A surety bond provides a level of comfort and assurance to project owners that the commitment being provided by a contractor will be seen through to fruition and ensures the owner will not be left with a half-completed project and no monies left in the bank. Surety relationships are crucial ones that need to be established early on and with individuals who know the industry and the struggles that contractors face on a daily basis. Three important areas sureties want to see include reliability of financial statements, solvency, and job schedules.

One way to set your surety’s mind at ease is to provide them with quality financial statements with adequately detailed data to address any questions or ratios they may want to compute. Having dependable financial statements prepared outside of the company lets the contractor know how their company is performing and what areas need work and allows the surety to trust the information provided to them.

Another area sureties are going to focus on is financial statement ratios with an emphasis on working capital. The surety wants to know above all else that the company has positive working capital (current assets less current liabilities). Surety companies will calculate how much they are willing to bond based on working capital position, making working capital a vital number to be monitored and maximized. Certain agencies, such as the Texas Department of Transportation, require a positive working capital position, or the contractor will forfeit their chance at bidding on jobs.

Job schedules are a fundamental element to contractor financial statements. They provide a detailed expression of the outcome and estimates that are the day-to-day activities of the company. Job schedules allow the surety to see how profitable jobs are estimated to be finished and where they actually finish up. Any significant changes in the jobs’ profit estimates will need to be explained. It is also a good idea for the contractor to monitor their under/over billings adjustments as this will affect how much revenue is recognized on the jobs. An excessive balance of billings up-front may raise questions of job borrow or cash flow constraints, whereas a disproportionate amount of earnings to billings on a job may indicate a loss job or that the contractor is not billing timely.

Be mindful of changes in financial activity from year to year and any major swings on jobs from one period to the next. A strong balance sheet is always a comfort-builder when it comes to surety happiness. Life happens, and sometimes jobs do not end up as positive as where they were originally anticipated, but as long as there are reliable explanations for what caused the issue, then it is a step in the right direction. Open and honest dialogue is the key to success!

For more information or answers to your questions contact Amanda Montgomery at amandam@gmpcpa.com

Amanda Montgomery, CPA

Amanda Montgomery is a Manager in the GMP Audit Division.