Stretching the Limits

Things are looking good for utility contractors — better, in fact, than they have in years. As the Great Recession fades in the rearview mirror and the summer months gather steam, more and higher-margin jobs are opening up for bid.
Stretching the Limits

Things are looking good for utility contractors — better, in fact, than they have in years. As the Great Recession fades in the rearview mirror and the summer months gather steam, more and higher-margin jobs are opening up for bid. It’s not uncommon for a busy utility contractor to bid two or three projects per day, ignoring less-profitable opportunities to take on others that potentially could fill his coffers with profitable work.  
After years of public and private entities scaling back or delaying their utility work, the good times are returning for utility contractors who weathered the recession. They’re bidding — and getting — more and better work, and building up their balance sheets that were battered during the downturn. 

But there’s a critical issue facing almost every utility contractor who’s enjoying the return of the good times: surety providers who remember the bad times, and, as a result, may not be eager to “stretch” their bond credit — even for their long-time and successful utility-contractor customers.

Sureties that suffered losses during the weak economy are very careful about extending bond credit to contractors — even the best ones — whom they believe are over capacity or close to it. As a result, contractors are often told “no” by skittish surety providers on the next major job that comes along.

New Issue
A year ago, utility contractors were facing a different issue with their surety providers: trying to convince them to provide bonds for the types of projects that they had routinely performed for years, prior to the downturn that began in 2008. But now the key is to convince their sureties to stretch their bond capacity beyond their comfort levels, to accommodate the growing amount of work that’s available for utility contractors who survived the recession that claimed perhaps a third of their competitors. 

A utility contractor may think that it’s not asking too much for their surety provider — particularly one with whom they’ve been working for years — to stretch beyond their comfort point. But contractors need to understand that it is a significant request for surety providers that are still tender from the buffeting they suffered during the downturn.

Tips
The question is: How can a utility contractor get his reluctant underwriter to provide, for example, another $250,000 — or $5 million or $10 million — in bond credit? Here are some tips:

Provide project details in a face-to-face meeting with the surety. Underwriters are human and love to sit down and meet face-to-face with utility contractors and their surety brokers to discuss the details of a project and why it makes sense for the contractor. The good news: If the underwriter agrees to a meeting, it probably means that the contractor is 90 percent of the way to getting a “yes.” A meeting with the underwriter to explain how a job fits within the contractor’s current work program — including when it starts and its positive effects on the company — can seal the deal.

Explain the company’s current financials. The underwriter typically needs to obtain approval from the home office — which may know nothing about the contractor — to extend the requested bond credit. Providing current financial information (cost-to-complete, work-in-progress, working capital, balance sheet, etc.) will help the underwriter “sell” the idea to the home office; financials that are six months old probably won’t do the trick.  

Likewise, the contractor should be prepared to answer in-depth questions from the underwriter, even if the underwriter is confident that the contractor can perform the work.  

Provide a detailed breakdown of job costs. The contractor should provide enough information to the surety to convince him that he’s confident that he can successfully complete the job on time and within budget. Provide a detailed description of the projected labor, materials and equipment that will be used on the job, and explain if new equipment is necessary.

In areas where the weather can affect the job schedule, describe how the contract provides sufficient time to complete the work, but also discuss the liquidated damages if the weather causes delays.  

Maintain a good, long-term relationship with the underwriter. Like anything else worthwhile, it’s in the contractor’s best interest to work on a solid, mutually-beneficial relationship with his surety provider. Understandably, the surety wants to feel like he’s part of the contractor’s team, rather than “just another vendor” or, worse, a necessary evil. A strong relationship that stands the test of time can yield positive results when the surety is asked to stretch.  

…but have a back-up surety in the wings. The contractor’s long-time, “go-to” surety provider may still be suffering the effects of the recession and may not be as willing to stretch bond credit. The contractor should identify an alternative provider that he can call on if necessary.  

Have a strong banking relationship. Contractors should demonstrate a solid relationship with their bank, including a line of credit that can handle any cash-flow issues as they take on extra work. Describe to the underwriter the payment terms with suppliers (i.e., 30, 60 or 90 days), ensuring that they’re longer than the agreed-upon payment terms with the owner.  

Discuss the relationship with the owner. A strong, existing relationship with the project’s owner (either public or private), as well as the engineer and architect, can help the contractor avoid problems, work through challenges on the jobsite and, most importantly, facilitate change orders. It’s a small world, and underwriters are aware of which owners are easy to work with — and those that aren’t. Teaming up with an owner that has a good reputation in the industry is a positive for the surety, as well as the contractor.  

Describe the subcontractors. Identify the subcontractors that will be working on the project and emphasize those with which the contractor has a long-term relationship and are well-known names in the industry. If possible, the contractor should explain that, if required, he could bond back his key subcontractors.  

Don’t be “last-minute.” The best time for a contractor to meet with the underwriter is during the early stages of putting bid numbers together — particularly for a job that may be a stretch. Meeting with the surety at least a week or two ahead of the bid deadline gives the surety time to feel comfortable with the request — and, hopefully, get to “yes.”   

Be prepared to discuss additional indemnity. This request may never come up, but a utility contractor shouldn’t take it personally if the underwriter asks him to consider providing additional indemnity for a project that may be a stretch. Instead, the contractor should be prepared to give a calm, rational response if the underwriter asks if he’d be willing to put that extra indemnity on the table. After all, the contractor is asking the surety to guarantee his company — and it doesn’t bode well for the contractor if he immediately offers an abrasive or defensive response to the surety who raises the issue.

Likewise, the utility contractor should be prepared to provide an updated personal financial statement on request. A wealthy owner whose company may not have the strongest balance sheet (perhaps as a result of the recession) could be asked by the underwriter to take money out of his pocket and invest it in the company.  

Be Ready
The surety industry is constantly evolving, retracting during the bad times and opening up when the economy improves. A utility contractor who hopes to take advantage of profitable work that comes his way — particularly if it’s a stretch — should be prepared with a plan to take to his underwriter when the time calls for it. 

He shouldn’t go it alone. A surety broker that specializes in the construction industry and has relationships with the local underwriting community can be the utility contractor’s best friend when he’s asking an underwriter to extend surety beyond his normal comfort zone. 

In short: Planning, preparation, good relationships with his bank and underwriter, detailed financial and job information and other factors — as well as representation by a knowledgeable construction surety broker — can help a utility contractor enjoy the good times for as long as they last.  

Chad Epple is the Commercial Vice President at HUB Northwest, based in Bothell, Wash. He can be reached at chad.epple@hubinternational.com. For more information on HUB Northwest, visit www.hubnw.com

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