Surety Bonds in Difficult Economic Times

When it comes to the construction industry, bonds are often required when working on specific projects but are rarely a sure thing.  These days contractors that have been around for a long time as well as emerging contractors are being asked by surety companies to meet stringent requirements to obtain a bond.  Successful contractors take the time to carefully prepare and gather data well ahead of any meetings with any underwriter.  To get you started, we have pulled together a list of factors to consider when preparing an application for surety bonding.

A Strong Balance Sheet
Underwriters often want assurance that your business is in good financial health and that it has the strength to undertake any project you are bidding on.  They often assess the strength of your balance sheet by looking at the adequacy of your working capital.  What this means is, they’ll review your current and quick ratios.  The current ratio is calculated by looking at the amount of current assets divided by current liabilities, while the quick ratio is the amount of cash, cash equivalents and receivables divided by current liabilities and is a better indicator of your short-term liquidity.

In addition, sureties often look at the age of your accounts receivables as an indicator of problems in the future as well as your firm’s capitalization and debt.  Too little capital and excessive debt are warning signs to a surety that your balance sheet is unhealthy.  Finally, underbillings will be reviewed carefully as high levels of underbillings can indicate problems on one or more jobs.

Operational Strength
Sureties will look at prior projects to see if your business has the experience, equipment and manpower to complete the requirements of the contract requiring the bid.  Sureties are looking for assurance that you are capable of handling the types of jobs you are bidding on.

Established Banking Relationships
Sureties will look to see if you have an established banking relationship as evidence of sufficient lines of credit and credit history.

Current Business Plan
Most sureties will want to review your business plan as an indicator of your goals and the steps needed to take to achieve them.  An up-to-date business plan is important and should be reviewed annually or when you hire key employees.

Other Requirements
You should also be prepared to disclose information pertaining to:

• Personal finances
• Any transactions between related parties
• The existence of a formalized continuity plan
• Employee turnover rates
• Any non-bonded work you plan to bid on

You can increase your likelihood of obtaining the bonding you need by putting effective financial reporting in place and ensuring your CPA is a trusted advisor who is committed to helping you reach your goals.

For more information, feel free to contact one of our construction specialty team members.