Construction contractor surety bonds provide significant commission opportunities for agents. Successfully navigating the initial underwriting process for performance bonds can lead to sticky client relationships as contractors grow their businesses. Negative cash flow can quickly lead to financial trouble for a construction business. This can be exacerbated by billing issues such as delayed or progress invoicing.
Know Your Requirements
Contractors need contract bonds to bid on construction projects, and many of those contracts require progress payments and retainage. While a performance bond protects the project owner from a contractor who fails to meet contractual requirements, a payment bond ensures contractors get paid for their work. Insurance agents who understand these products can build sticky client relationships and boost their sales by leveraging their knowledge to help contractors secure the required bonds.
For contractors with credit concerns, there are even specialized programs that make securing these critical bond products much easier. The key to meeting rigorous surety requirements starts with a properly configured job cost accounting system that regularly produces overbilling or underbilling reports (work-in-progress schedules). These reports can highlight overbilling and underbilling, identify profit fade, and locate cash flow issues.
Know Your Capacity
Your capacity is how much business you can handle over a given period. This can vary by day, hour, month, or year, depending on your industry and customer demand. Effective capacity planning aligns staff availability and skill sets with project requirements. It allows you to avoid over- or underbilling.
Overbilling results in more cash coming into your accounts sooner than you may need, but it can be a problem if it prevents the project’s timely completion. A good construction job cost accounting system can help you keep up with the numbers by running over/under monthly billing reports. Significant over/underbilling can be a warning sign of poor cash flow and could trigger the need to seek out new surety bonding capacity.
Know Your Limits
Many bonding companies establish their maximum contract limits based on the types of work performed. Some jobs require higher limits than others — such as blasting, highway work/barricades, HVAC, and roofing.
Contractors can over or underbill by invoicing for more than the costs incurred and recognizing profit early, a practice known as “job borrowing.” This can have advantages, such as working on the owner’s capital instead of their own, but it also means that losses from other jobs will show up later.
Financially savvy contractors create monthly Work in Progress (WIP) reports to spot problems and make changes before they cause major cash flow issues. They can also avoid fraud by reviewing pay applications carefully for erroneous totals or line items, roll-forward errors, and inflated rates.
Know Your Reputation
When a company has an authentic reputation, it builds trust with customers and clients. A reputation that leaves customers satisfied can be achieved by providing extra value and being approachable. Aside from ensuring the contractor is financially sound, payment bonds also protect suppliers, laborers, and lower-tier subcontractors by guaranteeing they’ll be paid.
This can prevent lien rights from being placed on a project by unpaid suppliers, which may result in costly delays and rework for the general contractor. Bonding companies closely examine a construction company’s net worth, discounting assets that carry risk. If a company’s capital consists mostly of equipment and fixed assets, it needs to be better positioned to fund a job as a firm with a balanced bottom line.
Know Your Risk
Contractors must be able to pay their bills, so positive cash flow is critical. Tracking the company’s financials is also key to avoiding underbilling and overbilling. The Work-in-Progress (WIP) report is a great tool to help spot potential issues. Look for any trending patterns that may signal a problem with management, internal procedures or style. For example, storing material that can only be billed once installed or inspected is an underbilled cost.
In addition, watch out for false representations that can lead to fraud. For example, a contractor might falsify minority content reports or city resident requirements. Also, monitor for documentation not complying with project requirements, such as test results, insurance certificates and contracts. If this happens, the contract underwriter will notify the CM and owner.