation or benefits package. Low turnover and the acquisition of highly qualified personnel speak volumes about a contractor’s character and capacity, two of the top angles from which a surety evaluates its willingness to support growth.
- Increased financial and surety capacity is more than just an ancillary benefit of formulating a sophisticated business plan. Considering that significant expansion is predicated upon securing increased capacity from financial lenders and the surety, it is a primary motivation for any contractor seeking real growth. The past-present-future view of the business plan—combined with its detailed analysis of the organization’s strengths, promotion of its opportunities and strategies for abating threats—communicates readiness for growth. It even can give underwriters a chance to reciprocate with observations based on years of experience evaluating contractors, provided the owner remains open to feedback.
Paint a Picture
Financial statements and other standards will continue to form the basis of surety underwriting criteria for the foreseeable future, but contractors seeking substantial increases in their surety programs will have to find effective ways to tell more of their corporate story. Properly constructed business plans fill in the blanks with a vivid, 360-degree picture of a contractor’s organization, giving sureties the lenses they need to read between the lines of a financial statement, see the complete picture and partner in the success that they help build.