year end financial statements

Secrets of Bonding #122: Don’t Sign That Lien Release!

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WAIVER OF LIEN BY CONTRACTOR, SUBCONTRACTOR(S) AND SUPPLIER

We, the undersigned, acknowledge receipt of the amounts stated below as full payment for all labor, professional services, materials, or equipment furnished for use on or about the property of…”

In construction, lien releases are common. Project owners expect their general contractor to execute them. GCs demand them from their subcontractors and suppliers. They are part of the routine. If you want to get paid, you sign it. But when should you not sign it? Let’s look at what a lien release does, and when you should be cautious about executing.

The Purpose of Lien Releases
Typically, a lien release is required in connection with a monetary payment. It comes up in any of these situations:

  • Monthly payment made from project owner to the general contractor
  • Monthly payment from GC to a sub or suppliers
  • Final contract payments to any of these

The lien release enables the accounting to transition from one billing cycle to the next. It is a form of receipt that protects the Payor by acknowleging that the Payee has received funds – they relinquish the right to claim they were not paid.

danger-aheadNormally, when contractors and suppliers are unpaid, they can file a lien (a security interest) against the title of the physical property. With such a lien in place, the property cannot be sold.  The lien release / waiver gives up the right to file such a lien and possibly other legal remedies as well.

Lien releases come in two basic flavors, and it is very important to recognize the difference between them.

The Good One: Conditional

“THIS DOCUMENT WAIVES THE CLAIMANT’S LIEN, STOP PAYMENT NOTICE, AND PAYMENT BOND RIGHTS EFFECTIVE ON RECEIPT OF PAYMENT. A PERSON SHOULD NOT RELY ON THIS DOCUMENT UNLESS SATISFIED THAT THE CLAIMANT HAS RECEIVED PAYMENT.”

A release / waiver is Conditional if it waives rights once a condition (usually the receipt of payment) occurs. An example of conditional language is:

“Upon the receipt of $____, Subcontractor hereby waives and releases its lien and bond rights for labor and materials through _________ (date).”

Unless the waiver states otherwise, the conditional waiver is not effective until the condition, such as payment, occurs.

Also note, this wording includes a condition regarding time which protects the claimant’s lien rights arising in the next billing period.

The Bad One: Unconditionalcaution-proceed-carefully-md

“THIS DOCUMENT WAIVES AND RELEASES LIEN, STOP PAYMENT NOTICE, AND PAYMENT BOND RIGHTS UNCONDITIONALLY AND STATES THAT YOU HAVE BEEN PAID FOR GIVING UP THOSE RIGHTS. THIS DOCUMENT IS ENFORCEABLE AGAINST YOU IF YOU SIGN IT, EVEN IF YOU HAVE NOT BEEN PAID. IF YOU HAVE NOT BEEN PAID, USE A CONDITIONAL WAIVER AND RELEASE FORM.”

Actually it is only bad if the claimant has not yet been paid. Then it would be inadvisable to provide an unconditional release. The claimant will have no recourse if they do not receive their payment, and they will also relinquish their ability to claim against the Payment Bond.

Conclusion
The Conditional Lien Release includes conditions and wording that protects the claimant’s interests.

The Unconditional Release can be detrimental if executed unintentionally or under inappropriate circumstances.

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.

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.

Secrets of Bonding #75: How come HE can get a bond?!

Steve Golia1 Comment

We have been dedicated exclusively to providing bonds for contractors for 40 years, and we’ve heard this question at least 40 times!

It’s frustrating for contractors.  Everyone knows surety bonds are hard to get, but it is really maddening when your less capable competitors are bidding public work and you can’t get across the goal line.  What is the missing ingredient?  Can we name the secret that answers this question?

The process of qualifying for bid and performance bonds is based on people and paper.  The contractor is interviewed and evaluated.  That’s the people part.  A file is gathered and the paperwork is reviewed.  What can cause a perfectly capable contractor to not qualify for bonding?  The answer may be the paperwork.

Secret #5 was “The Three C’s of Bonding – Plus One!”  It touched on this important point. In our experience, the most common area where capable and bond worthy contractors fall down is in the creation of their file.

The people part of the process is obviously important.  If the underwriter is uncomfortable with the applicant, guess what: No bonds.  The paperwork doesn’t matter if the human element fails.

However, it is equally true that the paperwork must achieve its goal.  And what is that goal?  It is CREDIBILITY.  The difference between two equally capable contractors, where only one is bonded, may be the failure to present a convincing file.

When reviewing a new account, bond underwriters know what is normal and believable.  Contractors who fail to meet these expectations will be rejected. Think of an extreme example: If you were evaluating the file, would you be more likely to believe an applicant’s self-serving comment that they have $100,000 in the bank, or an independent CPA firm that issued a report confirming they verified such an asset? HOW the info is presented can make all the difference.

It’s just that simple.  The purpose of the file is to establish the contractor’s CREDIBILITY for all who read it, including those who will not actually meet the applicant.  For them, their decision-making is based solely on the credibility and content of the file.

What are some of the most common paperwork deficiencies that derail contractors?

  1. Lack of credible financial information. They don’t have a year-end financial statement.  Maybe the accounting method is unacceptable or they should have a CPA prepared report but don’t. Sometimes the financial reports contain arithmetic errors and have sections missing.
  2. Bad advice. Actions taken by management can make it harder to obtain bonds. Borrowing money, investing and even the choice of accounting methods can have an impact.
  3. Incomplete files. Many contractors start but fail to complete.  Their energy is focused on “making money,” so they never take the time to complete their bond submission.

We don’t want to over simplify the process.  Each company is different, and there are nuances to developing each applicant to assure their strengths and capabilities are showcased.  We are not intending to explain HOW to establish credibility.  Out point is that unless it is established, there are no bonds – regardless of how capable the contractor may be!

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site and Subdivision Bonds since 1979 – we’re good at it!  Call us with your next one, Bid and Performance bonds, too.

Steve Golia: 856-304-7348
First Indemnity of America Ins. Co.

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Secrets of Bonding #6: Christmas in February

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This gift is for you – even if you don’t celebrate Christmas!

In the world of Bid and Performance Bonds, there are annual cycles.  Certain things are important at different times of the year.  For example, construction may follow the seasons and be less active in winter. The underwriting relationship tends to follow the contractors accounting cycle which revolves around the company’s “fiscal year-end” (FYE).  This day is the end of the fiscal year, and is when federal and state taxes are calculated.  The most common FYE date for companies is December 31st.  Therefore, February is crucial because their fiscal year recently ended, but it is likely that CPA prepared financial statements are not yet ready.  When they are produced, they will be an important building block for re-approval of the bond account and to determine capacity levels for the coming year. (Our comments here are applicable regardless of when the FYE date actually occurs.  You just apply the principles to that annual cycle.)

So here is the gift: This time, during the first quarter of the contractors new year, is the prime opportunity to assure the financial presentation is maximized. The contractor worked all year to produce good results that will enhance bonding and banking relations and carry the firm into the new construction season. Now is the final chance to manage and maximize that critical info.  Here’s how:

The contractor’s business plan for the current year should determine the amount of surety capacity needed.

The surety should review the internally prepared (i.e. QuickBooks) company FYE Balance Sheet and Profit & Loss Statement.  If a draft of the CPA financial statement is available, that’s even better.  The question to ask is “Based on this preliminary FYE info, does it appear we will qualify for our desired amount of surety capacity: $___ per contract and $___ in the aggregate (maximum at any one time)?”

If the answer is no, NOW is the time to make adjustments before the documents are produced in their final version.  Talk to the surety about the issues.  Talk to the accountant about how to address them.  Not everything can be corrected. But some problems are caused by discretionary actions that ARE reversible.

This procedure is important because it facilitates the discussion that prevents capacity problems that can last all year. No back pedaling allowed, only forward!

Maximize the bonding, increase revenues and produce higher profits.  Everybody wins.

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.

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