The nature of a surety obligation is often described as a three-party agreement between the surety, the principal (contractor) and the obligee (project owner).
At FCA Insurance, we also like to reference the three-party relationship that is formed between a contractor, their broker and their surety company. This three-party relationship is founded on trust, mutual understanding of business goals and the notion that all parties bring unique value to the table.
With that in mind, Trisura’s Stephen Logush, AVP Surety, brings unique and sound advice for contractors to the table in a brief interview summarized below.
Ironically, the name “Tri”-sura is thought to be a gentle nod to the client, broker and surety relationship.
We hope contractors are able to heed Stephen’s advice heading into 2024 so that we can all continue to experience mutual success.
FCA: What is a surety friendly balance sheet? What can contractors do to make their balance sheet stronger?
SL: Surety support is often leveraged based on corporate balance sheet composition. An initial assessment will look at profitability, working capital (liquidity) and tangible net worth (equity). From there, a full underwrite will often incorporate calculations of various ratios including profit margins, current/quick ratio and debt-to-equity ratio.
Organic balance sheet growth is a great indicator for a surety. Overall profitability suggests the contractor is able to successfully complete their work. Keeping profits in the company demonstrates commitment to the growth and longevity of the company.
Cash is always a key factor when reviewing a bond facility. It helps to mitigate any disputes, delayed receivables and supply chain issues.
Particularly with the current interest rates, bank usage and third-party debt is something we are monitoring regularly. Debt is more expensive to service and directly affects profit margins. For a contractor utilizing debt, defaulting on a credit obligation could be detrimental to them. Ensuring a contractor is compliant with their bank facility covenants and having a good working relationship with this creditor is also important to a contractor’s success and maximizing bond support.
To summarize, retaining capital and any earned profits within a company will help build a strong and liquid balance sheet which helps a surety increase the bond support they are able to provide.
FCA: What info do sureties want as it pertains to job cost tracking and internal reporting? What makes for informative and useful internal reporting? How does the time spent preparing this info benefit contractors?
SL: Most formal underwrites are based on the year-end financial statements reviewed by a third-party accountant. However, these statements are typically finalized four-plus months after the year end. Therefore, if the only reliable reporting is being provided on an annual basis, a surety could be out of date 16 months (or more) since a financial statement has been provided.
As everyone knows, a lot can happen within this time leading to uncertainty about what the current balance sheet might look like. This uncertainty carries an inherent risk and will often lead to less favourable terms.
Timely and accurate internal reporting that is provided to a surety on a regular basis (i.e. quarterly) can help demonstrate the contractor’s performance through the year and eliminate some of the unknowns and the amount of guessing a surety must do.
Especially for larger and long duration contracts, job cost tracking is an important tool for both a contractor and a surety. If a contractor can track the actual cost of a job relative to the budgeted cost at the tender stage, they can identify any efficiencies and more importantly catch issues before they turn into big problems. Regularly monitoring these projects and addressing issues as they arise will often mitigate losses for both the contractor and surety.
If a contractor can demonstrate to a surety on a regular basis how they are performing and that they are actively tracking their jobs to mitigate risk, this will help maximize the bond support a surety is able to provide.
FCA: If a challenge arises, like a claim, what does a surety company need from their clients? How does this affect support moving forward? Is a claim automatically a red flag?
SL: We view the surety/broker/contractor relationship as an ongoing partnership. Just like any relationship, times can be good or times can be difficult. While everyone is generally happy during the good times, the true colours tend to show during the difficult times.
We understand there are often two sides to every story so in a claim scenario, we try to collect information and documentation from all parties.
Especially with the strict timelines on some bond forms, it is important to have timely and open communication between the surety and the contractor. Documentation is more important than ever so keeping an organized record of contract documents, emails, pictures and other correspondence will help the surety evaluate the claim.
A lack of communication, late or poor documentation or incomplete information can all negatively impact a surety’s ability to review a claim and increase the chances of loss. While surety is not like other types of insurance where a claim is automatically a red flag, a negative claims experience can hinder a surety’s ability to provide bond support moving forward.
On the other hand, a positive claims experience in which the contractor was organized, responsive and worked with the surety to mitigate any losses will often increase the surety’s ability to provide additional bond support.
As we head into 2024, FCA Insurance wishes all contractors success and prosperity. If you are seeking advice, guidance or feedback on your surety relationship, please contact us at surety@fcainsurance.com.
Matt Manol is the manager of surety for FCA Insurance.
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