For many long-established utility contractors who have successfully weathered the economic downturn, surety bonds continue to be difficult to obtain. Surety providers are figuratively licking their wounds after suffering losses during the bad times and have remained cautious even as the construction market recovers.
Many successful-but-frustrated utility contractors have been asking how they can help their surety providers say “yes” on providing bonds for the types of projects that they routinely performed prior to the Great Recession. After all, they’ve been in business for years — through good times and bad — and they have skilled people and equipment ready to get to work. Perhaps their financials aren’t quite as strong as they were several years ago, but they’ve successfully weathered the recession — unlike many of their competitors who entered the public works arena after the housing market dried up.
The long-time utility contractor may be asking himself, “I still have most of my yellow iron, I’ve kept key project managers on the payroll and I’m ready to dig. So why is my underwriter — who has supported me many times in the past and has just walked through the ‘valley of economic death’ with me — making things so difficult?”
Keep in mind this rule of thumb: When it comes to surety, no doesn’t necessarily mean no. Surety providers understandably are cautious, but they also realize that they only make money when they say yes to qualified contractors. Thus, the best advice for the long-successful utility contractor seeking surety during these recovering-but-still-uncertain times: Work as a team with an established surety provider and with a qualified broker who understands your business and has access, business relationships and leverage in the industry.
“Paint a picture” using financial and operational data that will demonstrate how the project at hand will cash-flow and how the work will run off. Explain how both the utility contractor and the underwriter can succeed.
How We Got Here
Utility contractors who have successfully completed bonded work for years, but have recently felt the effects of tight underwriting, can attribute much of the problem to factors beyond their control. A surety underwriter, for example, is probably confident that an individual contractor who has performed similar types of work many times in the past can successfully complete a $10 million project.
However, the issue is not whether the contractor can perform; instead, it’s more about cash flow. The underwriter might be nervous about the contractor’s perceived ability to finance the project if he runs into trouble (if he’s not paid by the general contractor, for example). Many times, underwriters are even concerned about the owner’s ability to pay.
Surety underwriters operate under the assumption of 100 percent probability that the contractors they bond can not only complete the work successfully but also get paid. But underwriters who have taken losses in recent years turn cautious when an experienced, successful contractor’s balance sheet isn’t as healthy as it may have been prior to the downturn. Perhaps the contractor’s retained earnings and working capital have been diminished, leading the surety provider to ask: “Will this contractor be able to cash-flow the project? Will the contractor get paid — and, if he doesn’t get paid, can he afford to take the hit or fight about it if it comes to that?”
What To Do
A utility contractor should understand that an underwriter’s “no” really means, “Help me say ‘yes.’ If the desired financials aren’t there for this project, tell me, the underwriter, how we can mitigate risk.” The contractor’s broker may describe to the underwriter why he has confidence in the contractor (past performance, positive relationships with the owner and engineer and other advantages) but it takes more than that. Here are some key steps:
Communicate openly with the underwriter. Have the surety broker arrange a meeting among the three parties (contractor, broker, underwriter). Establish a starting point for open communications.
Provide good financial reporting. The contractor should explain to the underwriter why the projects that he’s pursuing make sense in terms of the company’s work program and how performing those projects fits within the company’s capabilities. Are additional assets needed to perform?
Maintain a good relationship with the bank. Having a positive relationship with its bank — particularly a construction-oriented bank — will help the contractor maintain its line of credit. Some contractors have struggled in recent years with their banking relationships, due at least in part to new mandates that have forced banks to become more conservative in their lending.
A strong relationship with the bank directly correlates to the strength of the contractor’s surety relationship. If the contractor pursues a larger-than-normal project, for example, the underwriter will ask if they have an adequate bank line of credit in place in case they run into a problem.
Demonstrate good job cost tracking. Provide solid job cost information to the underwriter to help him evaluate the situation. Realize that hope is not a plan; simply saying to the underwriter that “We hope we make money on this project” is not going to cut it. Instead, have a specific plan that demonstrates to the underwriter how the project will be performed and describe the cash flow on the project (when money comes in and when it goes out).
If the underwriter is concerned that the contractor’s financials may not allow him to cash-flow the project, the contractor should address that issue upfront. Explain how — if the contractor runs into delays, ownership problems or other issues — he can work through them and complete a contract that’s ultimately profitable.
The utility contractor should share with the underwriter a job cost breakdown: How the project actually plays out from not only a financial standpoint (from the point at which the contractor starts incurring bills and getting paid), but also from an operational perspective. How much labor is involved? Materials? How many subcontractors will there be? What’s the expected overhead and profit for the project? What are the equipment costs (and will the contractor need to buy any new equipment for the project or can he use existing equipment)?
In terms of cash flow: If the contractor knows that he’ll need to access his line of credit during the project, he should tell the underwriter when that will occur — and where during the project he’ll recover it.
Plus, if the contractor’s financial condition is not as strong as in the past, but he still wants to bid the same size projects, he should demonstrate to the underwriter his plan for recovery. Explain to the underwriter that he has profit in his backlog and in the jobs that he’s bidding, and that he’s included contingencies for risk management.
Have a back-up surety provider in place. The contractor shouldn’t assume that the surety underwriter with whom he’s been working for many years will always be able to support him. A “no” might come from the underwriter’s out-of-state home office, resulting from the entire company’s decreased risk appetite. If that happens, it’s best to be prepared with a Plan B.
Like anything else in business, having the right team can be critical to the contractor’s obtaining surety. One key is to work with a surety broker who’s dedicated specifically to the construction industry, rather than a generalist who might be serving customers in multiple industries and who may not have deep knowledge of construction. The broker who works solely in construction can leverage long-term, ongoing relationships with surety underwriters to the contractor’s benefit. It’s also helpful if that same individual has been a surety underwriter.
Working together, the utility contractor and surety broker should be cooperative and forthright when discussing financial issues; the underwriter wants to feel like he’s a genuine strategic partner — not a goalie who feels that he needs to stop whatever the contractor and his broker are trying to slip past him.
It’s a New Day
The days of relatively quick-and-easy surety — prior to the Great Recession — are long-gone and probably aren’t coming back. Long-established utility contractors shouldn’t be frustrated by their underwriters’ heightened due diligence following the downturn. To borrow a line from The Godfather: Don’t take it personally; it’s just business. Instead they should understand that it’s simply a new way of doing business, and openly communicate with their underwriters to provide information that demonstrates that, as always, they can do the job and are worthy customers.