In today's tight market, it's becoming harder and harder for contractors to secure the bonds they need. Whether they are a small operation starting out, or an established leader, chances are they have found it increasingly difficult in the past few years to secure contractor bonds. However, the good news is there are some steps they can take to ensure they are doing all they can to improve this process. Here, we've identified ten tips to help improve a contractors' surety program.
1. Engage a CPA who specializes in contractors. Construction accounting is a specialty. You wouldn't let a podiatrist perform brain surgery. Certified public accountants (CPA) have to know the ins-and-outs of the percentage of completion and completed contract methods of accounting in order to provide proper financial planning and tax advice to the contractor. A good CPA will present a contractor's financial statements in the format that makes the best presentation to sureties and banks, and balances the strong desire to reduce tax liability.
2. Work with a bank that understands contractors. Cash flows of a contractor vary greatly from other industries. In fact, they differ among varieties of contractors. It is important that a bank's loan committee and board of directors understand construction and the different lending risks associated with general contractors and subcontractors. Meet the decision makers at the bank and establish a rapport. Account managers tend to come and go, so it's important that the contractor ensures continuity in their relationship with the bank.
3. Establish a Web site. This is a new millennium. Owners, developers, banks, sureties and insurance companies expect to be able to learn about a potential business partner on the Internet. A construction company without a Web site is seen as old fashioned and lacking innovation. Once established, it's important that the site's content is accurate and updated regularly. A well-developed site can actually become a portal of communication for the contractor's staff, vendors, clients and subs.
4. Collection. Pay close attention to receivables. The best-managed companies make clear what the payment schedule will be prior to commencement of work and enforce their collection policies. They also prequalify their clients and confirm that adequate financing is in place to cover the proposed amount of the contract as well as contingencies. In today's construction economy, after securing the job, the toughest thing to do is collect for it.
5. Understand the law. Contractors have to understand their rights and the rights of others involved in a project including subcontractors of all tiers, the general contractor and the owner. Lien and stop notice laws vary from state to state and change almost every year. A slip can cost one of the parties to lose its rights and possibly thousands of dollars. A general contractor will likely be held responsible for the payment of all wages due to all workers on the project regardless of employer. State agencies will enforce minimum or prevailing wages in many cases and the general contractor will likely be held accountable. It's important to know the law and have an attorney review contracts regularly to keep them current with changes in the law. Because this is a payment issue covered by the payment bond, the surety needs to know that systems are in place to protect the contractor from paying for labor twice.
6. Meet the home office underwriters. A contractor should have an excellent relationship with his broker and may have the same with the local branch underwriters. Although the branch underwriter can be a strong advocate for the contractor, the real decision maker is in the home office of the surety company. A contractor needs to know the individuals on which his surety program depends. Home office underwriters should be invited to visit with the contractor in his office, tour a project, share a meal or play golf. The better the surety knows the contractor and the people making decisions for the company, the more likely they are to make decisions favorable to the contractor.
7. Employ a strong financial staff. Successful construction company executives look at the accounting department as a profit center, not a cost center. A top notch CFO will make the company money. Adequate staffing will allow paperwork to be processed efficiently, speeding collections. Accurate and timely financial reporting will allow management to make informed decisions about specific projects and the operations of the company as a whole.
8. Communicate. A contractor spends a lot of money on outside services and should utilize their services. The contractor has to have strong legal, accounting, financing, risk management and surety support. These advisors need to be kept informed of proposed changes in the contractor's operations and in operating results on a regular basis. These professionals have a wealth of information at the contractor's disposal and can keep mistakes to a minimum and help maximize the company's potential.
9. Reputation .Obviously, a contractor wants to have a good reputation in order to attract clients. But what about subs, suppliers, engineers and architects, lenders, insurance carriers and other surety companies? All of these parties not only have their own trade associations where they talk about their problems, but they all talk to each other. A contractor can't burn too many others before word spreads. Rumors fly in what is really a small community. Communication is faster, better and more efficient than ever and the Web provides a wealth of information about almost anything. When looking for a new surety relationship, a contractor can count on the underwriter making calls to a number of references.
10. The surety broker. The key to a successful surety program is a broker who can match a contractor with the proper surety or sureties. The days of a broker using volume with a surety to force them into a favorable decision are over, at least for the foreseeable future. In today's tough surety market, a good broker will be kept advised of all levels of operations and advise the contractor how decisions will affect surety credit. The broker has to maintain good relations with the surety on behalf of the contractor. The number of active sureties in the market continues to shrink. There are fewer options and when capacity becomes an issue, it's important to have all of those options available. Burning bridges was never a smart option, but it is more important than ever to keep all doors open. A good surety broker can coordinate all of the points raised in this article to maximize a contractor's surety credit.