Month: July 2015

Secret #100! Why You Don’t Need Us

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Let’s face it, not all bid and performance bonds are difficult.  Granted, bonds are different from insurance, but with some of the programs out there, you really don’t have to be an expert.

We refer to them as “EZ” type programs.  They have been around for years because surety underwriters realize there is a layer of business that can be processed with minimal handling by a decision-maker. 

At FIA Surety, we are surety specialists.  That’s ALL we do since 1979, and we’re getting pretty good at it…  but you really don’t need our help, unless:

  • The project is over the $500,000 range
  • The client has more than $400-500,000 of work on hand
  • The company is new
  • The project is not in their normal territory
  • Nature of the work is unusual for the client
  • Uncertain if they have the know-howno_idea
  • The job is complicated
  • Job not in the continental U.S.
  • Job term over 12 months
  • Maintenance over 12 months
  • Site or subdivision bond (Our specialty!)
  • Dual obligee such as a lender
  • Non-standard bond forms
  • Excessive bid spread
  • Demolition project
  • Hazardous material / environmental work
  • Marine work
  • Tax liens
  • Bond claims
  • Bankruptcies
  • Poor credit report

OK so maybe sometimes you DO need us…  We know how to handle all the various problems.  Chances are, we know how to solve any problem you run into.  We have the knowledge and the best service standards.

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.

Secret #99: The Awful Truth About Working Capital

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“Gotta have it.  Really need it.”  Click for mood music

  • Surety Bond underwriters DEMAND it. 
  • Contractors maneuver to maximize it. 
  • Bond agents pray for it…

What is Working Capital, and what is the awful truth that everyone ignores?

Define the term
When contractors apply for bonding, the company financial statement is analyzed by the surety underwriters.  They always calculate the Working Capital As Allowed on the Balance Sheet, which is simply:

Current Assets minus Current Liabilities

This number is also subject to interpretation by the analyst.  For example, they may disallow assets they feel are overstated or of questionable value – thus the title “As Allowed.”

The working capital figure is then compared to the size bonds and aggregate (overall) program the contractor desires.  Here is the important part:

For many bonding companies, if the WCAA is deemed insufficient, there is an immediate declination.

It’s true that “everything is important” in surety underwriting.  But it is also true that this is a life or death issue for many decision-makers.  Specifically, the fiscal year-end Working Capital As Allowed must be adequate for the capacity requested.  And that isn’t the awful part…

Underwriters focus their decision-making on the fiscal year-end (FYE) of the company, tax day.  For many contractors, this day is 12/31 each year.  This is a natural and convenient annual milestone that is presumed to be realistic and conservative.  Underwriters don’t want puffed up numbers designed to impress them.  That makes good sense.

Awful Truth #1
The Working Capital calculation is only accurate for ONE DAY.  If the company spends cash on January 1st, bills a contract, incurs an invoice, the WC is immediately different.

Awful Truth #2
The WC calculation is always based on obsolete info. When does the 12/31 statement get produced?  Maybe February, but more likely March, April or later.  This GUARANTEES that the WC calculation is always based on old, outdated info.

Awful Truth #3
Considering the great emphasis placed on the importance of fiscal year-end numbers, interim financial statements (produced on other days in the year), are largely ignored by underwriters.  This means if the company has a good mid year results they may be overlooked – however a downturn is always taken into consideration!

Conclusion
rainbowLike an elusive pot of gold, the WCAA underwriters depend on may never materialize as actual cash flow.  But another “truth” is that underwriters must base their decisions on something, and historically this has been a relevant indicator of future success.  Despite the often overlooked flaws we cited, Working Capital analysis will remain part of surety underwriting.

We keep the relative value of this indicator in perspective, and realize that interim statements and other underwriting elements should also play an important role.

About us: 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.

Secret #98: The Great Rate Race – Bonding

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Some years ago we met with a contractor and the conversation turned to Surety Bond Rates.  He had just become aware of different (lower) rates that were available from bonding companies.  He was clearly upset: “Do you know how many jobs I have lost over the years by a small margin?!”  Of course I didn’t…  The point was that he felt his bond rate caused him to lose opportunities.

GREAT RACE, JACK LEMMON PETER FALK 1965

Surely every expense and cost element is important when a contractor is pursuing “low bid” work.  The practice in the U.S. is for public bodies like federal, state and local municipalities to award work to the lowest responsible (meaning appropriately qualified) bidder.  Read this as “low dollar.”  It is a tough, competitive environment where margins are usually quite thin or zero!

The contractor’s ability to acquire new work is often linked directly to their control of all expenses, including the bond cost.  However the importance of the Rate Race may be overstated. 

Here are two important factors that are often overlooked:

  1. Assume the contractor is with Surety A, and Surety B has lower rates. There is no point in comparing the two if Surety B will not agree to bond this account.
  2. The contractor must remember, the extent of their discontent must be the difference between their current surety bond rate and another rate that is available to them. Example: Currently pays 2.5%, has an opportunity to pay 2%.  The discontent is over the rate difference: .5%, not 2.5%!

The first “Aha moment” is when the contractor realizes that every bidder is paying for a bond.  And the difference between the rates is usually quite small, not a significant factor in the outcome of the bid.

The second Aha comes from the realization that, when it comes to bonding companies, contractors may find CAPACITY is a much more important issue.

Contractors are restricted in the amount of work they can acquire.  The bonding company has a certain comfort level, and will withhold their support if the contractor acquires more projects than they feel is prudent.  The concern is that the contractor may become overextended and ultimately fail.  Think about this: Do the rates matter if the surety will not issue the bond?

Conclusion: We agree that bond rates, like all cost elements, must be monitored and controlled.  However, when selecting a surety and managing the relationship, the contractor may conclude that capacity is king and rate is secondary.

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.

Secret #97: Six Tips for Six-Month Reporting

Steve GoliaLeave a comment

Look into my eyes!  Deeper!  I see….. that your fiscal year-end… is December 31st!

OK, that’s a pretty safe guess.  Most construction companies have a 12/31 year-end, and 6/30 is their mid-year date.  It is the time for interim financial reporting to the bonding company.

Here are six tips to help contractors survive and thrive in this process:six_fingers

  1. Don’t delay: If mid-year info is not readily available, it makes the contractor look disorganized, or like they are hiding poor results.
  2. Cash Method: No good for banks or bonding companies. Accounting should be set for the “Accrual Method.”
  3. A CPA statement is often not required at mid-year. In house, such as Quick Books, is the alternative.  Check with the underwriter and maybe you can save some dollars.
  4. Maximize billings prior to the reporting date.
  5. Retain Cash prior to the reporting date.
  6. Delay distribution of profits to owners until after the reporting date.

7. Bonus Tip!!!  Compare this mid-year to last mid-year. The underwriters will! 

Are results are better or worse?  Company on track for a profitable year-end at 12 months?  If results are weak, prepare a written explanation regarding the influencing factors, and management’s response.

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.

Secret #96: Bullies, Banks & Bonding Companies

Steve GoliaLeave a comment

Growing up I was a tall kid, one of the tallest in my class.  I was taught “don’t get into fights,” sobully sometimes I became a target for shorter, older kids who wanted to push around a big guy.

Now that we’re all grown up, I’m glad to say that’s all behind us… or is it?

Construction companies contractor may feel bullied sometimes, by VENDORS who purport to serve them.  One of them could be the banker.

Banking Relations for Construction Companies
Working capital is important for contractors, especially when starting up a new project.  They may have to work for 45 days or more paying for labor and materials before they receive their first payment under the contract. Bank credit can be a perfect solution for this.

A new contract is an asset for the company, and the bank can rely on this when lending money.  But what happens when the contractor brings the bank a bonded project?  They will refuse to lend against that job!  Their position is that the rights of the surety conflict with their own.

Bonding Relations for Construction Companies
More bullies: Now look at the surety side.  When applying for bonding support, the underwriters ALWAYS ask about banking relations:

  • “Do you have a working capital line?”
  • “How much of it is currently available?”
  • “We want you to have a bank line.  It can help you get through a problem and prevent a bond claim.”
  • “If you are approved by the bank, it helps assure us that you also deserve bonding credit.”

Feel bullied?  No wonder!

The reality is that construction companies may need both bank and surety support.  In order to pursue public work (municipalities, state and federal contracts), surety bonds are mandatory. The surety wants you to have a bank, but the bank doesn’t want to support bonded projects. You can’t win!

The solution is for the contractor to avoid “project specific” lending and seek a general working capital line that can be used at their discretion on any new contract. That’s how to push back on bullies.

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.