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Often for Contractors, the time comes when you look at the upcoming bids list and wonder how you can qualify for the larger jobs that your competitors routinely go after. Bidding on larger jobs does require some planning. Here are some suggestions on how to increase your bonding capacity while still growing your company’s profitability.
A balance sheet is the most important thing to consider when increasing your company’s bonding capacity. Your company’s balance sheet is the cornerstone of this surety underwriting equation. Your balance sheet tells the story regarding your company’s ability to obtain larger bonds.
Typically, a contractor is offered an aggregate bonding capacity that is 10 times the net worth of the company. The exact amount depends on many factors such as a contractor’s experience, personal net worth, and availability of bank credit, among other things.
For example, a favorable construction company with a net worth and/or working capital of $1MM can typically expect to receive an aggregate bonding program of $10MM. As a rule of thumb, the single project limit will usually be 1.5-2 times your largest project. Even though these limits are flexible, your company may want to bid on a job that is slightly larger than the single limit. If that is the case, the surety underwriter will consider the project’s scope of work and current backlog, etc. As your company’s retained earnings and net worth increases, you can expect your bonding capacity to grow along with it.
Upgrade Financial Statements
Next, upgrading your year-end financial statements to a “review” level is important. Having these statements prepared on a percentage of completion (POC) basis by your CPA is preferred. If your CPA is unable to do that, then it’s time to hire a more construction-oriented accountant. Even though you many have a long-term relationship with your CPA, if they cannot create an accurate WIP or put together a proper POC statement, they may be hurting or halting the growth of your business.
In order to obtain larger bonds, you will need to provide your surety company with transparent underwriting updates. This includes quarterly WIP statements, an in-house balance sheet, P&L summary, and a mid-term financial statement prepared by your CPA. In addition, the surety company will expect aged accounts receivable schedules, along with the personal financial statements of the company principals.
Company Infrastructure & Philosophy
Company infrastructure and philosophy changes will ultimately need to be made in order to accommodate the above suggestions. While using the Quickbooks software can accommodate much of the heavy lifting for contractors with revenues below $15MM, it can be a good idea to upgrade beyond that. Quickbooks, while user-friendly, is not designed to handle job costing and large project tracking & reporting for a more sophisticated construction company.
Instead, many contractors use accounting software by Sage, as it’s designed with the contractor in mind and can accommodate for the project estimation. It can also track demands required for larger contractors with multiple ongoing projects.
The ultimate suggestion for increasing your bonding capacity is keeping an open dialogue with your surety company. Underwriters love good news, but the bad news must be shared on a timely basis as well. Building a foundation of trust with an underwriter will make it easier for a surety company to support you during construction slowdowns and help you obtain larger bid requests.
It’s important that you talk to your Surety Broker about increasing your bonding capacity. A good Surety Broker will be about to provide you with what your surety company's expectations are and what you need to do to accomplish this. In addition, your broker will be able to provide you with trusted, construction-oriented CPA firms in your area. It’s important that your Broker and CPA talk in order to ensure the ultimate bonding success of your company. Regardless of what steps you take to upgrade, steady profitable growth, and a willingness to communicate should be your guiding principles.
If you have questions, about your how your company can increase your bonding capacity, or you want to learn more about bonding opportunities, contact TSIB today!