December 2, 2011

Q: We are having a terrible time with our surety company. Are others experiencing the same thing?

A: Indeed they are. What’s interesting is we are starting to see banks easing up on lending criteria, yet the bonding companies are being even more careful on proving surety bonds.

Here’s why NSCA members are feeling it. The surety underwriters are now paying particular attention to the subcontractor community and the negative potential it presents for default or underperformance on jobs. They are actually predicting that we will have more failures to complete projects on time due to the downsizing we’ve had. Ironically, if the construction market has an uptick, their predictions on performance will hold true.

Much like banks employed tougher lending criteria beginning in 2008, the surety companies have followed. And it’s worked well for them. From 2009-2011 the default rate has been less than half of historic numbers of the previous 50 years. Just the opposite of what you would think.

You will be judged on balance sheet strength, business acumen of the management team, history of profitable work and the experience in that specific type of work. Knowing that, go back and see what reducing margins, chasing bid work, downsizing management positions and reduced backlog must look like to a surety underwriter. And remember, it isn’t just you they are judging, it’s our entire industry segment that is in play.

Here’s my advice. The next time you talk to a surety provider be prepared to share with them how you are managing overhead to be sensible and consistent relative to your (hopefully realistic and conservative) revenue projections. Show them examples of how you are managing your cash flow wisely. Share with them your financials and understand exactly how you compare to others (benchmarking) in this industry. Prove to them you have not strayed from your core competencies.

It comes down to the 3 C’s of surety: available Capital, having Capacity and showingCharacter. — CW

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