In the current market environment, every project is precious. Understandably, construction firms and contractors want to avoid letting opportunities slip through their fingers, particularly high-value projects that require surety credit.
Furthermore, when external turbulence signals challenges ahead, one lasting piece of wisdom is often repeated: Focus your efforts on what you can directly control. The advantages of reviewed or audited financials are more apparent than ever in the current context of uncertain macroeconomics and charged competition within construction.
Understanding the state of your finances offers a litany of advantages in any industry. Still, for construction and contracting firms, there are unique benefits that make audits and reviews powerful investments in growth potential. First and foremost, your attestation reports are key sources of insight that surety carriers will need to see to determine your candidacy for a larger surety program that can make transformative growth possible.
The Confidence & Capacity Correlation
From a surety carrier’s perspective, there’s nothing more important than the quality of the financial insights that a prospective partner provides. Whether you have a history of pursuing bonded work or are a business progressing from private development work to public projects, you’ll need to produce accurate and thorough statements to have a chance of securing meaningful surety support. Rest assured: Good, bad or ugly, surety carriers are primarily concerned with the accuracy of the information provided. In an industry as dynamic as construction, with so many moving parts and external influences, it’s common to see discrepancies and instances of overbilling and underbilling come with the territory.
Don’t assume that common hiccups will prevent you from pursuing the growth opportunities that often require surety support. Instead, keep in mind that surety carriers are a part of the construction industry and are familiar with its unique dynamics. To them, instances of overbilling and underbilling boil down to simple assets and liabilities. As long as your business can explain anomalies and remains open to having frank discussions that provide clarity, surety carriers are understanding — and may be as eager as you are to make a lucrative deal.
Submitting accurate financials is essential to building a relationship with surety carriers. As you might expect, they’ll look first for profitability. Companies struggling to stay afloat financially don’t make the most reliable partners on long-term projects, and surety carriers appreciate strong balance sheets that show equity increasing year-over-year.
Step two usually involves the surety carrier reviewing the work-in-progress (WIP) schedules to identify trends, ideally annually or semiannually. Increasing bonding capacity often depends on the issuer’s confidence that financial submissions are accurate and that the trends identified in WIP schedules support expanding the relationship.
When reviewing WIP schedules, surety carriers may take particular care to identify the accuracy of project completion estimates. For this reason, contractors and construction firms may put themselves in a stronger position by doing everything possible to ensure realistic timelines in the planning phase, and closely adhering to them in practice.
Beyond Bonds: The Business Benefits of Audits & Reviews
The very same information that surety carriers rely on to make sound underwriting decisions can also be a boon to your business. Audits and reviews provide actionable insights into your business’s financial performance and shed light on opportunities for improvement. The WIP schedule mentioned above is an excellent source of information that can help you learn how and why projects get off track — which can then be used to avoid or fix recurring issues.
For example, incorrect estimates and change orders may indicate that new, more accurate forecasting methods are required. Attestations also support your ability to calculate the percentage of completion, which can help with reporting, revenue recognition, cash flow and, in some cases, open avenues for tax advantages. All of that contributes to overall profitability which, in turn, improves your business’s financial sophistication and makes it a better candidate for increased bonding capacity.
Cost Analysis: Budgeting for a Better Business
The leading barrier that prevents construction firms from realizing the internal and external benefits of audits and reviews is the cost associated with attestation work. Let’s address that by putting the price of these engagements into context. Construction firms interested in bonding should consider the potential benefits to financing capacity previously discussed. Additional capacity can enable firms to take on more and larger projects that enhance their reputation and contribute to their bottom line.
Equally important are the implications for the rates surety carriers will offer firms based on the quality of financial information they can provide. Applicants seeking financing without a certified public accountant (CPA)-reviewed or audited statement can reasonably expect surety rates of 2.5% to 3%. Compare that to those submitting with a CPA-reviewed or audited statement, who can anticipate a significantly reduced rate. For large multiyear projects and organizations, maximizing cash flow can represent meaningful savings.
If your firm is considering attestation for the first time, there are a few steps you can take to keep the initial costs of that service as low as possible.
First, know your needs. Full-fledged audits are typically only required for large organizations seeking high-value surety programs worth $100 million or more. For firms seeking less surety credit, reviews are much more affordable and can be just as instrumental in securing a meaningful surety program and optimizing practices.
Finally, when it’s time to engage with a CPA, follow these steps to maximize efficiency. These steps will help ensure the project is completed in a timely manner, accurately reflects your business’s financial position and sets the stage for follow-up attestation work in the future.
Step 1: Produce accurate information.
It may not be as simple as it sounds. Firms that don’t have sophisticated accounting processes will need to build out the basics. It may take time and effort to implement, but a one-time investment in accounting software and training can serve as the foundation for growth.
Step 2: Submit information early.
Your CPA is best equipped to hit the ground running if they have the information they need as early as possible. Ideally, that means sending your financial information before the first virtual or on-site meeting. With the benefit that offers, they can start the attestation process with pertinent, informed questions that will kick-start their work and potentially offer better results sooner.
Step 3: Develop lines of communication.
Ensure your CPA has direct access to those using financial information within your firm. That will help when deadlines loom and make collaboration smooth, making the attestation process less demanding on those responsible for supporting day-to-day operations.
Companies with ambitious growth strategies need surety credit, and surety carriers need to see professionally certified financials. Hopefully, those on the fence about the benefits of attestation now have a clearer picture and can apply the cost-saving principles above to manage associated expenses most effectively.
With an industry and broad economic outlook that appears increasingly competitive, volatile and costly, there’s no better time than today to invest in your growth potential.