In today’s economy, risk-averse project owners are more likely to require bonds. At the same time, cautious sureties have become more rigorous in their evaluation and approval of bond requests. Therefore, it’s critical for contractors to show they’re “bond worthy.” Here are five tips for doing just that.
Make a strong statement
Your company may be financially healthy, but if you can’t demonstrate this to your surety, obtaining bonds will be a challenge. Make sure your financial statements are complete, accurate, and timely.
They should also provide additional documentation as needed, such as owners’ personal financial statements. Make sure to minimize year-end adjustments by preparing high-quality interim financial statements.
Manage profits and net worth
A critical indicator for a surety is your company’s profitability, so manage the factors that affect profitability, such as overhead costs and bonuses.
Your net worth provides evidence of your ability to absorb losses, but sureties also look “behind” this number at the quality of the underlying assets.
They may discount the value of riskier assets, such as aged receivables.
Cleaning up your balance sheet by removing risky assets and reinvesting profits can help boost your bonding capacity.
Work your working capital
Sureties want to see strong working capital which is defined as current assets minus current liabilities.
Current assets include cash and what can be readily converted into cash like short-term receivables. In contrast, illiquid assets may include your facilities and equipment.
When measuring working capital, sureties typically discount riskier assets, such as aged and/or related-party receivables and prepaid expenses.
To improve your working capital, consider accelerating collection of receivables, deferring year-end bonus payments as well as other expenses and refinancing short-term debt with long-term debt.
Track your progress
“Profit fade” (where a project’s gross profits shrink) will undermine a surety’s confidence in your financial strength; it can signal a number of weaknesses including inaccurate estimating and sloppy project management. Even profit gain can cast doubt on your estimating abilities.
Sureties also look at underbillings (billings that lag behind a job’s progress), which may point to cost overruns, inefficient management and/or lax billing practices.
Overbilling can reflect effective cash management, but it can also be a sign of overbilling on some projects to compensate for fading profits on others, known as ‘job borrowing’.
To instill confidence in your surety, prepare timely and accurate work-in-progress reports.
This will help you stay on top of your estimations and project management processes ultimately allowing you to correct problems as early as possible.
For sureties, there’s one thing worse than bad financial news: unexpected bad financial news.
What if an owner or key employee dies, becomes disabled or suddenly retires? In order to avoid resulting chaos, have a well-designed succession plan that assures your long-term prospects are strong.
Additionally, increase your surety’s comfort level by maintaining ongoing communication regarding any developments affecting your financial performance.
Doing so not only helps demonstrate good intentions, but also gives you an opportunity to explain any financial difficulties and to create plans for turning things around.
Along with boosting your bonding capacity, these strategies make your construction company more attractive to lenders and investors. Work with your CPA to discover other ways to build your surety’s confidence in your business.