The 5 C's of Surety Credit
Know what to focus on to develop solutions to common challenges

With construction spending currently variable to moderate, and in some cases down, there is an opportunity to become one of the best-in-class construction companies. Leadership speaker John C. Maxwell once said, "Success is due to our stretching to the challenges of life. Failure comes when we shrink from them." Given the inevitable market tightening, contractors can follow Maxwell's advice by securing and enhancing surety bond credit.

Contractors—especially in the face of construction spending uncertainty—should continuously build upon the five Cs of surety credit. The five Cs of surety credit that are currently impacting construction companies heavily are listed below.

1. Capital

Do the construction company and its owner(s) have the financial strength, including adequate working capital, equity and credit, to meet the project's financial obligations? These days, owners of construction companies need to be conservative in managing their working capital and equity in order to not only prequalify for projects with owners, but to also obtain bonding credit and unlimited contractors' license limits. This objective is often met with difficult obstacles, especially in light of meeting cash demands as a result of increased income tax rates and other variable increasing costs. To further exacerbate the issue, bonding credit is much tighter than it once was due to heavy losses within the construction market.

2. Capacity

Does the construction company have the personnel, equipment and experience to complete the project on time and within budget? One of the biggest challenges many construction business owners voice is finding qualified personnel, especially in the skilled trade area. Additionally, over the last several years, many construction companies were faced with having to reduce staff due to dramatic reductions in their volume of business. Now that the economy appears to be slowly recovering, those experienced construction workers that were laid off in prior years have now transitioned into other jobs outside of the construction industry. This has created a skill shortage that construction companies have to work diligently to alleviate.

Additionally, many construction companies sold equipment to meet cash flow demands during the downturn. With potential new project numbers continually growing, contractors are scrambling to remain competitive. These two issues have led to a dilemma: how do we do the necessary work well without the right people and tools?

3. Character

Does the construction company have a positive reputation in the market? More importantly, have the owners of the construction company displayed the kind of character that earns respect and trust in their business dealings? Character is a cornerstone of building a successful business, and it facilitates earning and maintaining the trust of bonding agents to ensure continued bonding ability.

Abraham Lincoln said, "Character is like a tree and reputation is like a shadow. The shadow is what we think of it; the tree is the real thing."

If the construction business owners have been forthright and honest during business dealings with customers, employees, vendors and professional consultants, regardless of tough times, then it speaks volumes and resonates with those extending bonding credit.

4. Communication

Does the construction company maintain a continuous dialogue with its surety company and agent? Some contractors without adequate financial resources, credit, experience and project opportunities may not survive these market conditions. However, construction firms have the ability to thrive by maximizing opportunities with the help of specialized construction professionals, including CPAs, attorneys and bankers.

The importance of communication cannot be overstated. Sureties do not like surprises. Interestingly enough, many construction business owners sometimes take for granted that the surety company and agents, along with their CPA, can often provide valuable insight in formulating solutions to problems. If the problems are addressed within the year, then they can possibly be mitigated. Unfortunately, CPAs and sureties often are faced with asking construction business owners,"Why didn't you call us to help sooner?"

5. Cash Management

Does the construction company have good cash management practices? Now that the construction industry appears to be on the upswing, it is all too easy for construction business owners to relax the purse strings and spend some money. However, construction business owners should stay focused on the truism that for bonding companies, "Cash is king."

Proper cash management is one of the keys to maintaining a healthy construction company, regardless of economic conditions. With the help of CPAs, business owners can put in place proper controls that provide not only a measure of comfort, but also a built-in insurance plan for weathering future financial storms. Moreover, proper cash management might even allow for expansion that facilitates the growth of the business for many years to come. Finally, construction business owners have to carefully manage cash to strike that balance between financial health and managed risk.

The bottom line is that surety credit should be a continual focus for a construction business owner. Using the 5 Cs of surety credit to assess your business, with the help of any financial advisors, should be at the forefront of your regular business practices. Be sure to keep your financial advisors informed and ask for their help to improve your surety credit and maximize your bonding capacity. Your advisors' help can mean potential growth in net value, employee morale, reputation, strength among competitors and more.