Bonding is risky business. To help offset the risk many surety companies utilize specific criteria when analyzing financial statements of a contractor looking for bonding. The items listed in this article can cause your surety company to second guess the financial ability of a contractor being able to repay the surety in the instance of a project failure. By better understanding what a surety will look for you can help to prepare your clients for future bonding.

What are the red flags?

• Accounts Payable – simply put is there more going out than coming in? If so is this being addressed and resolved quickly?


• Accounts Receivable – are they too high compared to sales? Is there a job or multiple jobs with slow accounts receivables?


• Overbillings and Underbillings – is either one excessive? Do they show the contractor is managing the cash flow on jobs? Is there enough cash on hand to finish a job? Are there issues with collections?


• Profit – is the contractor making money? Are there any significant losses? Is the contractor controlling job costs? Are profit estimates being overstated, which could bring the contractor’s character into question?


• Property and equipment – is the contractor positioned to do the job? Is there a plan in place in case additional equipment is needed to complete the job? Is the contractor’s liquidity and working capital suffering because of too much leased equipment?


• Funding – is the contractor able to properly fund the job? Are any new costs or safety measures accounted for? Are there any funding issues being aided with the help of the owner’s personal assets?


• Lawsuits or Liens – is there a plan in place to satisfy liens? What impact could a lawsuit have on the contractor and the ability to continue working?


• Repayment of debts – is there a high debt to net worth ratio? Is the contractor able to pay their debts? Is the owner needing to use personal assets to help pay down the company’s debt? Is this ongoing or a one time only situation? Are profitability issues with the contractor being addressed?


 

Contractors can benefit greatly by keeping open lines of communication with their surety. This helps to ensure a positive working relationship and it assists in understanding the operations and obstacles that may hinder bonding. The Allstar Surety team has many years of experience working with contractors to find bonding solutions, even for the toughest risks. We have a multitude of options available to help your clients get on the path to easy bonding.