Being in the right place, or the wrong place, can make all the difference. In the world of surety bonding, particularly contract bonds, timing plays an important role.
Here is a typical scenario. It is a question of timing:
The client comes to us to get their bond account set up for the first time. We send over the “laundry list” of documentation that is normally required. It’s a bit daunting. For companies that have never been bonded, they probably do not have all the info readily available. They must gather documents, others must be filled out, they must be scanned and shipped. There are better ways to spend a Friday evening!
The cause of this activity is usually that the first bonded project has popped up. We had a case like this recently where the project was being negotiated. No bid bond was required. If the effort was successful, the contractor would need a bond. If not, the bond monster goes back to sleep.
Our new client seemed unconcerned about the bond. They didn’t want to take the time to develop their file unless they won the project. Only then would they find out if it is easy, hard, or impossible to get the bond!
For this applicant, the project comes first – then the bond. Is this a smart approach? Maybe not, because sometimes the first bond is a harder, slower process than expected!
Let’s look at some aspects that could cause unexpected delays (assume this is not for a small contract):
- Financial Information – The underwriters will request business financial statements, not just tax returns. Not all companies automatically prepare these. If the year-end date is not close, it can be very inconvenient to go back and reconstruct the financial picture.
- Accounting Methods – Companies that have been using Cash Method statements will find they need to re-issue the document using a different accounting method. To accomplish this, the accountant will require an additional body of financial information, then they commence with their processing.
- CPA – Don’t have one? You will need to choose/engage a firm then allow time for their due diligence and procedures.
- Accounting Presentation – If a CPA Compilation has been the norm, it may be necessary to upgrade and re-issued as a Review. The CPA will need time to perform the additional services.
- Outside References – These are sent to creditors and vendors for handling, then you wait for their response.
- Historical Data – The project history of the company and its key people, including contract details, will be required. Prior financial data is needed. Three years of complete tax returns are often requested.
- Work In Process Schedules – Many contractors do not employ a sophisticated method of analysis. All sureties do! It may be necessary to upgrade the reporting with highly detailed individual project cost records and profit projections.
- Credit Reports – Erroneous or incomplete reports can have a devastating effect on the underwriting, and such problems are slow to correct. Adjustments to the credit report are only accomplished after a time consuming process with the rating bureau.
Issues like these can throw the timing off, and delay the bond issuance, but they are all correctable.
There may be other unexpected problems that cannot be easily fixed. For example, unacceptable financial ratios. The company could be solvent and profitable, but with poor ratios, some underwriters will say “Come back and see us next year.” An unacceptable company or personal credit report can have the same effect.
Contractors often dread the bond underwriting process. We’re not trying to foment anxiety by describing these pitfalls – actually just the opposite! By allowing enough time, we often can help the client through them.
Summary: Get your bonding set up in advance. Then you have it when you need it with no last minute surprises or disappointments.
FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it! Call us with your next one.
Steve Golia, Marketing Mgr.: 856-304-7348
First Indemnity of America Ins. Co.
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