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Restating Financial Results
Bad luck and unforeseen circumstances can put any construction company in jeopardy of losing bonding capacity or even ending its relationship with a surety altogether. If you find yourself on the outs with your bonding agent, there are some fundamental ways to turn your surety’s frown upside-down and get back on the right track.
Make no mistake, your bonding capacity is based on financial metrics. But your business reputation matters, too. Anyone entering a contractual relationship wants to know that the other party is trustworthy, and sureties don’t just want to know — they’re going to find out.
To foster that trust, prioritize and nurture positive relationships with your architects, owners, subcontractors, employees and suppliers. You’ll no doubt present yourself to a surety underwriter in the best light possible, but it helps if others can attest to your company’s good standing as well. If something has transpired to call your reputation into question, provide references who can support you.
A surety will closely review your financial statements, paying special attention to items such as:
For example, it will deduct current liabilities from your current assets to determine the strength of your capital position. In addition, it will calculate your cash flow that figures into things such as net income, depreciation and other noncash items, and principal payments on any debts.
Some steps you can take to maximize working capital and enhance your bonding attractiveness in more difficult times include avoiding bad debt by more aggressively collecting accounts receivable and deferring long-term expenses. You could also look to reduce business debt. In worse cases, you might even need to take out a personal loan to infuse cash into the company, though this should be used only as a last resort.
Before issuing a bond, a surety will need assurance not only that your company is solid financially, but you also have the experience and resources to get the job done. So, it will seek evidence that you’ve successfully handled similar projects in the past. This evidence typically includes reviewing a contractor’s financial statement and work in progress schedule to determine if there is any profit fade on jobs open in the prior year which closed in the current year.
In addition, sureties will review a company’s current year financials to see if there are any large under-billings. Large under-billings can also be a leading indicator if there will be profit fade in future years. Management should provide conservative estimates when estimating the profitability of the open jobs so contractors will have profit gain and not profit fade. It’s always better to under promise and over deliver.
Moreover, you must show you have the equipment to do the work. Having an established relationship with a bank is necessary, and an adequate line of credit is helpful in this regard.
Today’s sureties will also look at your human resources. This includes verifying you have experienced and qualified staff, as well as enough crew members with verified skills.
Given the shortage of skilled workers in many areas, construction companies often face tough questions from sureties regarding labor capacity. Your management team should be able to demonstrate a solid ability to get the job done.
As mentioned, although financial measures will drive your bonding capacity, your ability to communicate still has an impact. Your surety should always be well informed of any developments affecting your financial performance — either positively or negatively.
Problems threatening your ability to meet contract obligations can often be mitigated if addressed sooner rather than later. By the same token, tell your surety about good news too. Keep them in the loop about exciting strategic developments.
It’s not uncommon for contractors to suffer lapses in morale as they struggle with economic setbacks, bad weather, equipment breakdowns and a multitude of other problems. If you keep communication channels with your surety open, there’s always hope of rebuilding your bonding capacity.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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