In today’s unstable economy and tight market, it has been increasingly harder for some contractors to obtain bid and performance bonds. For small business owners and larger companies alike, it has been more and more difficult both during the current time and over the past couple of years to obtain contract bonds. Even though the market and economy may look dim right now, there are specific steps that contractors can take to ensure that they are doing all they can to make this process easier and more obtainable. Here are ten informative tips to help improve a contractors’ surety program:
1. Find a CPA Who Specializes in and is Knowledgeable about Contract Bonding
Finding the perfect CPA is where to start. CPAs must know about the percentage of completion or completed contract methods of accounting in order to provide the surety agency with all the necessary information that they require, as well as being able to provide the required financial planning and tax advice to the contractor. A knowledgeable and thorough CPA will present the contractor’s financials in a professional way that makes the best presentation to surety companies and agencies alike. Also, it will balance the strong desire to reduce tax liability.
2. Work With a Bank that is Familiar with Contractors
A contractor’s cash flow may be very different than other industries. In fact, they even differ among different varieties of contractors. It’s crucial that a bank’s loan committee and board of directors understand construction and the various lending risks that are associated with general contractors and subcontractors. It would be a good idea for the contractor to meet the decision-makers at the bank and establish a relationship. Account managers are known to come and go, so it is imperative that the contractor maintains close contact with the bank.
3. Establish a Web Site
It’s a new millennium! Some contractors do not have a website, but many are realizing that establishing a web site is crucial for the success of their business. Owners, developers, and clients expect to be able to learn about a potential business partner with a click of a button. Nowadays, a construction company that does not have a website can be viewed as old-fashioned, out of date, and lacking innovation. Companies who do not advertise online have a tough time competing with new and innovative contractors who are able to develop an informative website. Once the website is established, it is important that the website is accurate and updated regularly if any changes are made. A site that is well-developed and regularly maintained can potentially become a portal of communication for contractor’s staff/employees, vendors, clients, and subs.
A contractor MUST pay very close attention to open receivables. The most successful companies make very clear what the payment schedule will be prior to the start of work and enforce their collection rules and guidelines. They can also pre-qualify their clients and confirm what available financing is open to cover the estimated amount of the contract as well as contingencies. This is so important because in today’s construction economy, after getting a job, the most difficult aspect is collecting payment for it.
5. Understand the Law
It is also important that a successful contractor understands their rights, as well as the rights of other individuals involved in a project. This includes all subcontractors, the general contractor, and the owner. Contractors must be aware that lien and stop-notice laws vary from state to state, and they are changed nearly every year. One mistake can cost one of these parties to lose their rights, and possibly thousands of dollars! A general contractor will most likely be held responsible for the payment of wages due to all workers on the project, regardless of who the employer is. State agencies can and will enforce minimum or prevailing wages in many cases and the general contractor will likely be held accountable. It is also very important to know the law and have a knowledgeable attorney review contracts regularly to keep them current with law changes. Due to the fact that this is a payment issue covered by the payment bond, the surety company must be aware that systems are in place to protect the contractor for paying for labor more than once.
6. Meet the Home Office Underwriters
Truth be told, a contractor should have and maintain a very close relationship with their broker and may have the same relationship with the local branch underwriters. Although the branch underwriter can be a strong advocate for the contractor, the ultimate decision maker is at the surety company’s home office. The better the surety company knows the contractor, the more likely they are to make better decisions for the contractor.
7. Hire a Strong Financial Staff
Successful construction company executives view the accounting department as the profit center, not the cost center! A highly-skilled CFO will be an incredible asset to the contractor. Adequate staffing will make paperwork to be processed efficiently and correctly, thus speeding collections.
Contractors spend a great deal of money on outside services and they should utilize those services to their advantage. The contractor must have strong legal, accounting, financing, risk management, and surety support. These mentioned advisors must be kept informed of any changes in the contractor’s operations and on operating results on a regular basis. These professionals can help keep the percentage of mistakes to a minimum.
For any contractor to be successful, they must have a good reputation to help them attract potential clients, but what about subs, supplier, engineers, etc? All of these groups communicate with each other. A contractor can’t burn too many clients before word spreads. Nowadays, communication is faster and more efficient than ever and the Internet provides a great deal of information about anything, even contractors.
10. The Surety Broker
And finally one of the most important keys to a successful surety program is the surety broker. They can match the contractor with the proper surety company. In today’s tough surety market, a knowledgeable broker will be advised of all levels of operations and tell the contractor how decisions will affect surety credit. The broker must maintain an excellent relationship with the surety on behalf of the contractor. The number of active sureties in the market continues to dwindle, so there are fewer options and when bond line capacity becomes an obstacle, it is crucial to have all possible options available. “Burning bridges” is never a smart move, but it is more important now than ever to keep all doors open. A skilled surety broker should have the ability to coordinate each issue discussed in this article to maximize a contractor’s surety program.