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Building and Maintaining Contractors’ Surety Credit in Today’s Economy

Some bond producers report the outlook for the construction industry has improved slightly compared to a year ago. “There is a greater sense of optimism among many in the industry,” says Bryce Guignard, president of Guignard Company, Longwood, Fla. “Despite that optimism, I don’t sense that anyone believes we are out of the woods just yet.”

Adds Erle Benton, bond department manager at Cretcher Heartland, LLC, Overland Park, Kan., “Right now, contractors have more work than they did last year with a slight improvement in gross profit margins. The backlog was slightly higher, but they sure could use some more. Contractors are blowing through their backlog because it has been so hot and dry in our area of the country.”

Like Benton and Guignard, most bond producers believe the tough economy has not passed. “We tell clients to cut overhead, be more selective on bidding projects with good profit margins, renegotiate with banks, make personal sacrifices and protect themselves from unknowns by requiring subcontractor bonds, double-checking financing and scrutinizing contracts,” Guignard says.

Good Work Is Scarce in Many Regions
In some regions, bond producers have had candid discussions with contractor clients about their operations. “We advise our clients to spend ample time carefully considering how long they want to remain in business in this environment,” says Todd P. Loehnert, senior vice president of surety for Wells Fargo Insurance Services USA, Inc., Louisville, Ky. “Given the lack of margins and in an effort to protect their investment, some clients decide that they are not going to do work for free; they are closing their doors.”

Since the economic downturn began, Lawrence F. McMahon, executive vice president/surety manager of San Diego-based Alliant Insurance Services, Inc., has coached clients to cut early and cut to the bone to survive—yet companies are still losing money. “Revenues are down, and there does not appear to be a great deal of good work coming out,” McMahon says. “Construction firms have to keep lean and to resist the temptation to travel outside their comfort zone or to try new work that they have not attempted before.”

Some clients are going beyond cutting overhead, according to Rich Pratt, vice president of InterWest Insurance Services, Inc., Sacramento, Calif. “In some cases, they are moving into smaller offices and selling company vehicles and unused equipment,” he says.

How Bond Producers Can Help
Across the board, clients are advised to continue keeping overhead expenses in check. “We recommend that they keep overhead expenses down as their volume and gross profit are starting to rebound. They need to recognize as much profit as they can in 2012, so they can get their balance sheet re-established,” Benton says. “Some contractors are experiencing capacity issues because their balance sheet is smaller and project opportunities are starting to add up.”

Bond producers also help clients by providing more strategic business information. “Conversations haven’t changed much, except that we now provide leads for new banking facilities and assist in bonding or prequalifying subcontractors,” Guignard says.

McMahon agrees it’s his goal to keep clients abreast of the market and make any connections he can to help clients survive. “This year, I have sent a lot of interesting articles and information to my clients,” he says. “I introduced several of my mechanical, electrical and plumbing clients to another client we have from another office that was coming out to work for the military.”

Open communication between clients and surety partners is crucial. “We advise them to keep back-up surety markets given the ever-changing surety marketplace and encourage them to find other avenues of revenue—bonded and unbonded,” says Guignard Company Vice President Paul Ciambriello.

Bond producers also have been working more with their general contractors to vet their subcontractors. “I have been setting up a staggering number of face-to-face meetings between the client and the local, regional and home office underwriters,” says Stuart O’Farrell, a principal with Parker, Smith & Feek, Bellevue, Wash. “It is paramount that the underwriting arm is well aware of the client’s business goals and is prepared to support the client’s needs.”

Adds Loehnert: “We keep clients apprised of prevailing market conditions so they can find good project partners. We discourage arrangements with owners that are not closing out work and that are known for retainage that lasts forever.”

Additionally, Pratt advises clients to “keep good relations with their bank, look for non-bonded jobs if their balance sheet won’t support bonded work at the level they want to bid, and consider making a loan to their company and subordinate it to the bonding company.” He also uses the Small Business Administration’s (SBA) Surety Bond Guarantee Program for clients who no longer qualify for standard markets.

Advice for Small, Emerging Contractors
Joshua A. Etemadi, a sales manager with Construction Bonds, Inc.—a division of Murray Securus, Herndon, Va.—makes sure clients obtain as much protection as possible if they take on a risky project. “For example, one subcontractor was providing a bond for a privately financed project (with no bank financing), so we did extra research on the developer to assure it was as strong as it claimed,” he says. “Also, it’s good to ask for copies of the general contractor’s bond to make sure it has a payment obligation in case the project goes awry.”

“For contractors trying to expand their footprint or venture into a new type of project, we suggest they get involved in trade associations to help strengthen their relationships and build new ones,” Etemadi adds.

CCI Surety, Inc., Golden Valley, Minn., works with non-standard accounts, such as small, emerging and minority construction firms that have had challenges. “Today, owners are not just cutting employees, but also top personnel. They also have to evaluate their lifestyles and corporate and personal spending habits,” says CCI President Michael D. Williams. “Our job is to try and work them out of those problems.”

CCI also spent the last two years building relationships with larger general contractors to assist with their goals of hiring Minority Business Enterprises and Disadvantaged Business Enterprises (DBEs). The company met with the SBA and Procurement Technical Assistance Center personnel to train and help minority firms become certified, as well as match large general contractors with DBEs and provide the required bonds through the SBA Surety Bond Guarantee Program.

“We advise our clients to develop an internal sales plan that may include networking by phone, joining construction organizations, developing new relationships with larger companies and using the Internet,” Williams says.

With the uncertainty of the economy and of the sources of construction work through 2013, opportunities for surety bond producers to assist contractors will remain abundant.

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