714-505-9000 cpas@hmwccpa.com

Bad luck and unforeseen circumstances can put any construction company in jeopardy of losing bonding capacity or even ending its relationship with a surety altogether. If you find yourself on the outs with your bonding agent, there are some fundamental ways to turn your surety’s frown upside-down and get back on the right track.

Reputation matters

Make no mistake, your bonding capacity is based on financial metrics. But your business reputation matters, too. Anyone entering a contractual relationship wants to know that the other party is trustworthy, and sureties don’t just want to know — they’re going to find out.

To foster that trust, prioritize and nurture positive relationships with your architects, owners, subcontractors, employees and suppliers. You’ll no doubt present yourself to a surety underwriter in the best light possible, but it helps if others can attest to your company’s good standing, as well. If something has transpired to call your reputation into question, provide references who can support you.

Working capital is key

A surety will closely review your financial statements, paying special attention to items such as:

  • Jobs completed,
  • Work in progress,
  • Backlog,
  • Cash balances,
  • Leverage,
  • Accounts receivable and payable,
  • Sales and profits, and
  • Cash flow.

For example, it will deduct current liabilities from your current assets to determine the strength of your capital position. In addition, it will calculate your cash flow that figures into things such as net income, depreciation and other noncash items, and principal payments on any debts.

Some steps you can take to maximize working capital and enhance your bonding attractiveness in more difficult times include avoiding bad debt by more aggressively collecting accounts receivable and deferring long-term expenses. You could also look to reduce business debt. In worst cases, you might even need to take out a personal loan to infuse cash into the company, though this should be used only as a last resort.

Capacity must be justified

Before issuing a bond, a surety will need assurance not only that your company is solid financially, but also that you have the experience and resources to get the job done. So, it will seek evidence that you’ve successfully handled similar projects in the past.

Moreover, you must show that you have the equipment to do the work. Having an established relationship with a bank is necessary, and an adequate line of credit is helpful in this regard.

Today’s sureties will also look at your human resources. This includes verifying that you have experienced and qualified staff, as well as enough crew members with verified skills.

Given the shortage of skilled workers in many areas, construction companies often face tough questions from sureties regarding labor capacity. Your management team should be able to demonstrate a solid ability to get the job done.

Communication goes both ways

Although, as mentioned, financial measures will drive your bonding capacity, your ability to communicate still has an impact. Your surety should always be well informed of any developments affecting your financial performance — either positively or negatively.

Problems that threaten your ability to meet contract obligations can often be mitigated if addressed sooner rather than later. By the same token, tell your surety about good news, too. Keep them in the loop about exciting strategic developments.

All hope is not lost

It’s not uncommon for contractors to suffer lapses in morale as they struggle with economic setbacks, bad weather, equipment breakdowns and a multitude of other problems. If you keep communication channels with your surety open, there’s always hope of rebuilding your bonding capacity.

© 2019

 

For additional Construction/Contractor related articles click here.

Follow us on LinkedIn or Facebook.