Who is This Article for?This article is for contractors who have bid on public works projects (generally under $5 million) and are interested in larger projects
Most contractors who work in the public sector will eventually reach a point where they look longingly at the coming bids list, wondering how they could qualify for the bigger stuff their larger competitors are offering. First, realize that there is no quick fix. Your willingness to be “surety-friendly” and grow your business profitably is key.
Let’s start with your balance sheet. It is the foundation…the rock…of a surety relationship. Here is where your ability to get bonds begins and ends. For the purposes this article, I assume that you have some knowledge of balance sheet mechanics. This includes working capital (current assets less current liability) and net worth (“assets more liabilities”). The sum of all the assets and liabilities. Surety bonding capacity that you’re offered as a contractor is largely a multiple of the net worth of your company, usually between 5 and 10 times, depending on a multitude of factors beyond the scope of this short article. If all of the underwriting is favorable, for example, a $1 million construction company could expect to be offered an average bonding program of $5 million to $10 million. The single project limit is usually in the range of 50% to 35% of the aggregate amount. These limits are often flexible. An underwriter will look at the scope of work, current backlog and other factors if a contractor wishes to bid on a job slightly beyond his single limit.
As you can see, your bonding ability will grow as your net worth and retained earnings increase. This is a gross oversimplification of the underwriting process, of course, and there are many more factors that play into it, but net worth & working capital are big players in the bonding equation.
Next, you should upgrade your year-end financial statements to a “review level” and have them prepared on a percentage basis (POC). This should be possible with your CPA. If not, you will need a new CPA. I’ve witnessed it happen more times than once. A surety company will require that a contractor change his accountant in order to obtain future bonding. Your CPA may be great. However, if he isn’t able to create a WIP or make a POC statement that’s accurate, you will have major problems in your career as a contractor. You want a construction-oriented CPA, with lots of experience and clients in this arena.
If you want to get approved for larger bonds, your agent will need to provide timely updates to your surety agency. This includes at least quarterly WIP (work in progress) statements, in house prepared balance sheet and P&L at 3/30 and 9/30 (assuming you’re on a calendar year end,) and a mid-term (6/30) financial statement prepared ideally as a review, but at least a compilation. Along with the personal financial statements for the principals of the company, aged accounts receivables should be expected. This is something you should discuss with your CPA. If your CPA is unable or unwilling to do this, it’s time to find a new CPA.
To accommodate the above, many of the above will require infrastructure and philosophy changes. The upgrade should not be a surprise to Quickbooks. Quickbooks is not designed to manage the tracking, reporting, and costing of larger construction companies. Timberline and MasterBuilder accounting software are popular among contractors. They can be used to track and estimate costs.
Talk to your agent to increase your bonding capacity. They will be able to explain in detail the expectations of your surety firm and the steps you need to take to achieve them. No matter what you do to upgrade your company, steady and measured growth should always be the main principle. It is a matter of not eating more than you can chew. This is something surety companies are aware of and will give you enough rope to allow you to increase your job size. However, this only applies if the underwriting is reasonable. A surety company won’t approve a bid request for $15 million if your largest job is less than $5 million.