Author, Matt Gaynor, Director of Surety Bonding, Rancho Mesa Insurance Services, Inc.

One of the key documents required when we are assembling the Bonding Programs for our construction clients is a fiscal year-end financial statement prepared by an outside Certified Public Accountant (CPA).  Although we monitor internal financial information from our contractors throughout the year, at the fiscal year-end (usually 12/31), the bond company will require that the statement come from a third party CPA.  That way, they have some certainty that the information has been prepared by an independent financial source that has a background in working on contractor financial statements.

When working with a new client or raising the aggregate program for an existing client, we often discuss recommendations about what type of financial presentation (i.e., compilation or review) they should request from their CPA.  From a cost basis, the compilation may save the contractor a few thousand dollars.  Here is a description of each financial presentation:

• Compilation - the CPA takes financial data provided by the contractor and puts them in a financial statement format that complies with generally accepted accounting principles.  There are no testing or analytical procedures performed during a compilation.
• Review - inquiries and analytical procedures present a reasonable basis for expressing limited assurance that no material modifications to the financial statements are necessary and they are in conformity with generally accepted accounting principles. 

As a bond agent, I have noticed the historical decision point for when bonding companies ask for a contractor to upgrade to a review is when the single job size they are bidding exceeds $500,000.  Of course, we have many exceptions to this rule:

a. If the contractor rarely requires bonding and will only need an occasional $600,000 - $700,000 bond, a compilation is more than acceptable.
b. If the contractor has strong internal financial statements and only requires a bond less than $1,000,000 every few years.
c. If the contractor has a very strong cash position and a solid personal financial statement several sureties will require copies of tax returns but may waive the requirement for a CPA issued statement.

On the flip side, on several occasions we have used the future requirement that they upgrade to a CPA review at their fiscal year-end to provide approval for a bond they need now.  Under that scenario, both the bond company and the contractor have an understanding in place that the request for an upgraded financial statement will allow a positive approval to increase the bonding capacity in advance of the fiscal year end.

Keep in mind, it would be also be prudent to check with your bank to determine what level of financial statement they may require.  

In closing, for contractors looking to grow their business, it is best to provide a CPA review (and pay the extra money) then to risk not getting approved for that larger project or increased program.  It can also help to have a review as the owner starts to get a little further away from the numbers and they can get some level of comfort with a review as to the strength of their accounting system.

Talk to your bond agent and CPA now, to ensure all three parties are on the same page.

For more information about surety bonding, contact Rancho Mesa Insurance Services, Inc. at (619) 937-0164