A contractor’s construction business is strong with increasing revenue and on-time job completion. So why is it so challenging to get a surety bond? It could be due to one or more of the following common mistakes contractors make.
1. Obtaining work in a new geographic location
A contractor might be familiar with the risks in its own territory, but operating in a new territory increases the unknown, such as:
- labor supply;
- subcontractor quality;
- lien laws;
- permits; and
- weather/soil conditions.
When a contractor is away from its home base, there is more at risk. The surety will want to know the contractor is aware of as many factors as possible and that it has prepared for those factors.
2. Increasing job size or changing job type
Similar to a change in location, a change in job size or type can affect bondability. This doesn’t mean that a change in size or type will disqualify a contractor from getting bonded; it simply means that the surety might want to look deeper. A contractor might need to provide additional information showing it is prepared for the change.
If a change in job size/type is having an effect on the bond program, consider:
- building slower (instead of $1 million to $15 million, consider growing progressively from $1 million to $5 million to $10 million, etc.; or
- share the job with another contractor that is experienced working jobs of said size or type.
3. Inadequate capital
There’s no doubt that sureties want to see a contractor with plenty of cash on hand. This becomes a problem when the contractor does not recognize how much it costs to successfully complete a construction project. Contractors need to be able to pay subcontractors and suppliers, frequently before being paid themselves.
Contractors struggling with cash on hand should consider the following.
- Increasing the credit line. The construction industry is notorious for payment issues. Having a large line of credit shows the surety company that a contractor has the means to stay afloat during a cash crunch. The best time to arrange for a large (or larger) line of credit is before it is needed. This shows the surety that the contractor is prepared, in turn improving bondability.
- Reducing overhead. Does the time of year or season affect ability to pay certain overhead expenses? What expenses can be cut during those times? Does it make sense to lease a building for management and paperwork, or can those tasks be done from home? Does it make sense to store underutilized equipment, or can the company sell or lease that equipment to new employees? Overhead costs are taken into account by the surety, so looking for ways to rein in expenses can be advantageous.
4. Poor accounting system
Sureties want to see contractors that are detail-oriented. A solid financial and accounting system not only shows the surety where a company stands financially, but also where it is headed in the future. A solid accounting system shows the surety that the company is prepared for now and later.
5. Ignore red flags in subcontractors and suppliers
One wrong deal with a subcontractor or supplier could result in a damaged reputation, which can negatively affect bondability. Common red flags to look for in others include:
- won’t sign a contract;
- poor communication skills;
- high employee turnover; and
- no references.
Sometimes contractors need bonding on a regular basis, other times bonding might be waived or even unnecessary. One thing is true, though, to grow in the construction industry: a contractor needs an established relationship with a reputable surety. Understanding these five points can help build a better surety relationship and ensure the company is bonded when necessary.