Typically, contractors that require small and infrequent, or one-off performance bonds apply for a Fast-Track Program. This application process is quick and simple and does not require much financial or underwriting information. It is ideal for contractors that need construction bonds under $500,000. Approval is based primarily on the applicant’s credit score and a completed application can be approved by the surety company within a day. A Standard Bond Program, however, requires more complex financial information and cost systems from the contractor and takes more time for the surety to approve.
So why would a contractor want to upgrade to a larger, more traditional Standard Bond Program?
Firstly, the Infrastructure Investment and Jobs Act is anticipated to revitalize America’s infrastructure and drive significant job growth in the construction industry over the next few years. It will modernize and upgrade our roads, bridges, ports, and other key infrastructure assets desperately in need of repair. A Standard Program will enable a contractor to take on these larger government projects* which require construction bonds, thus procuring more work for their pipeline.
Secondly, a contractor can save money by securing a lower bond rate. Fast-Track bonds are typically charged at a higher rate depending on the surety and can differ in single and aggregate limits. Standard Program rates can be remarkably less allowing the contractor to bid more competitively and improve profit margins.
Here are a few key steps that a contractor can take to successfully transition from a Fast-Track bond program to a Standard bond program.
Partner with key financial advisors
Establish a relationship with an experienced surety agent who has access to and a thorough understanding of several different surety markets. They will be able to negotiate the largest program and most competitive rate/indemnity structure on your behalf and will be your best advocate when times get tough. A well-established surety agent should also be able to recommend a CPA who knows the construction industry inside and out, as well as a commercial bank that is comfortable with construction lending.
Improve the presentation of financial statements
Prepare a CPA Financial Statement, specifically a CPA Review. Although CPA-prepared financials can be costly, this amount can be offset by money saved in a lower bond rate. The surety will also look for the financial statements to be arranged on a % of completion basis. This recognizes revenue and expenditures as a percentage of the work completed during the period and provides a more accurate financial picture.
Build and tighten up balance sheet
Work to grow working capital and corporate worth by passing on extra and excessive expenditures. The balance sheet provides an indication of how well capitalized the company is, what bond program it can support, and the company’s ability to survive if a few projects go askew.
Open a Bank Line of Credit
From a surety perspective, there is an advantage to have extra liquidity even if it is not used. A contractor who has a line of credit in place and has an added cushion, presents a lesser risk than one who does not. The largest line a contractor can qualify for, the better.
Present Evidence of Internal Controls
Having proof of strong internal control systems that track job costs, receivables, expenditures, and inventory control are a sign of a successful contractor. Established protocols and documentation of job site inspections, change orders, and contracts are also extremely important. In addition, insurance policies, clear safety rules, and having employee incentives in place all add up to enhance the surety’s perspective of the contractor.
Provide Detailed Information of Awarded Job
Despite taking all the steps above, the approval of a Standard Bond Program, or more surety support, can come down to completing the bond request forms and required job information forms in their entirety and in a timely manner. Failure to complete forms may cause delays in the bond approval process, or bond approval denied.
Bumping up against construction bond capacity can come as a surprise to many contractors as they bid on larger government projects to grow their business. A contractor’s willingness and commitment to transition from a Fast-Track Program to a Standard Program by completing the recommended tasks mentioned above will increase chances of securing greater surety support and winning larger jobs.
*Under the Miller Act, construction bonds are a requirement for contractors providing services on federal projects over $100,000. Similarly, every state has its own “Little Miller Act” which specifies the contract amount above which construction bonds are required.
Originally written by Greg Angel, CPA and published in the Construction Executive, September 2022