For now, the building industry remains strong with labor shortages proving to be the toughest obstacle to overcome for construction companies. As the business and credit cycles turn, maintaining healthy backlog levels will become a critical issue for contractors. Maintaining a bond program, even if you don’t regularly use it, can help your company keep a healthy backlog, diversify its revenue stream in a downturn, and go after larger jobs that others can’t. In the end, your company will be ready to face any economic headwinds with continued support from your surety bond company.
No matter the business cycle, sureties look for predictable margins and will terminate accounts that present too many unanswered questions. When a downturn in the construction sector occurs, the bonding companies will likely decrease the supply of bonds, toughen their underwriting requirements, and will likely begin increasing the cost of bonds. Due to these economic realities, the best construction companies know the importance of keeping their bond program in order to stay nimble.
Here are five of the best practices contractors implement in order to keep their bond program active:
1. Hire surety savvy professionals who have a keen understanding of the construction industry and the surety underwriting process.
Inadequate representation will affect your company’s ability to obtain and retain your surety program. Best-in-class contractors assess their bonding agent’s expertise and current performance in the same way they assess their banking, accounting, and other professional partnerships.
2. Continually provide the surety with consistent, timely, and accurate information.
Providing complete financial statements along with job schedules and supplemental information is vital. Without consistent, timely, and accurate information, surety underwriters will tend to assume the worst-case scenario.
3. Work with your bond agent in advance of surety meetings in order to prepare for the questions the surety company will ask.
A professional surety agent will help his construction clients prepare for these meetings by facilitating the requests for information in advance of any surety meetings. The best agents will inform their client of the need for the appropriate documentation and will anticipate the questions their client will likely hear during the meeting.
A good underwriting meeting will not become bogged down in time wasting requests for information that should have been provided to and analyzed by underwriters prior to the discussion.
4. Go over your business planning process and incorporate the appropriate benchmarks.
A good business plan will include work that is within the company’s expertise, within the geographic area that the organization knows, and will demonstrate that management is ethical and of good character. Lastly, the plan cannot present a scenario that will continue a negative trend or throw financial ratios into a tailspin.
If this is not properly articulated, you run the risk of your underwriter assuming the worst: A plan does not exist or is completely inadequate.
5. Document success when projections are met, while contributing to and maintaining adequate liquidity and equity levels.
Any issues in cash collection, active or pending claims, and related corrective actions need to be explained. A proactive discussion will focus on internal controls and management systems, because they determine the work-in-progress, which in turn creates the outlook on the financial statement.
Including explanations of outstanding receivables, breaking out retention amounts, and noting any pending claims can help eliminate negative assumptions from the surety underwriter.
Whether in good times or bad, contractors who regularly perform these best practices will have a much easier time maintaining their surety program. With this level of preparation the surety negotiations become future-focused, with less time spent revisiting old problems. By keeping your surety company up-to-date with your present situation, everyone is in a better position to support your future bonding needs and help keep your business humming.
For any further questions or if you are interested in learning how Marsh & McLennan Agency can help with your surety needs please contact Ryan Hays at +1 301 838 9405.
About the Author: Ryan began his career in the insurance and surety industry. Prior to joining MMA in 2019 he worked as an underwriter handling construction surety accounts at Travelers. While underwriting he helped private and public builders meet the demand for new and improved infrastructure. By developing confidential client relationships Ryan learned how to verify and evaluate corporate and personal financial data, review job backlogs, and examine contract provisions to successfully underwrite a bonded job. Through his disciplined approach, Ryan can help negotiate terms and conditions consistent with established surety standards. He also understands the needs for businesses to stay nimble and he will help complex clients consider different approaches that support their business objectives. Above all, Ryan stresses the importance of owning and delivering positive outcomes with integrity.