We all know the phrase, “dress to impress.” We make sure that we are making that lasting first impression by dressing up for an occasion, but this same process can be used to maximize bonding capacity and provide a firm foundation of contractor success. But what are the three keys for construction contractors to impress sureties? CRI’s construction CPAs encourage contractors to focus on profitability, consistency, and historical performance.
(1) All Dressed Up: Profitability
A surety’s list of critical attributes for a contractor includes working capital, tangible net worth, debt, and receivables. Contractors obviously want to increase working capital and tangible net worth, while decreasing past-due receivables and debt. Sureties also consider the construction company’s backlog and the impact it will have on future billings and revenues.Contractors need to illustrate a healthy relationship between liquidity and debt. Sureties are uncomfortable with a heavily leveraged contractor who is utilizing most revenue to paying off debt. If construction companies find themselves in this situation, consider debt reduction strategies such as an equipment sale or leaseback arrangement to improve the situation.
Contractors need to illustrate a healthy relationship between liquidity and debt. Sureties are uncomfortable with a heavily leveraged contractor who is utilizing most revenue to paying off debt. If construction companies find themselves in this situation, consider debt reduction strategies such as an equipment sale or leaseback arrangement to improve the situation.
(2) Wardrobe Basics: Consistency
Significant swings in monthly performance should be eliminated if possible, and if not, contractors should be prepared to explain them. A surety is likely to evaluate methods for funding delays and retainage, as well as handling change orders. Profit fade on jobs will be investigated — particularly any fade exceeding 10% of projected gains.
Though a surety wants to know the job can be finished, it also wants insurance in the form of available assets to seize if there is a problem. Excessive inventory, prepaid expenses, and shareholder receivables count against the construction company while cash and current receivables are positives. Sureties are less enamored of property and equipment that aren’t liquid — particularly if too much capital is tied up in them.
Another important consideration for bonding capacity is work in progress. Sureties are looking for skilled business people, even more so than skilled builders. They want some assurance that construction companies are utilizing accurate estimates and consistent methods. Closing projects when multiple are open will typically improve bonding capacity, also. Ensure that charges are consistent. For example, billing one owner $250/hourly and another $150/hourly will usually raise questions. Undercharging on some jobs may lead the surety to reason that the contractor is undervaluing work in progress.
(3) Retro Fashion: Historical Performance
Sureties look beyond the numbers, too. They want to see a history of successful projects and work experience, an organizational leadership depth chart that demonstrates your ability to stay in business if a key leader leaves unexpectedly, a history of banking relationships and a business plan that indicates you know where you’re going and what you’re doing.
It’s no secret what sureties look for in a construction company: stability. Given the economy of the last few years, stability is one of the most difficult results for contractors. If you need help improving your bonding capacity, call the construction CPAs of CRI for help.