April 2004
By JAMES S. ANCHIN, CPA
The cautionary tales of the surety market tightening in the post-Sept. 11, post-Enron era have come true. Construction contractors surviving today likely already know the effects Ð fewer sureties and more stringent requirements to obtain the necessary bonding to do public and other types of projects. Sureties no longer court contractors. No, today the contractors must do the courting Ð it's not a matter of choice anymore, it's a necessity for survival.
So how can you make your construction firm attractive to sureties so that you still can compete for government and other surety bond-required projects? It's a question you should begin answering immediately. The New York City construction business is expected to experience a potential boon in the next few years with the rebuilding around the World Trade Center district, the new stadium that could bring the Jets back to New York and the potential for hosting the Olympics, not to mention an overall increase in construction as the economy improves. For a well-run construction company, business likely will be robust.
However, your surety choices won't really grow for while. The construction business has to pick up first and demonstrate significant long-term strength before any appreciable softening of the surety market. Meanwhile, consider taking these steps immediately and in the long run to make your construction company more attractive to sureties:
Show consistent profitability: Everyone, of course, wants to maintain their profitability. Sureties, however, look to a firm's profitability for several reasons. They want to make sure no surprises (or as few as possible) have come up for the company, causing its profitability to drop unexpectedly. Given that income typically is recognized on a percentage of completion basis Ð make sure your projects remain on target and don't fade dramatically at the end. If you can't forecast well, the surety may not want to take the risk on you.
Have sufficient working capital: A particular job may require significant upfront costs that the contractor must pay even before it has sent its first bill. Sureties want to know that the contractor has the necessary working capital and access to financing to address such possibilities.
Take a job you know: If your contracting jobs typically run in the $1 million to $2 million range, consider carefully before bidding on a $10 million project. Make sure that your company has the capacity to handle the job. You'll need to demonstrate that capability to the surety before it will even consider bonding you for the job.
Have a company succession plan in place: This advice is helpful whether sureties are involved or not. However, a bonding company wants to make sure that there are plans to keep the construction business going even if a partner dies, becomes ill or opts to leave the company. The sureties want to make certain the job will be completed Ð no matter who's in charge.
Clean up your credit history: Resolve any pending lawsuits or judgments against your company.
Maintain communication with the surety: Sureties not only don't like surprises in your financial statements, they also don't like surprises in general Ð the project timeline, problems that arise during the job, etc. Make your surety an integral part of your team and keep it informed of changes throughout the course of the project.
Have financial statements prepared professionally: That includes with appropriate schedules and footnotes! Professionals offer an expert reliability factor that is attractive to sureties.
Have sufficient bank credit: Consider a bank credit line as an integral part of your financial operations. A credit line allows you to handle those unexpected cash crunches that inevitably arise. Sureties know that in every construction job, peaks and valleys exist. They just want to make sure you know how to level the field to sustain yourself.
Have an experienced project management team: Experience lends well to projects being executed as smoothly as possible without any, or a limited number of, hiccups.
Be consistent with project completions: Share your past project history Ð from job schedules to account receivable schedules. The disclosure, especially when it reveals how well run your projects are, gives the surety the confidence to insure you.
Have a credible net worth: Avoid lending money to affiliates. A surety might be concerned if the company's money was being tied up in other ventures such as those that may or may not deal with the business' primary purpose, or those that may be riskier than the existing company.
Following these steps is no easy task. However, financial professionals can help you keep on track so when that important job arises, you are well prepared to obtain the necessary bonding to get hired. Making your company more attractive today will pay off again and again as construction activity in the tri-state area increases. Then, if the surety market begins to expand and diversify you may be the one to be courted.
About the author: Mr. Anchin is a managing partner of Anchin, Block & Anchin, LLP, a regional certified public accounting firm with offices in New York City and Westchester, that specializes in meeting the needs of contractors in the tri-state area.