Masonry Magazine February 2003 Page. 45
References of suppliers, people for whom the sub has completed work for in the past, bankers, insurance agents, Dunn and Bradstreet reports, etc. Capability is evaluating what type and size of jobs the contractor has successfully completed in the past. As a general rule of thumb, most bonding companies, referred to as Surety, will only issue a bond on a job less than two times the size of the largest successful job the contractor has completed. This will include bonded and unbonded jobs. Capability will also evaluate such things as the strength of your management and staff and if you have a formal arrangement in place for the continuation and completion of your work should a key owner or manager die or become disabled. The final, and most complicated part of the surety underwriting process, is the Capital portion. Capital refers to evaluating the financial strength of the contractor.
Evaluating the financial strength and weaknesses is a complicated process with a variety of formulas, analyses, and statements. Every bond company evaluates your financials slightly different. A good surety agent can review your financial statements and work with your CPA to help develop a long-term strategy and formula for building a strong bonding relationship. For the purposes of this article, we will only review the basic rules. The first rule is always the "Golden Rule." Cash is key and the more "gold" a contractor has in terms of short term, liquid assets-the better. Your financial strength is primarily determined by evaluating your Profit and Loss Statement for Net Working Capital and your Balance Sheet for New Worth/Retained Earnings.
Selecting the best CPA and Surety Agent is key to building and developing a strong bond line. The CPA should be familiar with construction and the various challenges associated with your industry. In addition, the CPA should coordinate with your bonding agent to present the complete information that will be required by your bonding company at a reasonable expense. There are three levels of financial statements that can be prepared by the CPA. A Compilation Report, a Review Report, or an
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Every bond company evaluates your financials slightly different.
Audited Statement. The Compilation is simply a properly presented form of your internal records, with minimal verification. A Review is more detailed, and the CPA is required to verify certain items such as cash balances and receivables. An Audited Statement is extremely detailed with the CPA acting as an independent verification of all information presented. The cost of each statement increases substantially as you progress from a Compilation up to full Audited Statement. On smaller bond lines and in certain circumstances, some bond companies will only require a Compilation or a Review. Larger bond lines will always require an Audited Statement. Before you spend the money with your CPA, make sure you have a Surety Agent who knows exactly what is required and what type of statement will be needed. Your Surety Agent should also speak to your CPA and discuss what schedules need to be attached, such as completed contracts, and a schedule that breaks out all under- and over-billing on work in progress.
A good Surety Agent needs to be fully informed about every aspect of your business and be informed of any issues, problems or concerns that could have a significant effect on your company at the earliest possible time. The Surety Agent should have a very strong working knowledge of construction, construction contracts and financial statements. This knowledge, along with a strong background in the surety agreement, can help you deal with problems that may arise with other subs, the owner, architect or the general contractor. The most common dispute will probably arise over change order billings and getting payments resolved. Subcontractors often have problems with the "pay when paid" provision dealing with General Contractors. A good bonding agent can often help mediate these concerns to make sure that all parties work together to keep the work on schedule and prevent as many problems as possible.
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February 2003
Masonry 43