For contractors, securing bonding is the lifeblood of their businesses, but it comes with challenges that range from having the necessary working capital to demonstrating a track record of success. Fortunately, with some work, these challenges can be overcome, making a contractor more attractive to a surety. This includes having sound financial statements and effective communications with all parties, as well as creating ongoing relationships based on trust. In the end, contractors require bonding for current and long-term business success. Taking the right financial management approaches can help open the door to future growth and opportunities.
1. Keep Sound Financial Statements
Sound financial statements are the foundation for persuading a surety to underwrite a bond, helping win a construction bid. However, these statements are not just a black-and-white compilation of numbers on a page; they tell bond underwriters that the contractor has the resources to do the job that would come with the winning bid.
Financial statements can also vouch for the historical performance of a contractor, which speaks to their ability to effectively manage a project. While these statements can be comprehensive (including a balance sheet, income statement, schedule of cash flow, schedule of contracts in-progress and completed contracts), they are necessary for proving that a contractor has a well-run business.
2. Build a Network of Trusted Relationships
Bond brokers rely on accounting firms with track records of generating products used to determine if a surety-contractor relationship is good for both parties. These relationships are symbiotic in nature because the bond broker’s recommendation of accounting firms with strong track records and the contractor’s choice of the accountant to produce the financial narrative are at the front of a process that begins with a winning bid and ends with a successful project completed. This ultimately helps put bond underwriters in a more comfortable place. There’s also room for forgiveness when showing a long-term pattern of success, broken by an occasional down year, after which there is a rebound.
3. Manage Cash Flow
The process begins with a balance sheet that reflects strong working capital, with a focus on the previous year’s financial success. Sometimes, a lack of success a year earlier can be mitigated with an interim statement from the previous 3 or 6 months, indicating business is on the upswing. Cash in the bank is a critical element in this process. An owner’s investment in the company can help with working capital, especially in its early years. Too often, contractors see their businesses fail, not due to lack of ability, but rather due to undercapitalization.
For many contractors, especially those on the cash basis of tax reporting, it’s better to delay billing later in December, as any cash received before year-end will be taxable in that year. This was a decision business owners had to make in 2017, in light of the lower corporate tax rates looming in 2018. Some decided to bill on December 31, 2017, collecting money in January 2018. These are a few tactics and considerations contractors use in business operations, and each tells a different story to surety underwriters seeking to determine the value of a potential or existing client. Not all contractors use any or all of the tactics in the same way. Every financial statement is different and speaks for itself.
4. Improve Communication
Often, these narratives are designed to communicate with different audiences. Financial statements in a construction bond scenario communicate with an underwriter and a surety but do not replace the need for meetings and communications in person with the accountant. Communicating with the underwriter and the surety create an opportunity to look at the financial statement in a light that considers potential, rather than just performance.
The underwriter might say the project the contractor is bidding on is beyond the company’s means to perform and refuse to grant the bond. Contractors may not want to hear that, but sometimes, it’s a harsh reality. Communications between contractor, accountant, bond broker and underwriter are critical to the long-term relationship that all parties seek. The surety company wants to grant that first bond to a contractor (and the next 20) and have built their businesses on this model.
Ultimately, the key is to focus on developing sound financial statements that are backed by real business performance. This provides a foundation of trust that will help any contractor secure the bonding they need to continually work on new projects, paving the way for future prosperity.