This post is part of a series sponsored by Old Republic Surety.
Especially now, at the leading edge of the post-pandemic construction boom, your agency’s contractor clients may need to increase their bonding capacity to take on more and larger projects. Here’s advice you can share with them now to help them get ready.
Many contractors that historically have needed only small and infrequent contract bonds have utilize abbreviated underwriting programs, such as Old Republic Surety Company’s FastBond program. The underwriting of such programs is based largely on the credit scores of the applicant and owners, and requires much less information than is required to qualify under a standard bond program for larger contracts. Here are some important reasons why a contractor would want to transition from a FastBond type program to standard contract bond program — and how to get that started.
Why would a contractor want to upgrade their bonding capacity?
- The cost of the bond itself. FastBond programs are designed for a contractor that has occasional bond needs, and FastBonds are typically charged higher rates. Old Republic Surety writes FastBonds up to $1.5 million aggregate, generally at a $30/thousand rate. (As of the date of this article). Standard program rates are often significantly less, enabling the contractor to tender more competitive bids and possibly earn better margins on their work.
- The contractor wants to grow. Any contractor wishing to grow and take on larger projects of longer duration will need to convert to a standard bond program.
How can you transition from a FastBond program to a standard program?
Standard bond programs require more sophisticated financial information and cost systems. A contractor can increase their bonding capacity with a standard bond program by following these key steps:
- Form a partnership with your key financial advisors. These include a professional surety agent, a construction-oriented CPA, a bank that understands construction lending and, of course, your surety underwriter.
- Increase the quality of your financial statement presentation. CPA-prepared financials add credibility to the information you provide. A CPA, preferably a construction-oriented CPA, will understand the importance of excellent internal cost systems and can provide the percentage-of-completion format preferred by sureties. CPAs will assist you in presenting your financial profile in the best possible light. Money saved by converting to a standard surety program will more than pay for the addition of professional CPA services.
- Grow working capital and corporate net worth. Make the commitment to build up your balance sheet to support your desired program by forgoing large bonuses or unnecessary equipment purchases. Once the balance sheet supports your program, surplus capital can be withdrawn as desired. This will show that you are willing to do what it takes now to make your company successful in the long term.
- Show proof of internal controls. Excellent systems that track job costs, manage the collection of receivables, provide for the prompt payment of bills when due, minimize surplus inventory, and enhance employee performance are all important to the success of your company. The following best practices will contribute to improved bottom-line profitability:
- Unannounced job site inspections.
- The use of approved contract forms.
- Proper documentation of change orders.
- Proof of insurance for all subcontractors.
- Protection of assets such as equipment and materials.
- Written safety policies to minimize job site hazards.
- Incentives that reward employees for bottom-line profit.
- Provide information about the job to be performed. The more detailed information you can provide the surety regarding the job you want to bid, the more confident the surety will be in providing the bond. Your willingness to fulfill underwriting requirements will greatly improve your chance of obtaining further surety support.
Old Republic Surety prides itself on taking a consultative approach with contractors who are willing to follow the proper steps to increase their bonding capacity. We will give you the advice you need to take your bonding program to the next level. Contact your bond producer for more information, or contact us and we can connect you with the best bond producers in the business.
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