Have You Met With Your Bond Company This Year?

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

After a recent meeting between a Rancho Mesa contractor client, the bond company that supports our contractor, and Rancho Mesa as the contractor’s agent, the bond manager sent me an email stating, “now that I have met with [your client], we are willing to increase their aggregate surety line of credit by $10,000,000. Thank you for setting up the meeting.”

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. These items all represent “objective” processes the bond company will use to make their credit decision.

However, it is also important to introduce the bond company to several “subjective” processes to include in their decision making. During a direct meeting between the contractor and the bond underwriter, you may uncover positive items that might make the difference between a yes or no response for a project. Examples might include:

1. Relationships with a certain municipality or a general contractor (in the case of a subcontractor client).

2. Various production schedules that could enhance the profit on a particular project.

3. Equipment savings unknown to the underwriter, etc.

As a home office contract bond underwriter in the late 1980s, I was invited by an agent and our branch underwriter to fly to Atlanta and meet with a certain contractor before deciding whether to support a large project that would require a bond. After walking though the jobsite with the client and reviewing the various estimating schedules for this particular project, I came back with a sense that the contractor could support a higher level of bonding beyond what our analysis of the financial numbers would have allowed. Therefore, we approved the bid for bonding. Although the contractor client came in third on that specific project, we had laid the groundwork for a much larger program of support going forward.

We recommend that you schedule to meet your bond company on an annual or bi-annual basis. If you would like a better understanding of how this meeting might increase your bond line of credit, feel free to contact me, Matt Gaynor, at (619) 937-0165 to discuss ways to ensure your bond program is efficient as possible.

Maximize Your Bond Line of Credit by Collecting Account Receivables

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.

When we provide the bond company a financial statement from a client, they will often request we include a Schedule of the Accounts Receivable and Accounts Payable statement. Generally, the schedule breaks out the receivables by 30, 60, and 90 day increments. Regarding the open receivable balances scheduled as “over 90 days past the invoice date,” the bond company will subtract this amount from the equity and working capital analysis because they feel that a greater risk exists in the collection of these receivables.

The over 90-day receivables become very important since the collection of these receivables can mean the difference between a bond company approving or declining a specific bid request (for a project which our contractor may already be heavily invested). The bond underwriter wants to ensure that the contractor has sufficient cash coming in the door to pay the labor, suppliers, and subcontractors on current projects – and may not want to take on additional risk if they are concerned about receivable collections needed to pay for these costs.

Being awarded a contract, whether bid or negotiated, is extremely important to a contractor’s success. But right behind the importance of winning and executing the contract, is the contractor’s ability to collect the money to ensure they are getting paid for the work they do. Make sure you have a good receivables team in place so that paperwork is issued correctly/timely, and consistently follow up on late payments to collect your money.

If you would like a better understanding of how the accounts receivable collection process affects your bond line of credit, feel free to contact me at (619) 937-0165 or mgaynor@ranchomesa.com to discuss ways to ensure your bond program is efficient as possible.

Time To Renew Your Bond Line of Credit

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.

Once this information is collected, submitted to, and reviewed by the bond company, they may follow up with questions or require additional information to explain what has been submitted. They will also ask the bonding agent to request single bond and aggregate bond program “parameters” based on the contractor’s estimate of work over the next 12 months. This information forms the basis for the bond agent’s line of authority that the bond company will provide to the bond agent.

The line of authority provides the agent with approval to execute the bid, payment, and performance bonds for their contractor client within the negotiated single and aggregate limits. The bond agent line of authority also includes certain conditions that would fall outside the agent’s authority to approve the bond request; therefore, the agent would need to submit the request to the bond company for approval. Some of the conditions that fall outside automatic approval include:

a.) a bid spread in excess of 10% between the first and second bidder.

b.) a project located outside the contractors’ normal geographic area for work.

c.) the contractor taking over work of a defaulted contractor, etc.

The agent line of authority is an efficient way for the bond agent to service their contractor client accounts without requiring approval from the bond company for every project. Upon receipt of a new bond request, the agent will review the project information to ensure it falls within their authority, and then they will execute the bid or performance bond and deliver the bond to their client. The line will usually expire on April 30th of the following year – which restarts the process to collect the financial information for the bond company to renew the agent’s line for another year.    

If you would like a better understanding of how the bond line of authority affects your bond program, please contact Matt Gaynor, at (619) 937-0165.

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.

Contractor Strategies to Maximize Your Bank Line of Credit

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

Some of my most successful bond clients opened their construction business with a good amount of working experience on their resume, but only a minimal amount of cash and capital. Unfortunately, bond companies like to see a strong amount of cash and capital. Therefore, my goal, as their bond agent, is to work with what they have at the present time to explain why they are a “good risk” now for bid, performance, and payment bonds - along with ideas on how to overcome the initial cash and capital constraints.

As a contractor grows and is looking at larger single and aggregate bond programs, I make it a point to work with the contractor on upgrading their financial presentation along with the goal to qualify for a Bank Line of Credit. It can sometimes be difficult to qualify for that “first” bank line of credit.

We want to help! On Friday, September, 28th, we will be inviting a local bank professional to cover "Contractor Strategies to Maximize their Bank Line of Credit." Our goal is to answer some of the following questions to prepare the contractor for a favorable submission process with the banker:

a)    What is the typical information needed from the Contractor to apply for a Bank Line?
b)    How do I determine what size Line of Credit I should ask for?
c)    What are the “key” underwriting areas you will concentrate on?
d)    How long after we provide you the information should we expect an answer?
e)    To qualify for a line of credit – do we need to move our checking account to your Bank?

The seminar will allow us to pull back the curtain with the banker to make this process as seamless and painless as possible. The seminar will provide the contractor an opportunity to ask the questions you might have avoided because you assumed you did not qualify.

If interested, please register online or contact Rancho Mesa Insurance at (619) 937-0164.

The Number 1 Reason a CPA Reviewed Financial Statement Can Benefit a Contractor

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

Small Performance Bonds No Longer Require CPA Financial Statements

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

In the past, many Surety Bond carriers required financial statements from a Certified Public Account (CPA), bank lines of credit, tax returns, etc. for contractor bond programs, whether the client required one bond a year or a large bond program. This is no longer the case.

Several “A” rated carriers now provide “personal credit based scoring” to approve single bonds of $350,000 up to $500,000. There is no need for company financial statements. Instead, the contractor completes a “fast track” application, which requests personal financial information about the owner(s). The bond company will run the personal credit of the owner(s). If the owner(s) personal credit is decent, the bond will be approved. A response is provided within 48 hours of submission. 

The program responds to requests for bid bonds, performance and payment bonds, and letters of bondability. Several carriers provide a “pre-qualification” feature so you can determine if you will qualify for the bond before you bid or negotiate a project that will require a bond. This pre-qualification feature is helpful for owners that are aware they have low credit scores.

So, if you are considering a project that requires a bond and you are not a big fan of collecting a lot of paperwork for one project – don’t fret.  We may have a solution to help you win that job!

Contact Rancho Mesa Insurance Services, Inc. at (619) 937-0164.

Adding an Additional Obligee to a Performance Bond

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

A Rancho Mesa construction client recently asked if they should be concerned when asked to add a Duel Obligee to a Performance Bond on a construction contract.  The short answer is “no.”  But, let’s expand on that answer.

It has become increasingly more common for project lenders to require they be added as an additional named obligee/beneficiary under construction performance bonds.  Since the lender will be providing the financing for the construction project, they ultimately want to ensure the work is completed in a timely and satisfactory manner.

The request is usually solved by attaching a Dual Obligee Rider to the Performance Bond.  The rider provides the lender with the same rights as the original obligee, as long as they agree to assume the owner’s obligations to the bonded contractor under the contract.

Rancho Mesa recommends its clients ensure the lender sign the Dual Obligee Rider as acceptance of the terms of the rider.  By having both parties (the original obligee and the lender) sign the rider when the Performance Bond is issued, the contractor gains assurance that the lender will meet the same obligations as the owner in the event of a claim under the Performance Bond.