Bond Companies Thoroughly Track Status of Construction Projects

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.

Additionally, several bond companies will also use a Contract Bond Status Inquiry Form to track the projects. This form is mailed to the obligee (i.e., the owner or general contractor on the bonded project) and requests project information is completed on the form, then returned to the bond company via mail, email, or fax. The questions posed on the form include, “Is the contract completed, and if so, what was the completion date and final contract amount?” In the event the contract is on-going, the form requests a percentage of completion or approximate dollar amount of the work completed to date. The form also asks the owner if they are aware of any unpaid bills for labor or material on the project.

The final area of the status inquiry form provides space for the obligee to fill in remarks. This can be a good or bad thing for the contractor. We have seen responses from owners and general contractors that range from “great subcontractor – excellent to work with” to “I will never hire this contractor again.” Other times, this area is left blank. 

While the primary goal of the status inquiry is to understand if a project is closed or remains open, the remarks section will grab the bond underwriters attention (positive or negative) and that will become part of their underwriting analysis, going forward.

If you would like more information on how the contract bond status inquiry might influence the underwriting of your bond program, feel free to reach out to me at (619) 937-0165 or mgaynor@ranchomesa.com and ask any questions to ensure your bond program is getting the proper attention.

How Accurate Work-in-Progress Schedules Can Positively Affect Your Bond Program

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 (WIP) schedule. 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.

The WIP or status of contracts schedule is used to track the progress of contractors’ projects from start to finish. The schedule discloses the details of each contract’s percentage of completion, and profitability to date in the current reporting period.

The major components of the WIP include:

1. The Contract Amount (which may go up and down throughout the contract based on change orders).

2. The Costs Incurred to Date (we recommend to charge as many costs back to the project as possible).

3. Total Estimated Costs (should be updated on a timely basis).

4. Billed to Date (billing the project on schedule).

The accuracy of the WIP schedule is extremely important since the bond company will provide capacity to the contractor based on profit to date for each project. The bond underwriter will track the projects over a certain period to determine if profits typically close higher or lower than the original estimate. For example, let’s look at a contractor who initially estimates his projects at 15% profit when they start up, yet historically closes them out at 20% at completion. If the contractor anticipates a $100,000 profit on a project and the work is 50% complete, the bond company may provide an additional $500,000 of capacity on that $50,000 profit (10% case) even though the project has not been closed out. 

On the reverse side, a bond company will have major concerns when they review a WIP schedule from a contractor that typically closes out projects at less than the original estimate.

If you would like a better understanding of how the work-in-progress schedule affects your Bond Program, please contact Rancho Mesa Insurance Services, Inc. at (619) 937-0165 to discuss ways to maximize your bond capacity.