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#3 - Bonding is a Team Effort

Hello, everyone! Welcome back to Ben’s Bond Blog. If you haven’t already, please be sure to check out our first (Bonding Basics) and second (Now How Do I Get a Bond?) posts – they will help to provide some background on the topics I will be discussing below.

The goal of these posts are to inform you, the readers, whether you are a general contractor, service contractor, subcontractor, bond/insurance agent (or anyone else who is interested in surety for that matter) and provide the base knowledge necessary to navigate through this sometimes tricky and overwhelming industry. I hope that these posts will cover most everything you would need to know, however I am sure that along the way this information will lead to questions I did not even consider. When that inevitably happens, I encourage you to reach out to me as I would be more than happy to clear up anything I may have missed. My contact information is below:

Ben Mathews

Direct: (410) 910-0204

In my first post I went over what a bond is and why they are used, in my second post I went over how one would go about obtaining a bond and getting set up with a bond program, so, unsurprisingly, we will continue that trend this time around and discuss who the external parties are that can help a contractor achieve the bonding support they desire.

As we briefly discussed in the last post, there are three “C’s” of bonding, one of these being Capacity, which is partly made up of the contractor’s internal personnel such as management, key field employees, office staff, and pretty much anyone else that has responsibilities within the organization. There are also several people and relationships that are based outside of the organization but still play important roles in helping with improving upon a contractor’s probability of getting the bonding support they need. Below I will discuss some of these that play the most important roles from a bonding perspective:

Construction Oriented CPA:

Who are they?

  • CPAs are business professionals who provide accounting, taxation, business formation, and operational consulting for firms.

  • They are licensed by the State Board of Accountancy –usually 150 credit hours (covering various accounting/business topics) required, passed CPA exam (four parts: financial, business, auditing, regulation) with annual continuing education requirements.

What is their role?

  • Provide compilation, review, or audit level financial statements.

  • Understand the complex tax issues and implications of business decisions.

  • Assist with setting up and maintaining an effective and efficient internal accounting system and controls.

Why are they so important?

  • A significant portion of a surety’s underwriting process depends on a contractor’s financial strength, but also the confidence that the numbers being presented are accurate and truthful. Having a respected CPA that produces quality statements will allow for the highest level of confidence from a surety, which leads to higher bonding capacity.

  • A good CPA will be successful in helping the contractor plan for the future in order to maximize profits, as well as minimize tax burden. Tax laws are extremely complex and there can be consequences to mishandling them – money left on the table or fines by the IRS.

  • A strong internal accounting system set up with the assistance of a CPA creates stronger and more reliable internal numbers, allowing a surety to feel more comfortable with internal interim statements. This can be helpful when a contractor may want to stretch their program mid-year and CPA interim statements are not yet available.

Small Business Banker:

Who are they?

  • Small business bankers are bankers who specialize in developing relationships with smaller firms and will sometimes specialize within specific industries.

  • They generally have a college degree in finance, business administration, economics, or a related field, as well as several years of relevant work experience.

What is their role?

  • The banker’s role is to develop relationships with their clients to help determine their financial needs and provide solutions in the form of lending (loans and lines of credit), cash management, bank accounts/online banking, credits cards, etc. These products help to support a strong cash flow for the contractor and maximize the return on their savings and investments.

  • Bankers can also assist contractors with improving their credit ratings.

Why are they so important?

  • Cash flow can be a major issue among contractors due to payments terms and the timing of receiving payment from obligees/general contractors and providing payment to their subcontractors/employees for work that has been done. While sureties do not like to see contractors heavily depending on lines of credit/outside debt, they can be useful tools to have available in the event that cash flow concerns arise.

  • Credit scores are becoming increasingly important in the surety underwriting process, especially for smaller bond programs for contractors that may not have CPA prepared financial statements. However, a bad credit score will be a red flag to a surety for a bond of any size (remember the first of the three C’s from the last post – Character).

Construction/Surety Attorney

Who are they?

  • Construction/Surety attorneys are those that focus their practice on construction and surety law. This includes construction contracts, construction financing, dispute avoidance/resolution (mediation, arbitration, litigation), surety bonds and insurance, liens, labor/employment law, business organizations, as well as many other areas.

  • They can represent all parties involved in construction – contractors, subcontractors, obligees, design professionals, sureties, and stakeholders.

What is their role?

Their primary role is to provide legal counsel for contractors. This can include:

  • Drafting, reviewing, and negotiating contracts

  • Assess legal risks arising from contract conditions

  • Analyze and resolve/defend contract claims

  • Help clients avoid disputes or

  • Represent clients in dispute resolution

Why are they so important?

  • Similarly to accounting methods and taxation laws, the construction industry has complex laws regarding contracts and claims (which vary from state to state), making it extremely important to have someone well versed in these topics as an advisor.

  • Sureties, unlike insurance companies, do not anticipate a loss when they write a bond. An experienced construction/surety attorney can play a key role in helping to avoid claims by reviewing contracts for hazardous wording and advising on how to handle tricky legal situations properly. In the event a claim does arise, they are able to help minimize any damage and protect the contractor, which in turn protects the surety. Just like a good CPA, a good attorney provides the surety with an increased level of confidence that the contractor is unlikely to face issues, or is adequately prepared if they do.

As you can see, it takes a real team effort of different parties and disciplines working together in order for a contractor to be firing on all cylinders and operating profitably. Some honorable mentions I did not discuss in detail above would be insurance agents (property/casualty, life), bond agents (of course!). When selecting these professional advisers, it is important to look for ones that have experience in the industry in order to get the most value from each relationship. Otherwise, they may be learning as they go just like you, which is not what you want. A good question to ask a prospective CPA, attorney, or banker would be “how many contractor clients do you currently have?” This will allow you to gauge whether they actually have a strong knowledge base and real experience working with contractors.

For any questions/concerns, please contact:

Ben Mathews

Direct: (410) 910-0204

Mobile: (443) 668-5419

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