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

People from outside the surety bond industry will sometimes ask if we work for 1) the carrier (bond company) or 2) the contractor client. This is an easy one. While we are approved to issue bonds by the 20+ carriers we are appointed with, make no mistake that we work 100% for our clients. 

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

We have entertained several recent submissions from our construction division prospects looking for bonding support of their companies that are majority owned by a private equity firm. The traditional surety market will push back on private equity submissions pointing out the goodwill and large amount of debt listed on the balance sheet. Throw in the limited indemnity package offered in support of the bond program and we have created a perfect storm for the account to be declined without any actual underwriting taking place. But there is hope!

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

During our recent budget discussions for the 2024 fiscal year, the Rancho Mesa Surety Department looked at a breakdown of the bonds we wrote in 2023.  As expected, 90% of our bond revenue was represented by the typical performance and payment bonds, subdivision bonds, bid bonds, bond riders, and consents of surety for our construction clients.

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

We often receive questions from our contractor clients regarding if/when they should require a subcontractor to provide the protection of a performance & payment bond for a project. Although the premium charged for the bond will add cost to the project – on many occasions the benefit of the bond will far outweigh the cost. 

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

In my recent StudioOne™ podcast episode with Kevin Brown, Of Counsel with the CPA Firm RBTK, LLP, we discuss the anatomy and considerations that go into strategic planning for your business. 

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

Several years ago, I put together an article on various credit driven surety bond offerings that require a one-page application to qualify for bonding. Quick and simple! At that time, the maximum limits offered by various carriers was $350,000 for a single bond.

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

November is the month that I meet with our contractor clients to discuss how the current year will end up and begin planning for the next year. We will also touch base regarding the items our surety carrier partners will want to hear about when we schedule our annual meetings (after the December 31, 2022 financial information is available).

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

The Rancho Mesa Bond Department is currently appointed with twenty-five surety carriers to support our contractor clients with all sizes of bond programs. It is key that the contractor is matched with the correct bond company to ensure timely approval for bonding. For both new and existing clients, we look at several factors to ensure you are partnering with the bond company that will provide the best single and aggregate bond program at the most competitive rate.

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.

Rancho Mesa's Director of Surety Matt Gaynor interviewed Kevin Carlin of Carlin Law Group on Wednesday, March 23, 2022 to learn about his background, where he started his law career, and current hot topic’s in the construction industry. Kevin is a well-respected construction attorney here in Southern California who represents a number of Rancho Mesa clients.

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

When we work with the bonding carriers on surety credit programs for our contractor customers, we traditionally put into place single and aggregate bond limits. This provides our contractor clients certain parameters when they are considering a maximum project size for bonding purposes.

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

The project our contractor client was required to bond has been completed and they are looking to get their final payment and collect their retention. But the owner or general contractor is requiring a Consent of Surety document from our contractor. What is a consent of surety and why is this document required?

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.

As we wind down the 2020 year, it is important for our contractor clients and prospects to start planning how the 12/31/2020 fiscal year end financial statement will look. The bond companies will use this information to set your 2021 Bond Credit Line for approval of your 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.

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

I received an email from a large Subcontractor client last week requesting performance and payment bonds in the amounts of $87,000 and $133,000, respectively. This client has completed projects in excess of $5,000,000 in the past and was surprised that the general contractor they were working with was requiring such a small amount to be bonded back.

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, 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, 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.

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.

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.

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.

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.