It's Time To Give Your Bonding Capacity a Boost
With signs that the construction industry is showing strength and climbing out of a particularly difficult period, it's critical that contractors lay the groundwork now to take advantage of the projected growth in construction activity. One step contractors should consider taking is to add bonding capacity.
A Competitive Advantage
Additional bonding capacity sends a signal to owners that your company is in solid financial shape and will be there for the duration of their projects. It can also help when you are lining up subcontractors to work on your projects. Finally, securing additional bonding positions your company to take on a wider variety of projects -- including projects with higher dollar values.
What You'll Need
Before issuing additional bonding, your surety will require documentation that confirms your firm's financial health. You should be prepared to provide financial statements; appropriate interim and annual schedules; schedules of contracts in progress, contracts completed, and backlog; and disclosures about the extent to which contract billings are used as bonding collateral. Be sure you respond quickly to any requests from the surety for financial information. Better still, be proactive and make your financial statements available to your surety on a regular basis.
Accounts Receivable
Before you seek to add bonding, review older receivables and establish arrangements with customers that have been slow to pay. Because large variations in a firm's accounts receivable can be a red flag, you'll want to monitor outstanding receivables and stay on top of collections.
Job Costs
Your surety will carefully review your estimated and actual gross profit on a job-by-job basis. Your goal should be to minimize "profit fades" -- the decline in profit margin from the time a contract begins to the time it is completed.
Having up-to-date job cost information will make it easier to manage estimated profits on your existing jobs. Update project labor and material costs on a weekly or bimonthly basis. Be sure appropriate accounting controls are in place to ensure that payroll costs and accounts payable are accurately reported.
Related-party Transactions
Disclose any related-party transactions in your financial statements. It's important that you are up front about detailing the nature and terms of any agreements between persons with potential conflicts of interest.
Personal Finances
Don't be surprised if your surety requests information about your personal finances. If, for example, you invest in real estate, you may need to disclose the related financing arrangements, cash flow, occupancy rates, and lease information. In addition, you should let your surety know about any personal loan guarantees you have made.
Your surety also may want to review your insurance coverage -- especially life insurance. Life insurance cash surrender values can enhance your company's adjusted working capital, an important factor sureties analyze. Because the surety is depending on your actions in the future, you'll also need to have adequate personal insurance.
