02/04/11

A proactive approach to securing bond credit

Over the past couple of years, downturns in residential construction have forced many contractors from the private to the public sector, driving down margins. This in turn has increased contractor failures, producing tightening in the bond and lending industries. Surety underwriters have responded to escalating losses by returning to fundamentals of underwriting. A proactive approach to assisting the underwriter in understanding your company will assist you in maximizing your bond capacity.

 Here are 5 steps you can take to negotiate the most favorable terms available in today’s tight market:

 

  1.  Develop a schedule in order to provide your surety with financial reports appropriate to the level of bonding  you need before these are requested. As an example, a contractor wishing to bid jobs in the $1 million and above range should plan on providing the surety with a reviewed, percentage of completion basis at year end, along with current personal financial statements and a bank reference letter confirming the size and usage of the operating line. An internally prepared statement should be offered at mid-year and work in progress schedules on a quarterly basis. When submitting a request to bid a job, be sure to include not only copies of the invitation to bid and bid bond form, but for larger requests a detailed job cost breakdown and why the job is a good fit for your company with regard to type of work, equipment, staffing and funding, as well as how it fits with other work underway.
  2.  Develop  a detailed business plan that includes benchmarks for the growth you wish to accomplish, and share the original and periodic revisions with the underwriter. This is a way of assuring the surety that you are aware of your strengths as well as areas in need of improvement and that you will focus on the types of work and geographic territory with which you are familiar and have a successful track record. Should you wish to expand on that territory or diversify into new trades, be sure to give full consideration to any risks that might entail and have good reasons for how you plan on addressing these, and share your plans with your surety in advance to solicit their input.
  3.  Develop the internal management controls and management systems necessary to address cash collection issues and potential claims issues, and be prepared to discuss these with the surety early in your relationship. These are essential to long term accumulation of cash, equity and working capital which serve to protect the surety as well as  your company. When submitting work in progress reports, whether bi-annually or quarterly, it is helpful to the underwriter to provide aged schedules of accounts receivable with retentions shown segregated, and any amounts in dispute or of doubtful nature should be disclosed as early as possible.
  4.  Arrange to meet with your bonding agent and underwriter at least once a year after you have provided year end underwriting information to answer any questions those materials may generate and to go over your business plans and projections for the upcoming year. Your professional bonding agent will be able to anticipate questions the underwriter will ask and assist you in preparing answers with supporting documentation in advance of the annual meeting. This makes the meeting very productive and has a favorable impression on the underwriter that will translate into enhanced bond credit, particularly in stretch situations.
  5.  Finally,  your surety bond agent is not only your direct connection with the surety, but should be considered a professional consultant in the same context as your accountant, attorney or lender. You should examine a potential agent’s qualifications, expertise and track record in assisting other contractors in growing their businesses, perhaps asking what other contractors in your trade area they have represented. Relying on an insurance agent who only occasionally dabbles in bonding, perhaps because they are a relative or friend, can be costly to you in terms of lost opportunities.

About the Author, Jim Ewald:  Jim has over 30 years experience equally spread between being a company underwriter and an agent representing a wide variety of surety markets, he is well-equipped to assist his bonding clients in securing the highest capacity levels and best terms available. Should you or an industry acquaintance have any bonding issues, Jim can be reached at (503)445-8404 or jewald@epbb.com.