The owner of a construction company that’s hitting its stride often looks excitedly to the next bid, the next contract, and the next project completion. A growing reputation and top line create expectations, then run into the reality of securing a surety bond for that next big job from an issuer that takes a more considered view of the company’s rapid expansion.
The owner needs an experienced surety agent they can trust, one who possesses wisdom and knowledge and is trustworthy. That advisor-advocate will ask grounding questions to help the contractor win the surety bond that judiciously takes the company to the next level. Here’s what young, growing contractors need to know:
Financial Health is Key
When a company is expanding, a surety bond issuer focuses on its balance sheet, specifically its working capital and equity. The issuer wants to see a healthy level of cash on hand, a quick turnaround on receivables, and limited underbilling.
While the business should demonstrate consistent profitability, it’s just as important, if not more so, that it shows retained earnings year over year rather than a pattern of distributing more than it is earning. Bond issuers also study how much the business spends each year on large, fixed-asset purchases relative to its annual profits, and they want to see that it makes minimal use of debt to fund its growth.
The Importance of Professional Financial Reporting
The construction company owner should have a professional — the company’s CPA or CFO — prepare the financial information to be submitted with the bond application. Insurers look closely at the numbers. They must be highly accurate, realistic, and show a consistent positive trend with the understanding that no company hits a home run every year.
An experienced surety bond agent will also review the financial reports and provide guidance on them and the company’s future. Here’s one insight: Revenue and job growth figures can be deceptive. Due to inflation, a job that cost $10 million several years ago can cost $15 million or even $18 million today due to higher labor and materials expenses. So, while it might appear that the contractor is growing, it’s just keeping up with the economy.
The company owner should spend as much time studying the expense side of its profit-and-loss statements and ask questions such as, “Is the company’s profit margin going up or down?” and “Are the flurry of new contracts that are driving growth adding to or subtracting from the bottom line?”
Agents Provide a Deeper Understanding of Growth
An experienced surety bond agent presents a different response when an issuer asks whether their client is growing in a healthy way. For example, the agent correlates a new project with a previous one that had the same number of buildings. That apples-to-apples comparison provides a better financial picture than the gross income statement. The analysis also gives the issuer greater comfort that the contractor’s growth is proceeding at a satisfactory pace.
Beyond the Application: The Agent’s Value
Surety bond agents show their value when they go beyond the application. When a school construction firm plans to bid for a new project that’s $20 million larger than any it has done before, the agent sits with the owner to talk through the answers to questions such as, “How does this job compare to previous ones? What are the differences? How does the project’s much larger size impact the company’s ability to fulfill requirements such as on-time delivery and construction-quality requirements?”
The work often begins well before the bid is submitted. The agent sits with the owner and talks through the hard questions a bond issuer will likely ask. Sometimes, a contractor will say to the agent, “Well, what do you think?” The answer is, “Well, what do you think? It’s your business, your business plan, your manpower and resources.”
If these matters are not discussed beforehand, the agent is left saying to an issuer, “Hey, they’re not sure. What do you think about bonding the contractor?” The answer will be quick: “Not interested.” When prepared, the agent meets with an explanation of why the project makes sense from a financial and operational standpoint and therefore meets the criteria for being bonded.
The Agent as a Trusted Provider
The business owner is best served by sitting down with their surety agent annually, more often if growth is rapid quarter over quarter, to discuss goals and how those fit into the company’s strategic plan. Sometimes, that CEO needs an external sounding board to balance the pressure from within their company to expand. The owner can go to a trusted bond agent for sound advice without thinking, “Well, they just want to write a bond for me, so they’re going to tell me what I want to hear.”
That makes the relationship much more than transactional. For example, the agent can share with the owner the experiences of other contractors with a company that has a history of being difficult. That could lead the CEO to turn down a contract and thus avoid sharing with the agent later, “Yeah, you were right about that owner. We wish we’d never done it.”
The contractor also benefits from being able to call the agent at any time and say, “Let’s talk through this potential deal.” Rather than listen to estimators who say, “Let’s go after this, let’s do this,” and project managers who say, “I know how to do this and that on the job,” the business owner can learn from an experienced agent the questions they haven’t asked themselves or that they need to ask themselves.
The owner of a young construction firm needs guidance to avoid mistakes that can set back the company’s growth. An experienced surety agent can secure the needed bonding, listen with a keen ear, and provide direct feedback to make that happen.