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How can a contractor take its bonding capacity to the next level?

Jeremy Crawford
Vice President
CCI Surety, Inc.

The most important step in increasing a contractor’s bonding capacity is working closely with its surety through an experienced surety agent. Contractors often make the mistake of looking for increased bond lines when the opportunity for larger projects present themselves only to find out they do not qualify. Making a surety agent aware of plans to seek larger projects ahead of time allows the agent to make recommendations about financial preparation, banking decisions, personnel choices and other factors that will affect how the account is viewed. It also shows the surety that a thoughtful assessment of future opportunities is under way.

Early input from underwriters can help contractors make decisions about equipment, debt management and banking decisions. My unofficial fourth “C” of underwriting is communication. Active communication among contractors, their agents and the surety helps them work together to anticipate and overcome any potential obstacles to meeting the contractor’s bonding goals.

Michael Bond
Head of Surety, Executive Vice President
Zurich North America

Surety bonding capacity is a vital asset for construction firms looking to grow in today’s hyper-competitive market. Contractors need to develop a holistic view of surety capacity. A complete financial presentation from a construction-oriented CPA and well prepared internal statements are a must. Selection of a professional surety-oriented broker is a vital component as well.

Contractors need to develop and present to sureties a strategic business plan for the type of work they intend to pursue, along with evidence that they have the managerial talent, craft skills and experience to successfully complete that work. This presentation should be in writing, and the contractor should be prepared to make personal visits with sureties. Sureties often look to the contractor’s management capabilities as a tie breaker in surety bonding capacity considerations. Presenting complete financial data and a strong business plan will help the contractor achieve the desired level of surety support. 

Antonio C. Albanese
Vice President
Nationwide Surety & Fidelity

The secret to taking bonding capacity to the next level starts with a focus on the core business and strong management controls. It’s important to have a growing balance sheet and reasonable levels of equipment debt. The operation should be able to collect cash and handle liquidity needs with minimal outside working capital financing.

Relationships are also paramount. To be the best, they need to work with the best. The staff should be qualified and tenured. The CPAs, bankers and brokers/agents with whom they affiliate should be high quality. From there, they need to create and maintain good relationships, not only with their agent and bonding company, but also with subcontractors, owners, suppliers and architects.

Strong communication with their surety is also key. They should have regular meetings with their bond company so everyone is on board and understands the contractor’s business plans.

Michael P. Cifone
Senior Vice President, Surety
Hudson Insurance Group

Just because a contractor can increase its capacity does not mean it is ready to do so. A contractor should take its bonding capacity to the next level when it will help take profits to the next level. Operating the business at the next level involves changes to systems, personnel, infrastructure and cash flow. Obtaining a commitment from the contractor’s banking partner is an important factor in increasing bonding capacity.

A contractor must demonstrate its ability to handle an increase in the number and size of its projects. In addition, a contractor that is expanding geographically and with unfamiliar owners will need to support its growth with a viable business plan. A contractor can utilize the knowledge and expertise of the surety and its agents.

Developing a strong project management team is critical to increasing profits and bonding capacity. Also, having an experienced workforce is in place will give a contractor an opportunity to prove that bigger can be better.

Chris Hunt
Underwriting Officer
Liberty Mutual Surety

The desire to elevate bond capacity should be underpinned by a trusting relationship built on open, honest communication. Schedule recurring meetings with the surety and maintain a clear flow of information.

Being transparent with the surety is paramount. Problems routinely surface in the world of construction, and relaying those and the impacts on your company demonstrates confidence and credibility. Operate with a mantra of “no surprises.” The surest way to adversely impact your creditworthiness in the eyes of the surety is to share bad news late in the game.

Reinvest in the business, build up your risk capital, shed debt and relentlessly guard your liquidity position. Surround yourself with top performers, including professional advisors, and craft a thoughtful business plan based on your core competencies. Communicate this to your surety, and assimilate their feedback as a trusted advisor.

Susan Hecker
EVP & National Director of Contract Surety
Arthur J. Gallagher & Co.
National Association of Surety Bond Producers

Understanding where the risks are and how best to mitigate them is key to obtaining surety support for the business plan. Also needed are the best talent available in the right seat on the bus; a high-quality and well-utilized internal job cost accounting system; business partners immersed in the construction industry; a good continuity plan; and more cash and credit capacity than is typically necessary to run the business.

Be able to explain the new business plan and be prepared to defend your readiness. Anticipate the surety’s questions, and make sure your quarterly financial presentation is thorough.

Sureties often can assist with ideas or resources to help mitigate problem situations. They will not tolerate finding out about problems late in the game. Your credibility is the most important facet of your relationship with your bonding company.

James Bly
Managing Director
Alliant Construction Services Group

Five key factors will help improve a surety program, whether it’s to increase bonding capacity or secure for an acquisition, shareholder buyout or recapitalization strategy.
  • Monthly financial statements and WIPs within 45 days of month’s end demonstrating the ability to manage an increased workload.
  • Disciplined internal cash forecasting, headroom on bank covenants and adequate cash for startup of work. 
  • Annual budgets with quarterly updates that include details about backlog burn and new work targeted to meet the plan.  
  • Mitigation factors implemented to manage the risk of labor availability, productivity, schedule, material escalation and subcontractor default. 
  • Removal of cost reimbursable work, runoff from the bid/award to project start and joint venture backlog from your surety capacity limit.
How does character impact a contractor’s bondability?

Chris Murphy
Chief Underwriting Officer, Construction Services
Travelers Bond & Specialty Insurance

There is no element of a surety’s decision-making process more powerful than consideration of a contractor’s
character. What sureties emphasize most often is the contractor’s reputation for honesty, fair-dealing and doing what it says it will do. A contractor can have an impressive project résumé, sufficient capital invested in the business and even an impressive earnings history. Those attributes are nice, but without strong character they are not enough to embark on a business relationship that depends on trust and transparency.

Character even extends to financial reporting. A contractor’s financials are largely based on its own estimates of future cost
and profit estimates, the dependability of which has a huge influence on how the contractor is perceived by a smart surety underwriter. Under-delivering on shared expectations of the outcome of projects can create a glass-half-empty perception that is hard to undo.

Alan P. Pavlic
President & COO
Old Republic Surety Company

When it comes down to end results, “character” may be the most important of the three “Cs” of surety. We have to be able to
rely on a contractor’s character in the underwriting process. We have to believe and trust the information that is received from a contractor, both verbal and written.

As a surety underwriter, you have to trust that the contractor is providing you with correct information—not just financial, but also job, management and continuity information. We have to be able to rely on the contractor’s word that capital will stay in the firm, and that jobs will only be bid in specific geographic areas, as well as within the contractor’s expertise.

Character is especially important in the claims process. Especially when a loss may be eminent, the contractor’s true character is revealed. Capacity and capital can hide some sins, but not all of them. Poor character in a contractor will only lead to one thing in the long run, and that is losses.

H. Thomas Dawkins
Senior Vice President
Rutherfoord, a Marsh & McLennan Agency

The surety/contractor relationship is viewed as a partnership with common interests. When an issue of trust surfaces, it is nearly insurmountable. Both capacity and capital are quantifiable situations that can be addressed and remedied, but character, honesty and trust are areas that cannot be corrected once breached.

For many years, most surety companies had a cardinal rule of not bonding accounts without conducting face-to-face meetings. Today’s standards include personal credit reports and even background checks as they look for inconsistencies. A lack of proper disclosure may lead to an issue of trust along with inconsistent financial reporting. Any semblance of non-disclosures or improprieties may lead to the surety asking the agent to place the account elsewhere.

On the flip side, a surety that is comfortable that a client exercises honest and solid ethical business practices will be in position to get the best possible consideration when a surety is faced with a difficult underwriting decision.

Henry W. Nozko, Jr.
ACSTAR Insurance Company

Character is considered a component of underwriting by all surety companies. The weight that character contributes to a surety’s underwriting decision varies among sureties and underwriters, and might differ from account to account. Suffice it to say, character always has some influence on the underwriting decision.

For example, this surety generally over-weights character. One contractor with a flawless performance record meeting credit obligations and uneventfully completing projects for more than 20 years, but has a weak financial statement with negative equity, would most likely score higher than another contractor with sufficient capital but that dates back just a few years and has had a few hiccups with credit obligations and job performance.

Character can replace capital, but capital cannot replace character.

Josh Penwell
Vice President of Contract Underwriting
Merchants Bonding

The character of the shareholders and leadership team of a construction firm is a critical component for a contractor’s bondability. Successful construction companies are experts at managing risks, and it is reasonable to assume that the manner in which the owners of a construction company handle their personal matters is a reflection of how they operate their business.

A risk-averse owner will generally bid work more conservatively and incorporate many risk mitigation techniques into contracts. An owner of a construction company that carries an excessive amount of personal debt obligations may be viewed differently than one with a more conservative lifestyle. The type of investments made by an individual is also a reflection of how conservative the individual is.

Surety capacity will be positively impacted if the surety determines that the shareholders and leadership team have high ethical and moral standards, and are determined to be honorable individuals with high character.

Peter Worthington
Underwriting Consultant
Liberty Mutual Surety

All three “Cs” are important to a surety underwriter, and the most intangible is character. It takes a significant amount of time to develop a relationship—a true partnership between the surety and contractor that is strengthened in good times and not-so-good times. Having a contractor that does what it says it will do in both good and tough times creates that understanding between the parties. In many cases, the true character of a person arises in difficult times. Character begins early in the lifetime of the contractor and is developed over time.

Building the relationship with the surety, project owner and contractor will yield great results for all involved. Character is key to the underwriter’s assessment of the contractor’s overall credit quality, and only the contractor can influence the assessment. Having that understanding will allow additional surety support when the numbers may not add up.

Michael J. Mitchell
Vice Chairman
The Graham Company

In my opinion, character is the most important factor when it comes to bondability. Having a strong character is powerful; it means the surety can trust the principal or owner, and trust that shared financial information is credible and accurate. That trust will always outweigh capacity and capital. There is an instinctual element that is inherent to determining bondability. If a surety does not have a good feeling about supporting the contractor, then there is cause for hesitation, and that pause communicates more to the surety than anything a contractor can say or do.

On the contrary, if you have a strong character, a surety will overlook some capital and capacity issues and will look for ways to support you. This is human nature: When you like and trust a person, you instinctually want to support them, but it all starts with having a strong character.

What cash management techniques should contractors employ in order to be successful as the economy recovers?

Edward Titus
Senior Vice President, Surety Division
Philadelphia Insurance Companies

Cash flow management techniques require periodic evaluation and review that must be embraced at the top and become part of a contractor’s culture.
  • Ensure staffing and equipment acquisitions don’t outpace revenue, determine proper tax status and evaluate captive versus traditional insurance.
  • Review areas where cash is typically trapped: under-billings, pending change orders, receivables, retentions and inventory.
  • Evaluate benefits of self-performing versus subcontracting, process billings and change orders in a timely fashion, obtain documentation before performing work out of scope, review costs to complete at a project level, identify changed conditions and take advantage of vendor discounts.
  • Build strong working relationships with owners, banks, the surety company and legal counsel.
What are the bonding implications as the government promotes joint ventures as a way for small businesses to participate on federal projects?

Mike Specht
Vice President – Surety
Minard-Ames Insurance Services / INSURICA

The bonding industry now understands how the various disadvantaged business programs work and continues to focus on full disclosure to the contracting officers about the arrangements for bonding. Given the fraud cases concerning contractor teams that violated the disadvantage business programs’ rules and regulations, underwriters and sureties want to avoid receiving fines and jail time that have been levied against contractors for improper teaming practices.

The disadvantaged business programs have created opportunities for small contractors and their much larger partners that, in many cases, are required to perform the majority of the work and qualify for all of the bonding. One has to wonder if all parties involved would be better off if the government directed more smaller contracts (ones that disadvantaged contractors can perform and bond on their own) to the small contractors and set aside the big work for medium, large and mega contractors.

In what ways can improved construction accounting software impact a contractor’s business?

Matthew S. Haydon
Senior Vice President, Commercial Surety
Arch Insurance Company

Of the four primary financial data sets sureties study, only the work-in-process (WIP) schedule provides any clue as to the contractor’s future earnings and future cash flow.

One of the common challenges of the surety is “the big job.” The surety can evaluate the capabilities of the contractor, but can’t forecast the periodic earnings and cash flow needs of a three- or four-year project and how it overlaps with the runoff of the existing backlog.

Accounting software that evaluates a potential job from a financial impact perspective allows the contractor to see when it might be cash flow positive (or negative). Being able to model and test delays in payment or unanticipated cash flow disruptions enables the contractor to plan for unforeseen financial impacts.

Having reports that forecast earnings and cash flow based on the current WIP and potential new jobs greatly reduces the risk to the contractor and the surety.

Robert Thomas
Hanover Surety

The business value of quality accounting software manifests in greater accuracy, timeliness and reliability of job performance measurements.

Today’s construction accounting software should provide a seamless and integrated system that brings together the original estimate with the job budget, including the cost estimates, general conditions, contingencies and profit estimates. Against these targets, the actual costs incurred on the project can be evaluated among many cost code elements to give the project management team an early and more exact indication of cost overruns or acceleration. This creates the opportunity to proactively apply corrective measures to contain or reverse the impact of cost overruns.   

These improved outcomes provide the construction company an opportunity to achieve more consistency in its project results and greater confidence in the management systems governing the backlog activity.

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