All contractors, regardless of size, history and class are required to provide certain “reporting” to their surety partner on a regular basis. This can vary between quarterly, semi-annually and annual reporting. We understand these requests, especially when required quarterly, can seem onerous and you may have asked yourself, “Why is this relevant and what is the purpose of these items being requested?”
What is important to remember is that your surety company and your broker are partners to your business and ultimately have the same desires as you – timely and profitable completion of contracts that you have taken on.
In this instalment of Surety Corner, we will review some of the most common items a surety broker will request from a contractor and look behind the veil as to why they are required:
Copies of contracts, schedules and budget breakdowns
Let’s start at the foundation of what a surety relationship is – it is a guarantee that you will perform your obligations under the contract that is being bonded. If you were to guarantee something on someone else’s behalf, it would be diligent to understand exactly what it is you are guaranteeing. That is exactly why your broker wants to understand the contract, scheduling and how you arrived at your pricing.
Not only does this help keep the broker informed, but it is to the contractors benefit as well. Sureties and brokers review endless amounts of contracts on behalf of their clients and are often able to point out onerous terms that are not easily spotted.
When it comes to reviewing pricing breakdowns, the broker is not looking to scrutinize each line item. Rather, they are looking to see a breakdown of materials, labour, equipment and profit to further understand the job and share any market intel they can to function as an important business partner.
A broker wants to assist in the review of a contractor’s financial position in order to ensure they have the cashflow and financial wherewithal to manage a contract successfully. Regardless of the sophistication, skill and experience of a contractor, there are numerous challenges a contractor could face over the course of a job that will require strong cashflow, working capital and equity to endure. Depending on the nature of the contractor’s operations, different areas of the balance sheet and income statement are focused on to ensure the specific needs of the business are being met.
Work on hand statements
Firstly, what is a work on hand statement? This is a breakdown of contracts on the go, each broken down by:
- Contract price
- Amount billed to date
- Total costs to date
- Total costs remaining (estimate)
While the balance sheet and income statement noted above tell your broker how you performed in the past, the work on hand statement helps predict the success of a contractor in the future. By assessing the profitability of contracts on the go, a broker can help you predict a future cashflow challenge or even identify profit fade over the course of the job to improve estimating in the future. On the flip side, if you are expecting a banner year and would like credit for it, the work on hand statement can show that to your broker before it fully transpires.
Personal net worth forms of business owner(s)
This form is typically received in concert with the above noted forms to supplement the information gathered at the corporate level. Your broker simply wants to understand what resources are available to you that aren’t captured by a corporate set of financials. In cases where a contractor is new to bonding, they may have been removing profits from the business for the last 10 years and the balance sheet will look bare. That being said, if the owner of the business is sitting on a healthy cash balance personally, certain credit can be given and support can be structured with that in mind.
For a growing contractor with established bonding and healthy corporate financials, a personal net worth form is often still requested as this information forms the overall picture of a contractor’s financials.
Bank terms and conditions letter for operating line
The request of this item is often questioned: “What does this have to do with my bonding?”
There are a few reasons:
- When assessing cashflow, the terms of your operating line will allow your broker to understand whether relief is available to finance slow accounts receivable turnover or cost overruns.
- Your broker seeks to understand what covenants the bank has put in place to ensure any suggestions your broker makes is in line with lender expectations and does not interfere with existing relationships.
- Your broker also seeks to understand what the bank has taken as security to guarantee the line of credit so that they are consistent in their approach as well.
In short, the request for this document gives your broker a better understanding of another very important relationship to their clients – their banking relationship.
Ultimately, your broker seeks to be a partner in your business. Like any relationship, transparency and open communication allows for all parties to put their best foot forward in supporting each other.
Andrew Cartwright is the vice-president of surety for FCA Insurance. Cartwright recently joined FCA after a decade long tenure as RVP for a large national surety company. Matt Manol is the manager of surety for FCA Insurance. Manol recently joined FCA after spending his last six years underwriting contract and commercial surety products for a large national surety company. Send comments and column ideas to firstname.lastname@example.org