How To Maximize Surety Capacity In An Uncontrollable Construction Economy
by Jake Buss, Gene Lilly Surety Bonds
There are many facets of the current construction climate that are out of the control of today’s contractors. In times like this it is even more critical to set yourself up for success in the areas that you can control. This discussion will highlight some of the aspects of a construction company that can control and some of the things contractors can do to take ownership of their surety program so they can support the work they need.
Communication. We have often discussed how important open dialogue and communication is to a healthy surety relationship. It goes without saying that the importance of this is magnified during tough times. Surety companies can live with and support contractors through tough times and even losses if they understand what is happening and what is being done to be profitable.
Specific Job Details. This concept goes hand in hand with the idea of open communication between contractor and surety partners. It is much easier for a bond underwriter to approve a project when they have a good understanding of what is going into the work. The greater the detail provided with a bond request the better the underwriter can see the risks involved in the job. Surety companies are more concerned with the unknown than the known. The contractor and professional bond agent need to come to the surety company with a concise plan that addresses what could go wrong with a project and what is being done to address those hazards. Every project has risk, but sureties need to know what you have done to mitigate that risk.
References. More than ever, surety companies want to talk with people that can tell them how a contractor, as their client, is doing out there. Sureties want to know how the project is delivered and that suppliers and subcontractors are being paid for their services. As with everything else, the greater the detail that can be provided the better the situation for the contractor. If there is a particular project that went well for both the contractor and owner, it is beneficial to have a specific reference letter put together. The important items to address are scope of work to identify what was done, quality, scheduling, communication and overall project dollar amount.
Along with project references, surety companies are taking a closer look at what their contractor’s creditors have to say as well. The important relationships here are your bank and suppliers. In addition to the standard “good guy” letter from your bank, sureties are increasingly requiring copies of loan documents. While these items tell the general story of the banking relationship, a strong endorsement of the business banker that knows and understands the contractor’s operation can go a long way in securing surety capacity.
Similarly, surety companies want to know that the contractors they support are paying their bills and satisfying supplier obligations. It is important to know that your suppliers are responding to payment inquiries appropriately. Be sure that if you have negotiated special payment terms and are abiding by those that your creditors are reporting those agencies that you are operating within those terms.
Personal credit reports are increasingly becoming a key component in surety underwriting. This is certainly something that you can have control of. With the knowledge that your surety company is going to use your personal credit score as a criteria for your company’s bond capacity it is critical to do your own homework. Check your own credit score and be proactive in making any corrections or changes that can affect the way someone would view that.
While the emphasis of this discussion has been on “Off Balance Sheet” things you can do for your surety capacity, it is important to keep the company financial statements healthy as well. Protecting the Balance Sheet is still the most important thing contractors need to do when pursuing surety support. It is critical to keep overhead expenses to a minimum and to take a careful look at any capital purchases. With regard to your surety program, there is no substitute for the timely and accurate internal financial presentation.