With fewer construction companies competing for work in a still healthy construction market, opportunities to expand market share are within reach for some. The problem for many contractors, however, is they cannot take on larger projects unless they increase their bonding capacity. Unfortunately, as a result of losses in recent years, sureties have gone back to the basics in bond underwriting: A contractor has to earn the bond line, and earn it every year.

The importance a surety plays in the life of a construction company cannot be overstated. In effect, a surety provides an unsecured line of credit—unlike banks that require collateral. Contractors know they share a sacred relationship with their surety and should do everything they can to nurture the relationship. They also realize that a long-time relationship with a surety doesn’t guarantee the relationship will continue indefinitely.

Yet, a handful of other contractors take their surety for granted. They are the ones who haven’t yet experienced the pain of losing a surety partner and building a relationship all over again—if another surety partner can be found.

To solidify and/or improve relations with sureties, contractors need to treat their surety like a business partner. Information needs to be shared often, and no financial aspects should be withheld. In terms of specific information, the Surety Information Office (SIO) in Washington, D.C., says trust is strengthened when contractors regularly provide information such as:

• Proof of consistent profitability and a history of successful projects
• Work experience and descriptions of past, ongoing and future work
• Financial statements prepared by a CPA specializing in construction
• Comprehensive business plans, forecasts and short- and long-term strategies
• Organizational depth of leadership, accounting, estimating and project management
• Continuity plans in the event of the death or loss of a key executive
• References from subcontractors, suppliers, business associates and advisers
• Successful banking relationships
• Ownership descriptions
• Disclosures of joint ventures and subsidiaries

In past years, sureties have wanted to see this information a couple of times a year, or perhaps quarterly. Today, they often ask to review selected items monthly.

Among the leading issues for contractors seeking higher bonding limits, working capital and net worth are at the top of the list, followed by receivables. Underwriters take a dim view of receivables older than ninety days. Debt, too, is a focal point. Those who are carrying too much debt might want to consider debt-reduction strategies such as selling and leasing back equipment.

 

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