By Mike Dugan
Who is This Article For?: Contractors who have experience bidding on public works projects, generally under $5 million, and are interested in bidding larger projects
For most contractors operating in the public arena, the time inevitably comes when he/she looks longingly at the upcoming bids list -- eyes wide -- wondering how they can qualify for the big stuff that their larger competitors bid on. First, understand that there's no quick fix. Much depends on your willingness to become "surety friendly" while growing your company profitably at the same time.
First let's discuss your balance sheet, the cornerstone... the bedrock... of the surety relationship. Your ability to get bonds starts, and can end, here. For the purposes of this article, I'll assume you're at least loosely familiar with balance sheet mechanics, including working capital (current assets less current liabilities) and net worth (assets less liabilities.) The aggregate surety bonding capacity that you're offered as a contractor is largely a multiple of the net worth of your company, usually between 5 and 10 times, depending on a multitude of factors beyond the scope of this short article. For example, assuming all the additional underwriting is favorable, a construction company with a net worth of $1 million might expect to be offered an aggregate bonding program of between $5 million and $10 million. As a rule of thumb, the single project limit will usually be in the neighborhood of half to three quarters of the aggregate amount. Limits are usually flexible. If a contractor wants to stretch and bid a job that is slightly larger than his existing single limit, an underwriter will consider the scope of work and current backlog, among other things.
So, as you might guess, as you retain money in your company (retained earnings) and your net worth increases, you can expect your bonding capacity to grow along with it, all else being equal. This is a gross oversimplification of the underwriting process, of course, and there are many more factors that play into it, but net worth & working capital are big players in the bonding equation.
Next, upgrade your year end financial statements to a "review" level, and have this prepared on a percentage of completion (POC) basis. Your CPA should be able to get this done, and if not, you need a new CPA... period. I've seen on more than one occasion a surety company require a contractor to change his accountant as a condition for future bonding. Maybe you have a good thing going with your CPA, but if he can't create an accurate WIP or put together a decent POC statement, he's a giant roadblock to your continued growth and success as a contractor. You want a construction-oriented CPA, with lots of experience and clients in this arena.
To get approved for the bigger bonds you'll need to provide your surety company (by way of your agent) with timely underwriting updates. This includes at least quarterly WIP (work in progress) statements, in house prepared balance sheet and P&L at 3/30 and 9/30 (assuming you're on a calendar year end,) and a mid-term (6/30) financial statement prepared ideally as a review, but at least a compilation. Aged accounts receivable schedules are also expected, along with the personal financial statements of the company principals. Again, talk to your CPA about this. And, again, if your CPA can't/won't do this... it's time for a new CPA.
Infrastructure and philosophy changes will need to be made to the business to accommodate much of the above. Quickbooks should be one of the first casualties of the upgrade. It's not designed to handle the job costing, tracking and reporting needed for a larger, more sophisticated construction company. Many contractors use accounting software by Timberline or MasterBuilder, as these are designed with the contractor in mind, and can accommodate the estimating and tracking demands.
Bottom line: Talk to your agent about increasing your bonding capacity. They'll be able to tell you in more detail what your surety company's expectations are, and what you need to do to accomplish this. Regardless of what steps you take to upgrade, remember that steady measured growth should be the guiding principle. It's a case of not biting off more than you can chew. Surety companies understand this, and will usually give you enough rope to stretch on job size, assuming the underwriting makes sense, but not enough to hang yourself with. If the largest job you ever completed is $5 million, a surety company will most likely not approve a $15 million bid request right off the bat.
Michael Dugan is a surety bonding broker in New York and New Jersey. A published author and subject matter expert in the surety niche, Mr. Dugan can be reached at mdugan@clginsurance.com
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