Underwriter: “Tell me about your job cost records.”
Contractor: “I’ve been doing this for so long, I know just where I am on every job! I keep it all up here.” (Pointing to head.)
Underwriter: “Do you produce mid-year financial statements to track your progress?”
Contractor: “No, I have a bookkeeper do my taxes at the end of the year. That’s when I find out how I did.”
Underwriter: “Have you been profitable the last few years?”
Contractor: “Sure, but why give it all to the government? I bonus out the earnings to keep my taxes low.”
This is not an atypical conversation. Is this contractor a good applicant for Bid and Performance Bonds? Will the company be able to qualify? Mmm… Probably not! Let’s look at the decision making process used by bond underwriters to understand why.
You know the normal routine. Many pieces of information are required: Questionnaire, financial statements on the company and owners, resumes, a bank reference letter, work in process schedules, tax returns, etc. Why do bonding companies ask for all this? The info is needed to reveal where the company has been, the current status, and where it’s headed. This evaluation will determine if the company is approved for bonds.
All bonding companies are looking for successful, well-managed firms that require bonding in their normal course of business. Remember: All sureties are risk averse. They are not looking for desperate contractors who need a bonding company to rescue them from impending failure. Sureties are “for profit” operations that issue bonds for the sole purpose of making money.
Now that we understand the underwriter’s viewpoint, think about that opening dialogue. Did the company appear to be successful, well-managed and headed in the right direction? Would the answers make you confident to back them with your money?
The simple fact is that regardless of how financially successful business owners may be, if their companies do not appear to be successful in the eyes of third-party analysts, bonds will not be forthcoming.
The contractor who carries the books in his head, takes out all the profits, and has a minimal financial presentation does not have a means of proving the company is viable to outsiders. The single most important key to obtaining bonding is for the company to demonstrate a level of success and good management. Contractors who have not been successful and those who cannot prove their strengths will have great difficulty obtaining bonds.
The guidance we provide to specific contractors depends on each applicant’s circumstances. The company may need to develop better management practices or accounting methods. Some need to build up their track record of completed projects.
For companies that have never been bonded, the simple answer is that they must demonstrate that they have operated profitably/successfully on non-public work. This is the critical steppingstone to bonded work.
Surety agents make money by delivering bonds to contractors. They will always attempt to provide bonding even if applicants are minimally qualified. However, all bond agents know that the best applicants are companies that have thrived on private work and now wish to pursue public contracts. These firms can show elements of success that bonding companies expect to see.
The essence of qualifying for bonds is to demonstrate the past success, solid management and future business plans that make surety underwriters enthusiastic supporters of the firm.
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