Case Studies

Surety Bonding 101: get your skeletons out of the closet

Posted on by mrsuretybond

Withholding information from a Surety company when trying to get bonding support is a sure way to get yourself in trouble.  In this technological age we live in, information, however seemingly obscure, is readily accessible at the click of a mouse.  Let this example I recently encountered be a warning:

A construction company was looking for support for a $17 million dollar bond, a bond almost twice as large as their previous largest completed job.  Our presentation had to be perfect, and we believed it was;

  • Bank line, check
  • Adequate working capital, check
  • Detailed job breakdown, check
  • Bonding back of key subcontractors, check
  • Owner was one that they have worked for previously with stellar recommendations

In addition,  the contractor agreed to use funds control on the project, which added an extra layer of security to the Surety.  We presented our case, and fully expected the bond to get approved.  It did not… here’s why;

The Surety company, in their due diligence, found out that one of the owners had his brother on the payroll on the job that was to be bonded.  It turns out the brother used to have his own construction company… and got de-barred for not paying prevailing wages on a state job.  So now, the Surety company believed that the company may be a front for the brother, who can’t get jobs under his own name.  Whether or not it was true was irrelevant… the trust was gone, and so was their chance to get the bond.

In our own interview process, we asked the owner about his brother, and why he was not an owner of the company as well… to which he told us that “he doesn’t want the aggravation”.  We took him at his word.  The Surety company googled the brother’s name, and found out what they found out.  Instead of letting us know the full story, and spin it in a positive light… the bonding company found it out themselves and assumed the worst.  What could we have done had we known this information before the bonding company did?

  • He could have told the bonding company about the brother’s prior issues.  The owner, learned a great deal from the mistakes that his brother made, has seen the devastation it caused to the business, and is committed to doing everything the right way.  In addition, here are the following oversight precautions being taken in order to ensure the same situation never happens again, etc.

See the difference between the two scenarios?  Same situation, but different results if only we would have prepared.  The biggest threat to not getting bonding support, is not telling the whole truth.  Once you get caught, you are toast.  The bonding community is small, and underwriters talk.  Find an agent you trust, and lay your cards on the table.  The only obstacle a good agent can’t overcome is the one he doesn’t know about.

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Planning

Surety bonds: getting them ain’t what it used to be

Posted on by mrsuretybond

I went to see a contractor yesterday who discovered very quickly that the bonding process and guidelines are a lot tougher than it was in the past.  His company was bonded 5 years ago, when getting a surety to give you credit was practically as easy as picking up the phone.  Times were a lot different then, here is the reality of now and the most important things you need to prepare for:

  • Year end Financial Statements: This is the single most important financial piece of information that will determine your bonding capability for the year.  The presentation must be done by an accountant who can do it on a percentage of completion basis, with over and under billings.  A good agent can help you find creative ways to enhance your statement.
  • Bank Line of Credit: What happens when you start a 1 million dollar job, and something goes wrong?  (Unexpected expenses, owner delays/refuses to pay on time, etc)  Where is the money to fund the job going to come from to keep the cash flow going until things get sorted out?  That’s right, the bank line, and it needs to be comensurate with the surety program you are looking for.  No bank line… no surety.
  • Aging of Receivables: Do you have receivables over 90 days old?  The surety company wants to know, as anything over 90 is discounted from you working capital.  If there is a lot of over 90 receivables, there better be a good reason why, and a plan to get you paid quicker.
  • Personal Financial Statements:  The surety company wants to know what you’re worth, personally.  Why?  If things went terribly wrong and multi-million dollar claims were filed, do you have skin in the game to get the problems worked out, or will you just run away.    The surety companies want to know, and it’s hopefully the former.

There are other things you need as well, such as: personal tax returns, corporate tax returns, work in progress schedules, contractors questionnaire, reference letters, etc.  Some more critical than others, but all necessary for the underwriting process in this tough credit market.  Information and presentation are key, so if know what you need and how to present it, you are on your way to having a surety partner.

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Case Studies

Surviving in this tough construction market: Why you need a plan.

Posted on by mrsuretybond

This experience I had with one of my clients shows how valuable it is to have a business plan in this challenging construction environment.

Recently, I met with a NYC contractor, whose surety line was pulled due to his terrible balance sheet… let’s call it Construction Company A.  The company was under bidding jobs just to keep their employees and crew busy, hoping the market would turn around in the meantime.  Bid openings where there used to be 5 other contractors, now had 40!  The 6 month interim statement showed a loss, and the year-end statement was not better.  As credit is extremely tight, the surety company felt it was too big a risk to support.  We needed to find a new surety, or else Company A would have to close their doors.

Working closely with the contractor, we developed the following strategy:

Step 1: Our first step to formulate a forward thinking business plan, that would show the surety that Company A was aware of the environment, and taking steps to mitigate their current losses while emphasizing the strengths of the company, which there happened to be many.  We came up with new potential avenues of revenue, which Company A had not thought of before, and eliminated the work opportunities that they were getting, but taking at a loss.  We came up with a forward thinking business plan that answered all the questions a surety company would ask, and setting milestones every 6 months going forward to gauge our progress and review what was going right versus what was going wrong.   We were ready to tell the story.

Step 2: The next step was finding an underwriter that would listen to what we had to say.  This is often difficult in these times, as underwriters have piles of “clean” cases to be looked at, so the ones with a little “hair” on it often get ignored.  I’ve worked with several underwriters who love the business plan presentation and use it as a primary tool in making their bonding decisions.  We ended up getting Company A a bigger surety line than what they had before, as they had a clearly articulated plan with realistic milestones that proved to the underwriter this was a risk worth taking.

Did it make underwriting sense from a strictly numbers perspective?  Probably not.  Surety underwriters usually look back at what you did in your previous years to determine what you are going to do going forward.  Since many contractors have experienced a downturn in recent years due to the economic slowdown, looking back will not help.  We need to convince underwriter to look forward.  A carefully crafted business plan could do just that.

Surety underwriting is a combination of art and science, and you must take into consideration that a human being with emotions is ultimately making the decision on whether your company is a good risk or not.  The presentation to the underwriter must tap into that emotion that your company will not be one of the casualties of this economic marketplace.  While most contractors have a plan in their head of how they want to move forward, they don’t have it on paper.   Taking the time to formulate a forward thinking business plan with a professional who understands the mind of an underwriter is a key tool that shows the underwriters you are serious about your company and its future, which can be the difference between you getting the bond line/financing you need, or not.

Hope this example illustrates the importance of planning.  If someone has another situation they would like to share, would love to hear the story.

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