Managing surety programs that support your business plan
Helping you eliminate construction project surprises and keep your promises.
By Nicholas W. Paget — Account Executive, Surety
In the construction industry, there is a certain level of risk involved when undertaking projects. However, there are tools available to help transfer some of the risk involved in this type of work: surety bonds.
Surety bonds on federal public works were mandated in 1935 and provide a way to transfer project completion risks from the owner to a surety provider. Over time, many have recognized their value. Although bonds are used to guarantee contractor performance, they have been adopted by other private and public parties, serving to prequalify and guarantee services from a surety for financial and performance obligations.
State and federal laws mandate surety bonds on public works as a way to assure project owners that contractors will perform their work and pay specified subcontractors, laborers and material suppliers. Using this risk transfer mechanism allows the surety company to assure project owners that the vendor-contractor will meet the commitments he has made in contractual documents.
When it is time to bond projects, the project owner specifies bonding requirements in the contract and turns the responsibility of obtaining and delivering bonds over to the contractor, who in turn works with a surety bond producer.
Obtaining surety bonds involves numerous parties with each playing a role in the process. In order to obtain surety credit, you need to consult with a professional bond producer.
These are licensed business professionals with specialized knowledge of surety products, the surety market, business strategies and in-depth knowledge of underwriting differences for various sureties. A bond producer serves as an objective, external resource for evaluating a construction firm’s capabilities and can suggest improvements to help a construction firm meet underwriting requirements. This producer can also provide networking contacts — such as CPAs and attorneys when needed. Finding the right fit between bond producer and surety relationships can be beneficial for construction firm development.
There are elements to consider when developing surety credit for your business.
- Have a plan. For a surety company to pledge its assets on your behalf, it needs assurance that your company is managed through a plan and vision that encompasses the company’s past and present, as well as its people, market understanding and expectations for the future.
- Provide accurate financial statements. Surety companies can extend credit to companies that do not have sophisticated financial reporting, but prefer to follow the “rules of the financial game.” If your company has timely financial reporting that is accurately prepared by a CPA specializing in the construction industry, you will have an advantage when negotiating a surety program.
- Profit. Profitability comes from doing many things very well. Typically, profitable organizations usually share common characteristics, including positive working capital, growing equity, balanced debt and diligent expense control. Companies with consistent profitability can negotiate surety programs confidently.
- Facilitate the surety relationship. Surety bonds are not a commodity. Programs that support your business plan depend upon a regular flow of information on opportunities, successes and failures. Companies that communicate, provide timely reports and consider the surety company’s perspective during strategic planning will cultivate a stronger surety relationship than do their counterparts.
- Understand risk management. For any size contractor, this area is critical. Effectively managing safety, contract administration, subcontractor management, risk selection, insurance, quality control, continuity and contingency planning can make a big difference in company performance.
Statistics show the risk of contractor failure is significant. But professionals who work together to manage their business plans in quantifiable ways can have positive results. Surety professionals understand various risks and can focus on assessing fundamentals and partnering with their clients to meet opportunities and challenges. The most beneficial surety relationship responds to your business plan with confidence — eliminating surprises and keeping promises.
Nick Paget is an Account Executive in Surety for Payne Financial Group. He can be reached directly at npaget@pfgworld.com.
