By: Dan R. Riemenschneider, CPA, CMA, Tax Partner

Construction companies looking to maximize bonding lines should pay attention to several issues.

Kevin Keller, a surety bond specialist from Drengler, Liptak and Keller, says bonding companies are paying attention to the “3 C’s” of a construction company.  These include, character, capacity and capital.  To demonstrate fitness in each area requires companies must have the following attributes:

Character of management and the company is an important quality evaluated by the sureties.  The surety will determine if a company has a good reputation of paying bills in a timely manner, resolving disputes amicably and generally getting along with others.  The surety will also investigate whether the company, owner or management have a history of bankruptcy, litigation, tax liens, etc.

The capacity of the company is a factor in bonding limits.  Capacity requires the company have experience to do the size and type of projects that they want to pursue.  Contingency plans should be in place if something unfortunate were to happen to the owner of the business.  Does the company have the proper depth of experience and management?

Capital means financial and operational resources are in place to indicate a strong likelihood that the company can complete the job.  These resources include having a profitable track record, good financial ratios and a proper level of positive working capital.

According to Keller, most surety companies underwrite all three above areas, but in the end, the strength of the financials is the most important factor.

He also says the top five operational items that sureties look for are:

1. A construction oriented CPA firm. High quality in the financial presentation, including statements prepared according to AICPA guidelines for the construction industry.  Income recognized on a percentage of completion basis. Schedules of completed and uncompleted included along with all appropriate footnotes.
2. Good internal accounting systems with the ability to provide a credible, timely quarterly interim financial statements and job profitability reports.
3. A strong banking relationship with a good working capital line of credit.
4. Experienced ownership with a profitable track record and focus on the company's core business.  Surety's tend to shy away form contractor's who are engaged in speculative development or other high risk businesses
5. A strong organization with depth of personnel and continuity of ownership.

If your Organization is struggling to obtain needed bonding requirements, please contact your BC engagement executive or John Finnucan,  or Greg Blasiman, Co-Directors of the  BC Construction / Real Estate Services Group, to discuss a strategy to put your Organization on a smart path to financial strength and opportunity.