Industry News
Author, Matt Gaynor, Director, Surety Department, Rancho Mesa Insurance Services, Inc.
Currently, all contractors licensed in the State of California are required by the Contractors State License Board (CSLB) to have a $15,000 contractor license bond on file with the state. This amount has been in effect since January 1, 2016.
Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
In the normal process of bidding a construction project, our contractor clients are required to post a 10% bid bond to guarantee that they will execute and deliver a signed contract along with 100% performance and payment bonds, if they are awarded the referenced project. While this is a requirement for public projects, bid bonds have also become more prevalent for certain private projects. By approving the required bid bond, the surety company provides their stamp of approval that they have reviewed the bidding documents and are willing to support the contractor for the specific project.
Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
When the bond company approves a performance and payment bond for our contractor clients, they want to keep track of the project until completion - at which time the liability for the bond is no longer on their books. One tool they use to track a construction project is the Work In Progress Report (WIP) which the bonding company analyzes on a quarterly or six-month basis to track the profitability of the project on a percentage of completion basis. When the bond company sees that a project is 100% complete on the WIP or Completed Contract Report, they will mark the bond file as “closed,” once the warranty period has expired.
Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
Getting paid on time by project owners is essential! As construction companies attempt to collect their account receivables, a frustration builds as the overdue payments stretch from 60, to 90, to over 120 days. You might have already paid certain suppliers or subcontractors, and now your cash flow is getting stretched because your receivable has been delayed. If this is a bonded project – you do have an additional avenue of recourse to collect.
Author, Andy Roberts, Account Executive, Surety Division, Rancho Mesa Insurance Services, Inc.
The construction industry is currently booming. According to a survey conducted by the AGC of America, and a recent article written by Rancho Mesa’s Kevin Howard, the industry shows no signs of slowing down, as 80% of contractors predict growth in 2020. While that’s great news for the industry, we are starting to see some trends that can cause some issues for contractors.
Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
In the world of surety bonding, the various financial information the bond underwriter will analyze includes the Balance Sheet, Income Statement, A/R & A/P Aging, Bank Line of Credit, Work In Progress Schedule, and the owner’s personal financial statement. This is to determine the level of single project and aggregate program credit line to support the contractor’s bonding.
Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
We often hear the term “cash is king” in the construction business. When referring to our contractor clients’ bond line of credit, this term is paramount. The various sources of cash listed on a balance sheet (i.e., cash in the bank, accounts receivable, available bank lines of credit) will largely influence the bond company’s calculation of the bond credit line. Let’s focus on accounts receivable.
Author, Andy Roberts, Account Executive, Surety Division, Rancho Mesa Insurance Services, Inc.
When we have clients that are required to bond for the first time, often their first questions are what is a surety bond, how do they work, and why am I being required to provide one.
In its basic form, a surety bond is a three party agreement between the contractor, called the principal, the project owner, called the obligee, and the surety company. The surety company provides a financial guarantee to the obligee that the principal is both qualified and capable of performing the contracted job.
Author, Chase Hixson, Account Executive, Rancho Mesa Insurance Services, Inc.
A common misconception in the home care industry is assuming a Home Care Dishonesty Bond is the same as having coverage for theft of client property. Many business owners don’t realize that Home Care Dishonesty Bonds, following the payment of a claim, will seek reimbursement from the business owner. That means the business owner is ultimately going to pay the claim if they don’t have an insurance policy to cover this type of act.
Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
The majority of Rancho Mesa’s contractor clients have a fiscal year, end of December 31, for their company financial statements. During March, April, and May we collect a variety of financial information from our contractors to update the bonding company. The underwriting items we request include the 12/31 CPA financial statement, along with the work in progress and closed contract schedules. We also request an updated bank letter, account receivable/account payable schedules, and a personal financial statement from the owner.
Author, Andy Roberts, Account Executive, Surety Division, Rancho Mesa Insurance Services, Inc.
For a contractor that is wanting to bid a job, or has won a job that’s requiring a bond that they are not able to qualify for on their own, one option for increasing their bond capacity and ability to qualify would be to have a third party also indemnify to their Surety. While there are definite risks, this type of agreement can be very beneficial to both parties.
Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
When meeting with new contractors looking to qualify for increased bonding capacity, one of the first items generally discussed is the work-in-progress Schedule (WIP). Understandably, the balance sheet and profit & loss statement get the most attention when compiling financial information for the bond company, but the WIP, whether on a quarterly or six month basis, allows the bond company to gauge how well the contractor has estimated their projects and how conservative they have been on a project’s profitability. Preparation of an accurate work in progress schedule is the only way to gauge the true profitability of the company.
Developing Solutions • Building Trust • Protecting Clients – ONE RELATIONSHIP AT A TIME.™
