With an increasing number of bidders on construction projects, many small and emerging contractors are exploring ways to gain an edge over their competitors. Being bondable is one way a company can set itself apart.
"Most of the work coming out right now is government work, so it’s important to be bondable," says Joshua Etemadi, a producer at Construction Bonds Inc., a division of Murray Risk Management and Insurance, Fairfax, Va. "Once contractors get their first bond, they are part of a group of contractors that has been independently verified, vetted and qualified to compete on bonded projects."
Lawrence McMahon, senior vice president/surety manager of Alliant Insurance Services, Inc., San Diego, agrees. "Most of the private work has dried up and the available work is public works and military," he says. "Without a bond, contractors cannot access this work."
Many contractors cognizant of this situation are considering obtaining surety credit for the first time to prequalify for work on public projects.
Commit to the Process
William Maroney, senior vice president of City Underwriting Agency, Inc., Lake Success, N.Y., says small, emerging contractors seeking to become bonded for the first time need to commit to the process.
"First, ask yourself if you are committed to being a solid businessperson in the construction community," Maroney says. "If so, then utilize set-aside programs to help build credit, such as the U.S. Small Business Administration (SBA) and others in your community. View these programs as stepping stones, not crutches. Your goal is to establish yourself as a qualified, capable construction company. Also, surround yourself with solid professionals familiar with the construction industry, such as accountants and bankers."
(The National Association of Surety Bond Producers can help find these professionals and guide contractors through the entire process. A directory of bond producers is available at www.nasbp.org.)
After 20 years of working with groups that help small and emerging businesses in his community, such as the New York State Small Business Development Center at Farmington State College and the Model Contractor Development Program created by The Surety & Fidelity Association of America, Maroney is familiar with the characteristics of successful business owners. "I’ll walk into a seminar with 15 people in the audience, and two will come up to talk with me afterward to ask for specific details," he says. "They’re the people who have the best potential for reaching their goal. It may take time, but if they commit, they can do it."
Adds Etemadi: "We frequently tell our clients that although we’re providing a piece of paper, we’re really providing an opportunity for the contractor to bid on projects that they haven’t been able to bid on in the past."
David Castillo, first vice president of Alliant Insurance Services, Inc., Las Vegas, emphasizes the importance of taking the time to prepare complete financial documentation for surety credit. "I equate it to the construction process," Castillo says. "Contractors wouldn’t try to bid on a project without the blueprints and specifications. Submitting complete financial paperwork about your company is critical to obtaining surety credit."
Seek help preparing this documentation from professionals in the surety industry, such as bond producers and construction-oriented accountants and bankers.
Thomas Padilla, vice president of Manuel Lujan Agencies, Albuquerque, explains that while working capital and net worth are important, they are not the only considerations. "In today’s economy, we must consider many other factors, including the level of debt (and its relationship to net worth), the level of overhead a contractor carries and the existence of a well thought-out plan (including contingencies) for the future," Padilla says. "The first two are critical, as they will have a direct bearing on the contractor’s ability to adjust to the changing economy and survive with less work and lower gross margins. The third shows me the contractor has spent time analyzing its operation and the market as it relates to the company, rather than just bidding and hoping for the best."
Etemadi suggests contractors obtain a copy of their credit report immediately. "If you’ve never attempted to get a bond before, you want to know what your credit looks like before anyone else does," he says. "Do this before you put time and effort into a bid."
Hire a Construction CPA
John Naso, vice president of surety services for The Horton Group, Orland Park, Ill., recommends contractors partner with a quality certified public accounting firm that knows the construction industry. Also, the CPA should understand the terminology of a construction company’s financial documentation, and the proper presentation and disclosure that banks and sureties expect, such as work in progress and completed construction schedules.
Naso encourages contractors to seek recommendations of CPAs from various sources, such as bankers, bond producers and local chambers of commerce. He suggests choosing a CPA firm that is nearby so the accountant can review the company’s accounting software and perform quarterly documentation in person.
"Interview several accounting firms to determine which one is the best fit for your team of professionals and who will help you obtain surety credit," he says.
(Construction-oriented CPA firms can be found in the Associate Directory at www.nasbp.org, or by contacting the Construction Industry CPAs/Consultants Association, www.cicpac.com.)
"CPA-prepared financial statements are not cheap, but usually the cost of a statement is immediately offset by the difference in your bond rate or in your increased bonding capacity," Etemadi says.
Grow the Company
Contractors should take steps to increase their line of surety credit over time. "The best thing about growing through increased bond capacity is that the growth is overseen by multiple parties," Etemadi explains. "When a surety company approves a contractor, the underwriter frequently makes recommendations for continued growth, like securing a line of credit with a bank or securing a CPA-prepared financial statement. The contractor builds a ‘circle of trust’ with several outside professionals who all want to see the contractor succeed.
"As they take these steps, they continue to have that oversight to ensure they are growing the right way," Etemadi says. "For example, the CPA’s financial statement for the firm contains job schedules showing the projects that are in progress and those that have been completed. Based on this information, the surety could approve a larger project because the paperwork demonstrated the contractor’s success. Consequently, the banker may increase the contractor’s line of credit."
Carl Dohn, president of Dohn & Associates, Palatine, Ill., emphasizes that contractors must maintain open, honest communication with the team. "Do not misrepresent anything. Do not overstate anything," he says. "The only way an experienced producer can accurately represent a contractor’s ability to a surety underwriter is if it really knows what is going on at the contractor’s operation."
"It’s important," Padilla adds, "for a contractor to communicate bad or potentially bad news quickly and accurately. In turn, producers and sureties need to share good and bad news with contractors to be true advisors. With today’s technology, it’s tempting to use only email and assume we’re all on the same page, but nothing surpasses personal communication. If contractors want their producers and sureties to stay with them through tough times, they need to communicate their plans for the future and what adjustments have been or will be made to ensure the continued survival of the firm."
McMahon notes that another key to good relationships is an open dialog and a commitment to meet with the surety regularly to build that relationship.
Become a Success Story
The SBA’s Bond Guarantee Program helps contractors secure bonding that may not meet the requirements of the standard market. For example, Construction Bonds, Inc. helped a mechanical contractor that had worked as a subcontractor for three years secure a bond through the SBA in order to pursue prime contracting opportunities.
"Within one month of working with him, the client won his first contract, and the agency bonded it through the SBA for approximately $500,000," Etemadi says.
After helping the client bond two projects through the SBA, Construction Bonds Inc. graduated the firm into the standard market by helping the firm obtain a CPA-prepared financial statement that was vital in securing a line of credit with a bank.
Ultimately, Padilla adds, "small firms are not that different from larger ones. The key is that all parties listen and cooperate."