bid bonds

Bonded Contracts – Show Me The Money! (Secrets of Bonding #139)

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 Laurel and Hardy. Ben and Jerry. Bonding companies and money. They just go together!

Let’s take a look at the focus bonding companies place on money when providing Bid and Performance Bonds. It’s a matter of survival. If called upon, the surety hopes to complete the project with the remaining (unpaid) contract funds. They track a number of elements and there are critical milestones. Learn about them so you know what’s ahead.

Of course there is a significant financial evaluation of the applicant (the construction company), a subject we have written about extensively. Visit our index of article subjects. Here we will only talk about the bonded construction project.

An early money question is “how is the work funded?” Most bonded jobs are public work. This means the project is paid for with tax dollars. On private contracts, the work can be funded in a number of ways. For commercial building, the project owner may have a construction loan or set funds aside in an escrow account. In any event, the bond underwriter wants to be sure the contractor will be paid after they incur costs for labor and material. Not being paid could cause the company to fail and result in claims on all open bonds.

Regarding the new contract, the surety will ask:

  • How often will the contractor be paid?
  • Is a portion of the contract amount paid up front, immediately when the work commences?
  • Are there Liquidated Damages – a financial penalty assessed per day for late completion of the work?

Once the contract is underway, the surety wants to monitor the money:

  • Is the job proceeding profitably, and therefore headed for a successful conclusion?
  • Do the contractor’s billings correlate with the degree of completion? It can be dangerous when they get too far ahead by billing the job aggressively.
  • Are suppliers of labor and material being paid on a current basis (by the contractor / surety client)?
  • Is the project owner paying the contractor in accordance with the written payment terms?

Sometimes underwriting issues are resolved by using a “funds administrator.” This procedure is intended to enable the contractor to perform the work, while the money handling is performed by a professional paymaster. The paymaster pays all the suppliers of labor and material, plus the contractor. This procedure minimizes the possibility of claims under the Payment Bond.

When the project reaches a conclusion, there may be important final transactions:

  • Final payment – the contractor collects the last regular payment under the contract. The bonding company issues a consent for release of this payment. If there are any problems or issues, they may withhold such approval. Underwriters can require copies of lien releases (from suppliers of labor and material) to assure that everyone has been paid – to prevent Payment Bond claims.
  • Release of Retainage – the contractor now collects a percentage of the contract amount that was methodically held back (retained) as security for the protection of the project owner. Surety consent is often required for this, too. The owner will not release this money unless all the loose ends are resolved, referred to as a “punch list.”
  • Bond “overrun” premium – normally the surety is automatically required to cover additions to the contract amount (bond automatically increases.) Therefore, they are entitled to an additional premium for such exposure. If not collected during the life of the project, this would be a clean-up item at the end. Sometimes a refund is issued for an “underrun” (net contract reduction.)

Bonus Question: Why do some underwriters require premium payment in advance for Performance and Payment Bonds?

Answer: Unlike insurance, surety obligations (P&P bonds) are not cancellable. Therefore, if the underwriter doesn’t get paid the bond premium, they are still “on” the risk!

Conclusion

Surety underwriters strive to bond reputable, capable companies. But even the biggest, best contractors cannot avoid the financial aspects that pop up during the life of all bonded jobs.  Deal with them as they arise. Now you know what to expect.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety 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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Secrets of Bonding #138: Hate Union Bonds

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Union Bonds, aka Wage and Welfare Bonds, can be a troublesome area for contractors, agents and bonding companies.  But we like to think there is something there to love. We will explain…

The Hating

For contractors, this is often their first brush with the wonderfully playful world of surety bonds. Maybe the contractor is focused on light commercial work, or is exclusively a subcontractor, so bid and performance bonds have never been needed. The contractor wants to get workers from the union hall so a new contract can begin on time.  Suddenly this road block appears: “A $50,000 surety bond is required.” Unfortunately, the contractor learns that financial statements are needed – but they are not immediately available.  And there are financial strength requirements, which the contractor may need meet, soooo…!

For bonding companies, you might assume that if they get paid their premium, they should be perfectly happy to issue these.  They are not.  The union bond is often their first bond request from the new client.  In other words, they don’t have a file, don’t know the financial condition of the applicant, are not confident in their ability to operate successfully, and this bond is considered a “financial guarantee” (as opposed to a performance and payment bond). A financial guarantee bond guarantees that the principal (construction company) will pay funds when due at a future date.  Get out your crystal ball!  If the contractor cannot pay the required union wages and benefits resulting in a bond claim, where will the money come from to reimburse the surety for the loss?  Underwriters are quick to admit they think these bonds are the worst part of a contractors account, and they dislike having one as the first bond request from a new client.  They prefer to get a couple of P&P bonds under their belt first.

For the bond agent, if they can get the bond approved and issued, what’s not to love?  The problem is that for many new applicants with credit issues or poor financial statements, the bonds are only approved with “full collateral.”  This means if you want a $50,000 bond, the surety wants to HOLD $50,000 as a security deposit against potential future claims.  Plus you pay the bond premium.  Plus you sign an indemnity agreement, probably including personal indemnity, plus your spouse. So, faced with these terms, it is not unusual for the contractor to give the $50,000 directly to the union in lieu of the bond.  For the agent, this means when the bond is approved, the client no longer wants it.  No commission.  Ugh!

The Loving

Here is the flip side.  If the bond is painlessly approved, everyone goes home happy.  But even with a full collateral requirement, there are reasons to still chose the bond (over security held directly by the union). With a bond in place, any claim by the union must be reviewed and analyzed by the surety’s claims department.  The surety is likely to ask the contractor for info and an explanation. Normally money does not go flying out of the bonding company.  It is possible the claim may be declined. This investigative process can be protective for the construction company. If a cash deposit is used, the union has immediate access to the contractor’s money.  Secondly, the wage and welfare bond can open the door with the surety.  Maybe it will lead to a new performance bond facility.  That could result in more revenues, more profits, greater success for the contractor. Another benefit is that after a track record is established, the collateral requirement could be waived. Now the contractor has the bond with NO collateral required.  It was worth the wait!

So there you have it.  Wage and welfare bonds may seem like a PIA, but even if it’s hard to get the bond, it may be worth having in the long run.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety 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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Secrets of Bonding #135: Surety Bond Challenge Question!

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Our articles have covered some of the oddities of the surety world: Seemingly crazy bond forms and rating procedures.  Out of all of them, one is the strangest. An agent colleague called us on one this week, so let’s talk about this ugly baby.

Characteristics:

  • Inexpensive, but hard to get.  Often collateral for more than the bond amount plus full indemnity is required.
  • The bond penalty (dollar amount) may not be fixed.
  • Banks and insurance companies can be both the applicant and beneficiary of such bonds.
  • This bond “renews” for free – for years.
  • It is a surety bond that can have another bond as it’s subject.

Sounds pretty weird? Raise your hand if you know.

It is a Lost Instrument Bond.

So what do these do? No, you don’t get one when you can’t find your tuba.tuba

These bonds are required when an instrument such as a cashier’s check or stock certificate has been lost, and a replacement is desired.  The bond protects the interests of the issuer, and is subject to claim if both the original and the duplicate are cashed.  The bond applicant would be responsible for the financial loss – thus the common need for collateral.

The subject of the surety bond can be a government issued investment bond.  So this is the one surety bond that covers another bond!

Bonding companies are not fond of these because they make a one-time annual premium charge, but the bond must remain in effect for a statutory term, typically years (ugh!)

drummerUnderwriters may refuse to provide a bond immediately after the instrument is lost.  The concern is that the original may be found and the bond returned for a refund.  The surety may require a cooling off period to see if the original is located (90 days?)

Instruments with a changing dollar value, such as shares of stock, are covered with an Open Penalty bond.  This means the dollar value will automatically increase to cover the current value of the instrument, in the event of a claim. This is one more reason to make underwriters reluctant – and require more than 100% of the initial value in collateral.

Lost Instrument Bonds: The ugly babies of the surety world.  So now you know.  They aren’t ugly, they’re just “different!”

(BTW, the author thinks ALL babies are beautiful!)

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety 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.

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

Secrets of Bonding #133: “Please Sign Here” (with caution!)

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sign-here-arrow-2

We have written about indemnity agreements before (enjoy Secrets #19 and #79) but recent activity with our clients has inspired yet more on this vital subject.

As a follower of the “Secrets” series, you may already know what a General Indemnity Agreement (GIA) is, and that it is a requirement all bond applicants face.   Basically, it contains a payback obligation to the surety similar to a promissory note.

As a bond applicant, why should you be cautious when signing such documents?

The first reason is that it may include companies or individual people who are inappropriate. Some examples:

  • An affiliated company in which the bond applicant has a minority interest. These should be excluded if the bond client doesn’t have a controlling interest.  
  • Another example would be an individual person with little or no ownership in the company who is not married to an officer, key person or major company owner.

The second reason is that there may be clauses in the indemnity agreement that may be subject to negotiation – although underwriters tend to resist such modifications. Nevertheless, if you see something objectionable such as “Confession of Judgement” which is not even permitted in some states, you should ask for it to be removed. 

This would also be the time to ask for additions to the document, such as a dollar limitation on personal indemnity of certain individuals (Spouses? Minority owners?) or Trigger Indemnity which is only activated under specific circumstances.  No harm in trying.

The third reason is because of the gravity of the indemnity obligation. Through the GIA, the bond applicant company and its owners agree to repay the surety for losses and expenses.  They are literally putting everything on the line. sign-here-arrow-204x300

What is the dollar limit of this obligation?   Is it:

a) The contract amount? 

b) The Payment Bond amount?  or

c) The T-list of the surety? 

Answer: The liability amount is unlimited. 

This is a big deal. Keep in mind (see Secret #1!) “Bonds Are Not Insurance.”  The surety is a guarantor of the principal’s performance. If the contractor fails to perform, the bond is not insurance to protect them from the consequences of their failure.

In conclusion, the bond applicant should approach the signing of a GIA with some caution.  Certainly it is a document to read and manage where possible but this brings us to the final point: If you want surety bonds, it is mandatory that the surety be indemnified.  Regarding the indemnity of spouses not active in the business, they too must sign.  We tell contractors “Nobody likes it, but everybody has to do it.”

sign_here_manIf you want bonds, be cautious, but get ready to sign on the dotted line.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety 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.

(Don’t miss our next exciting article.  Click the “Follow” button at the top right.)

Secrets of Bonding #117: Mating Fun!

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Remember these from school?  I always found them slightly annoying. 

OK here we go!  Match up each one with its mate.  

1.      This surety bond has an annual term.  Plumbers and electricians need them.  The bond runs to the contractor’s municipality. Site Bond

 
2.      Surety bond accompanying a project proposal. Bond has no expiry date and usually are never cancelled. Power Of Attorney
3.      Guarantees the construction of “public improvements.” FIA Surety: 856-304-7348

 
4.      Provides project info such as costs, billings and expected profits. Work In Process Schedule
5.      Provides project info such as performance &/or claim issues, degree of completion, date of acceptance, final contract amount. Overrun
6.      Proves that the person signing the bond on behalf of the surety has the authority to do so. Pierre

 
7.      Performance bond premium charge for increased contract amount. Contract Status Inquiry Form

 
8.      Who you call for site, subdivision and contract surety bonds. Bid Bond

 
9.      Capital of South Dakota License Bond

 

 

 

 

 

Hearts

OK let’s see how you did.

  1. This is a license bond. Usually written in low amounts and freely issued.
  2. That’s a bid bond. They guarantee the bidders sincerity and interest in the project.
  3. Site bonds cover water, sewer, sidewalks, roads – not the buildings.
  4. Work In Process Schedule prepared by the construction firm using internal info only they have.
  5. Status Inquiry Form prepared by the project owner indicating the degree of acceptance of the contractors work and indicating the overall health of the project – in their opinion.
  6. Power of Attorney is attached to every surety bond proving its authenticity.
  7. Overruns may be charged when contract increases occur or at the end when the job is completed / accepted.
  8. FIA Surety expertise to solve your bond toughies. And we guarantee a same day response!  

You see, bonds CAN be fun and rewarding.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety 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.

Secrets Of Bonding #114: Offer a Concrete Solution?

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This Concrete Subcontractor has a big problem.  How would you solve it?

The Facts

  • The bond applicant, we will call ‘Subby,’ is a highly experienced subcontractor who performed concrete work on a school job.
  • Subby was not required to give a Performance & Payment Bond to the GC.
  • The GC, “Gigunda Const.,” has given a P&P bond to the school district.
  • The GC claims that the concrete Subby installed has failed a critical strength test. As a result, Gigunda is demanding a 2 year maintenance bond to cover potential defects.
  • Subby has disputed this claim and feels they are in compliance with the contract.
  • Since the requested maintenance bond will run to the GC and not the school district, it appears the issue must be resolved from within the subcontract terms (not directly with the school district).
  • Subby has an ongoing relationship with a major bonding company: “Wonderful Surety.”
  • Wonderful Surety has refused to provide the maintenance bond.
  • Subby’s agent called us for help. Is it possible we may support it?

Consider the Issues

  1. The work is not covered by a performance bond.
  2. Subby’s current surety has refused to support them.
  3. If Subby ignores the problem, the GC may ultimately have a performance claim on their bond. The GC, and their surety, are responsible for the entire project, including the subcontracted work.
  4. If Subby ignores the problem, the GC may have to fix it – and will back charge them for the costs.
  5. If Subby doesn’t provide the maintenance bond, the GC will withhold the remaining money in their sub contract.
  6. Gigunda’s subcontract may have imposed the GC contract conditions automatically on to the subs (possibly including concrete strength requirements).
  7. It would be normal for the subcontract to state that Subby must protect Gigunda from claims arising from their work.concrete_truck

Possible Solutions

Which One Do You Like Best?

  1. Subby can ask a new surety to provide the maintenance bond.
  2. Subby can rip out the questionable work at their own expense and re-do it to Gigunda’s satisfaction.
  3. Subby can review the subcontract to determine what strength requirements were indicated, and if Subby is actually in violation.
  4. Gigunda can press their surety to issue the maintenance bond. (Although this would be unlikley if Gigunda is the beneficiary.)
  5. Subby could refuse to get the maintenance bond or replace the work (do nothing.)
  6. Subby could ask Gigunda for a contract amendment providing additional money to rip out / replace the questionable work.
  7. Subby could let Gigunda hold money for 2 years in lieu of the bond (the entire bond amount).

So you chose: #_____

 

Conclusion

The step we recommend is #3, “review the subcontract requirements.”

Subby is an experienced concrete company that is convinced their work product is correct. They are not aware of the strength requirements that are the basis of this dispute – but a careful legal review is needed.  

Subby should also ask the GC to cite where these strength requirements appear in the subcontract.

If the work is in violation of the subcontract, Subby will have to choose between paying to replace it now, or face the difficult task of obtaining the maintenance bond. It is possible that no surety will support this without requiring substantial collateral, or maybe even full collateral.  

Pretty tough, but the bond would offer some important advantages even if full collateral is required:

  1. Subby could totally avoid the cost of replacing the work if the concrete performs successfully. Only time will tell, and filing the bond gives them that time.
  2. The bond is better for Subby than letting Gigunda hold funds. If Gigunda concludes the concrete has failed during the 2 years, they will have to go through the surety’s claim department for recovery.  That’s better than just letting the GC use their money if they want. This type of advantage always exists for bond applicants when choosing between a surety bond or putting up cash directly with an obligee / beneficiary.

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.

Secrets of Bonding #112: Net Worth – Feed the Pig!

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When it comes to Bid and Performance Bonds, you may have heard that Working Capital is a deciding factor.  If the calculated amount on the applicant’s financial statement is insufficient, the surety underwriter will decline the bond.pig3

So what is Net Worth (NW) and how important is it for bonding purposes?  Let’s start with a brief description of what this is and where you find it in the financial reporting.  Funny thing about net worth: It is a measure of the company’s financial strength, but it is listed among the company’s debts! Hmmm…

Where Do You Find It?

NW aka “Stockholders Equity” is listed on the company Balance Sheet, which is divided into assets and liabilities (debts). 

The assets include cash in the bank, accounts receivable, buildings, equipment, etc.  The liabilities are accounts payable, bank and other loans, other debts, and (in a corporation) the Stockholders Equity. The NW or Stockholders Equity section appears at the bottom of the Liabilities column, below “Total Liabilities.”

What Is It?

Stockholders Equity shows the funds put in (loaned to) the firm by the stockholders such as Capital Stock, plus the portion of all past profits allowed to accumulate in the company (called Retained Earnings). These comprise the corporation’s NW.

Why is it a liability?  NW is a liability because it is owned by the stockholders, not the corporation itself. If the company shuts down and is liquidated, the NW goes the stockholders and the corp reverts to its original financial position: $0.

pig2Think of NW as a piggy bank that holds the company’s long-term, ultimate financial reserves.

Now let’s discuss what this has to do with surety bonds. Bond underwriters always evaluate the Working Capital amount.  And many place equal importance on the NW.  While it is true that a company can show good Working Capital but have no NW, is a lack of NW really a concern?  You may assume it is difficult to get a bank loan with no NW, the same applies to bonds. 

Surety underwriters are concerned about a company’s staying power if they don’t have financial reserves to help survive tough times.  When companies fail, there are bond claims – exactly what the underwriters don’t want!

Analysts will wonder “Why is there no NW in this company?” especially if it is not a new entity.  Has there been a lack of profitability, a failure of management, and therefore no profits to accumulate?

Our “Secrets” articles are usually inspired by the file activity we enjoy each week with our valued agents. Such was the case this week.  Here is the actual info from a financial statement that was the seed for this article:  “(  )” indicates a negative number.

STATEMENT OF EQUITY, September 30, 2015

Balance at January 1, 2015               $            0
Plus: Member’s contributions               33,616
Less: Net loss                                          (50,597)
Less Member’s distributions              (131,060)
Balance at September 30, 2015       $(148,041)

This report is describing the changes in one part of the NW.  They started with nothing, put in $33 thousand, lost $50 thousand this year, and on top of that, took out everything they put in and more!  What are they thinking?!

Q. If you are the bond underwriter contemplating the likelihood of this company’s survival, what might you conclude?

  1. Company management is weak?
  2. Their ability to continue may be doubtful?
  3. Instead of bolstering the company with additional funds, the owners are stripping it of assets – maybe with the intention of declaring bankruptcy?

A. All of the above!

Our conclusion is that Net Worth IS important. In bonding, the company is the applicant.  Its financial position indicates if management has achieved profitability and accumulated a war chest of funds to provide a strong foundation.  Without it, future credit may be unavailable, and the company may falter when facing difficulties.

NW is one of the critical factors underwriters, and all credit analysts, review.  It should be nurtured, protected and preserved.

pig1

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.

Secrets of Bonding #107: Surety vs. Fidelity, The Cage Match

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Surety. Fidelity.

They’re both bonds, they come from the same family, but can they get along?cage-match2

To some, this timeless battle is mere entertainment, a Cage Match for the ages.  We’d like to put this question to rest once and for all. Which is more important? Which is more beneficial? Do companies need both?

A surety bond is a guarantee of performance. For example, the state of New Jersey is guaranteed that a construction company will faithfully perform its building contract. 

A fidelity bond protects a business from acts of employee dishonesty. 

Which is More Important?
One could argue that fidelity is more important because EVERY company would benefit by avoiding the impact of employee theft / dishonesty.  Companies have been ruined by such crimes. Examples:

Worker nets $400,000 in refunds. After mastering the furniture company’s phone and mail-order system, Suraj S. started issuing himself refunds for purchases made by customers. Suraj would cover up his rampant refunding by altering inventory records. In less than a year, he stole almost $400,000. 

Security expert finds — and exploits — $1 million hole in company’s internal controls. It’s not an unheard of scenario: A company hires a former “professional” thief as a theft-prevention specialist because of real-life expertise in the security field. In this case, a former embezzler, Barry W., was hired at (name withheld), Inc., as a “theft-prevention specialist.” Rather than protection, Barry ended up writing himself checks on company stock — signed with a signature stamp of a co-worker — cashing the checks, then destroying the canceled checks that were returned to the company. He made false entries in the company’s books to cover his actions. Before being caught he stole a staggering $1,138,334!

For contractors that depend on public works contracts, surety bonds (bid, performance, payment) are essential.  The company cannot survive without them. However, they may survive without a fidelity bond.

Should a Company Have Both?
Let’s stay with the construction company example, but this is true for all firms that have cash flow running through their accounting department. Fidelity bond underwriters know it is often the trusted employee who commits the act of theft. It is simply because they are in the best position to steal. It is not uncommon for a theft scenario to reach astronomical levels as it drags on for years, undetected. 

cage_match

Added Bonus
Does having a fidelity bond help a company qualify for a surety bond or vice versa?

The underwriting of fidelity bonds includes an evaluation of internal controls, such as money handling procedures, monthly account reconciliations and annual audits.  The issuance of surety bonds involves the analysis of accounting procedures, financial performance, quality of management, operating history, and many other factors. Having the appropriate fidelity controls in place, and actually having a fidelity bond, are pluses for the surety underwriter.  We may conclude that surety bond clients are natural candidates for a fidelity bond, and the opposite is also true for those companies that need surety bonds in order to operate. It helps both ways.

There you have it: Surety and Fidelity can co-exist in harmony at last, each proud of the role it plays. 

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 #97: Six Tips for Six-Month Reporting

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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.