Blog

Your surety bond construction clients need more from you than contract and commercial surety bonds. They need a trusted adviser to help them grow. To be an adviser, you need to check in regularly with your contractor clients about their business growth strategy, to hear about their prospects, and to listen for the challenges they are facing in different types of projects. By doing so, you can better understand where each of your clients’ businesses is going be prepared to respond quickly to new surety bond needs, and offer other products and services to help them grow.

Like any business, construction companies can grow through expansion, merger, or acquisition. Your clients need to keep their businesses bond-worthy to sustain growth and increase their value. When meeting with your clients, take the time to help them understand how to protect their surety bond status as they approach growth. Here’s how:

For your clients who want to expand, increasing their bond capacity to take on a larger workload will be top of mind. Help them understand that in order for you to support their need for increased bond capacity, they must demonstrate strong fiscal health via:

• Clear financial statements: These documents should deliver at-a-glance insight into finances, work in progress, depreciation, overbilling, and underbilling. In addition, explain the purpose of CPA statements – reviewed/ audited annual financial statements that use percentage completion or completed contract accounting methods.
• Enhanced working capital: Explain that working capital — the money needed to cover the company’s short-term expenses — is a primary indicator of business health and a driver of increasing bond capacity. To increase the strength of a balance sheet, explain that keeping profits in the company rather than distributing them can improve bonding capacity. In addition, encourage your clients to maintain a business line of credit and to pay it down each month or quarterly. If they already have a line of credit in good standing, suggest they seek an increase before it is necessary.
• Get protection from subcontractor risk: Construction companies that are growing may use subcontractors more and more often. Explain to your clients that protecting their businesses from subcontractor risk helps ensure that they stay bond-worthy. A strong prequalification process and subcontractor bonds can mitigate this risk.

Do you have construction company clients who intend to hand off management to the next generation? Many construction companies are closely held family-run organizations. A change in leadership from one generation to the next could change the company’s bond capacity and the rates they qualify for and affect their growth. For example, a buy-out can change a company’s equity and working capital, or if the succession happens because of a death, the company’s capacity to complete work may be jeopardized.

Having an effective business continuity plan in place is important. Counsel your clients to include:

• Specific internal sale provisions: Strong business continuity plans include internal sale provisions that identify next-generation ownership and a financing structure to purchase stock from the exiting owner.
• Stipulated capital levels: To protect existing surety status, a business continuity plan should include stipulations for the level of capital that must be maintained in the business in the near term to complete current projects and execute new plans after the business ownership transition.
• Conserved knowledge: Whenever possible, a business continuity plan should outline how institutional knowledge that is maintained by exiting leadership or current key employees can be retained and support new ownership in decision making.

Merger or acquisition can boost your clients’ revenues and profitability as well as reduce risk exposure. But counsel your clients about the pitfalls they may experience that could unbalance their business growth strategy by interfering with their bonding capacity to bid and secure profitable work once the deal is done.

• Less leverage and working capital: An acquisition can add interest-bearing debt and deplete cash reserves. If this debt and less working capital destabilize net worth, new bond needs may not be able to be met.
• Inexperienced management: If the acquiring company is inexperienced in construction or managing the nuances specific to new geographic regions, unexpected collateral requirements to support bonding can result.

At Gray Surety, we offer a wide range of contract and commercial surety bond services for established and emerging contractors. Our team is also here to help you provide your clients with the sound business advice and technical expertise that support your clients’ growth strategies and profitability.

Have questions or concerns? Let us help. Contact Gray Surety today.

The foregoing information does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. For more information, we encourage you to consult with your attorney.