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Surety Insider Reveals the Secrets of Maintaining and Expanding Your Company’s Bond Capacity

What You as a Contractor Can -- and Must Do -- to Keep Your Business "Bond-Worthy" -Get the Clout to Bid the Work You Want!

 

By J. Mark Strange, Surety Advisors, LLC, Bonding Agents

When a Handshake Isn’t Enough
Contractors are a special breed of businessmen. Contracting is one of the few businesses that require you to price your product including profit in advance of knowing what the true costs will be! Successful contracting may come naturally to some but to most outsiders (including bonding companies) it is an amazingly complex business where many factors can drive success or failure. Additionally, considered from an owner’s point of view, payments are advanced to a complete stranger (the contractor) that has undertaken their project while knowing very little about the other projects or business transactions the contractor has committed, some or all of which may be in trouble.

Contract Bonding (Bid, Payment & Performance Bonds) Provides Protection to Owners and General Contractors from the risks of Contractor Default.

Survival is Dependent on the Ability to Bond
Your business faces no shortage of opportunities but obstacles do exist and combined with unreasonable deadlines you might pass on many good jobs. Properly approached, there is no reason bonding should be one of the obstacles to your profitable growth.

We are in the middle of one of the greatest general construction growth periods in our history. I want your company and mine to prosper during this unprecedented time.

I want to share some secrets about the underwriting and credit analysis that bonding companies universally use to determine who gets bonded and who doesn’t- secrets that are not well known outside of the surety industry, but which all contractors who have to bond should know.

I want to share this information with you because advice is a crucial part of the service we provide our clients. I am willing -- actually, I’m excited -- to reveal to you the secrets about bonding. Secrets that ensure your business won’t miss the unprecedented contract opportunities that are available!

Why would I just give these secrets away? Because it’s just as good for my business as it is for you. I want to let you in on the knowledge I have accumulated as a surety professional and insider. I want to do this because I have, time and time again found that generosity and the willingness to provide really great service come back to me- tenfold. In fact, that’s how I have built my business.

What if Your Surety Says…No More Bonds?
Let’s get to the heart of the matter. This report is about your business, the risks it faces and how a bond program can be designed to meet both your and the surety’s expectations.

The Basics: Three “C” s of Surety Underwriting
Bonds are credit guarantees that you will perform the work contracted and pay suppliers and subs. If you don’t the bonding company is obligated to perform in your place. A contractor therefore must demonstrate good management and profitability; that he or she keeps promises, deals fairly and performs its obligations promptly. At the core of all the information gathering that you go through and the bonding company’s painstaking analysis of your business, ultimately, if the bond underwriter is in doubt about your...

Character - Honesty, discipline, leadership, performance under adversity

Capacity - Staffing, experience, records & management systems

Capital - Financial strength & liquidity.

...You won’t get $1 of Bond Credit.

Four Steps to Get the Bond Capacity You Want

Assemble Your Bond Team

Accounting- Surety companies want independent financial verification. They want reviewed- even audited annual financial statements. Get a CPA familiar with construction accounting- either percentage completion or completed contract methods of accounting.

Legal- Some contracts you just shouldn’t sign no matter how badly you need the business or how profitable you think they are. One-sided contracts and fine print can kill a business. You need an attorney to review construction contracts and liability clauses.

Banking- Surety companies know and understand that you need to have contingency financing. Get a banker that understands lending in your construction field.

Bond Agent- A surety bond agent is an insurance agent that has a special expertise in bonds and construction insurance. As independent businessmen and through their contacts and connections, they are in a unique position to introduce you to accountants, attorneys and bankers that have experience in construction. Most importantly, they are the key to arranging and managing your bonding relationship.

Personally Meet the Bond Underwriter

A good bond agent will make sure you personally meet the underwriter at least once a year. No amount of number crunching can substitute for an onsite assessment of the owner and organization to add confidence to an underwriters’ analysis.

Maintain the Relationship

Continual open communication between you, the agent and bonding company are essential. Depending on the frequency you need bonds, plan on delivering financial information semi-annually or even quarterly including a job status report that gives a snapshot of every job’s progress and profit. Be prepared to answer questions the surety may ask if they see:

Large costs and earnings in excess of billings

• Has the owner failed to pay?
• Have billings not been approved?
• Are there unapproved change orders?
• If the job is complete, why not fully billed?

Substantial billings in excess of costs

• If this is the case, cash balances should be strong, If not why?

Profit Margin Fade

• Are there problems with the project?
• Poor job cost procedures?
• Poor estimating?

Stick to Your Business Plan

Sureties understand and can accept the need to adapt to changing construction business conditions- they have to also. However, if you and the bonding company have agreed to a bond program based on your submitted business plan, expertise, volume and financials, any bond requests that vary wildly from your agreement or plan could be declined and raise serious questions about bonding any future work.

Inside Information for Those New to Bonds


6.5 Tips if you are New to Contract Bonding:

1. Not all bonding companies charge the same rates. State regulations now permit more flexible surety rate filings. Many companies have rates based on experience, credit worthiness and volume of bonds needed. Some actually pay dividends!

2. Small Bonds can be written based solely on your personal credit.

3. The Small Business Administration has a bond program that “co-insures” 80% of a job with some qualified bonding companies. This helps disadvantaged or emerging contractors access bonding.

4. Just like a bank, some sureties will take collateral to secure the bond.

5. Some bonding companies offer funds control, another tool to give the emerging contractors access to bonds.

6. If practiced correctly and transparently you can have multiple surety relationships to expand your bond needs.

Tip 6.5- Get an Experienced Bond Agent

Surety Advisors, LLC is a bond only agency... I have 30 years experience serving construction clients, evaluating their expertise, their strengths, their weaknesses and their financials. I have also spent decades seeking bonding companies that have unique underwriting appetites and matching these sureties to the right contractors.

Whether you are looking to change your existing bond relationship or just thinking about arranging your first bond I hope this information has been helpful and you will call me to discuss your bonding needs. My staff and I are eager to help!

Sincerely,

J. Mark Strange

 

IMPORTANT NOTE: While we specialize in Surety Bonds, this Website provides only a simplified description of bonds and is not a statement of contract. Wording may not apply in all states. For complete details of bonds and conditions, be sure to read the bond, including all endorsements, or riders, if applicable. Bonds CANNOT be bound, amended, or altered by leaving a message on, or relying upon, information in this Website or through E-Mail.

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