From a surety’s perspective, bonding capacity isn’t simply a number based on revenue, net worth, or working capital. It’s a reflection of how confident the surety is that your company can successfully perform its obligations, especially when projects don’t go according to plan. Here are some areas that commercial contractors often underestimate:
Revenue
Revenue growth sounds like a good thing, and it often can be, but rapid growth will put pressure on a contractor’s financial resources and management team. A company that grows from $50 million to $100 million in annual revenue has not simply doubled its sales; it may also have significantly greater working capital requirements, larger projects, more people to manage, and more opportunities for something to go wrong. That’s why underwriters look at whether the rest of the business has grown along with the revenue. Strong margins, adequate liquidity, effective project controls, and management depth all help demonstrate that you are properly planning to manage growth of the company.
Profitability
Owners will understandably be taking distributions from the company in profitable years for a variety of reasons including tax liability. The issue is whether the company is retaining enough capital to support its current operations and future growth. Retained earnings provide an additional cushion when projects underperform, cash flow tightens, or unexpected costs arise. If a company is consistently generating strong profits but distributing most of those earnings, a surety may question whether enough capital is staying in the business to support larger projects and a corresponding larger backlog. Distributions don’t have to be avoided, but they should be considered alongside the company’s broader strategy and bonding needs.
Consistency
A strong bottom line is important, but underwriters want to understand where that profit came from and whether it is likely to continue. Was it generated through normal operations? Is it consistent with historical performance? Did one unusually successful project drive a significant portion of the results? Are margins realistic and repeatable? Are earnings being retained in the business? A contractor with steady, predictable profitability can present a stronger risk profile than one with larger but highly volatile earnings. In an industry where a single job can have a major impact on annual results, consistency over time gives a surety greater confidence in the business’s ability to perform at a larger scale.
Cash Flow Management
A contractor can report strong profits while still experiencing significant cash flow pressure due to underbillings, slow collections, retainage, front-loaded costs, large subcontractor payments, or rapid growth. Surety underwriters want to see that a contractor is managing growth through strong cash management and disciplined working capital practices and not simply relying on their line of credit or other bank borrowings to fund that growth. Strong cash flow forecasting, disciplined A/R management, appropriate billing practices, and sufficient liquidity can help a contractor navigate periods of tighter cash flow. This becomes particularly important for larger projects and/or spikes in backlog, where the dollar amounts and timing of both costs and collections can have a much greater impact on the company’s financial position.
WIP Reporting
A surety is not just looking at your work-in-progress schedule as a financial reporting requirement. They view the WIP as a window into how well the company understands and manages its projects. One difficult project isn’t necessarily a concern. Consistent profit fade, unexplained margin swings, large underbillings, or significant cost-to-complete adjustments can raise questions about the accuracy of forecasting and the visibility management has into project performance. Reliable WIP reports over time help to show that project managers and financial leadership have effective systems in place and that management has a clear view of where each project stands.
Proactive Communication
Surety underwriters don’t expect every project to go perfectly. They understand that contractors will face disputes, cost overruns, employee departures, claims, and other challenges along the way. What they don’t want is to be surprised by a significant issue after it has grown into a much larger problem. If a major cost overrun, potential claim, cash-flow concern, ownership change, key employee departure, acquisition, or other significant event is on the horizon, open and timely communication is critical. Keeping your surety informed will give them an opportunity to understand the circumstances, evaluate the potential impact, and work with management to develop a path forward.
Preparing for Growth
As your company prepares for continued growth, your surety wants to understand more than just your financial statements. Bond underwriters look at the strength of your management team, how your business operates, the risks you face, your financial position, and your plans for the future. Building a strong relationship with your surety agent and underwriting team will help to keep them informed of your company goals and build confidence in your ability to successfully take on larger obligations. The more your surety understands your business and growth strategy, the better positioned they are to support your next stage of growth.
At McConkey, we have proprietary internal underwriting and analysis tools for our commercial construction clients. If you have any concerns about your current surety program, limits, or upcoming ownership transition planning, please reach out to our team. We are here to help you navigate the market as we work to deeply understand each of our clients’ needs from a financial, operational and growth perspective to best position your company for the future.
