With the new year around the corner, it’s the ideal time to look ahead and plan for your goals and business needs, including the surety bonds you’ll require. It can appear contradictory to plan for bonding capacity and bond sizes for jobs when you may not know what the required bond size will be, but much like the farmer planting seeds before the rain, you can take meaningful steps to prepare to position yourself for whatever opportunities come.
Now is the time to get set up for next year’s bonding needs and the advice below can guide you to a great start for the next 12 months.
Planning Ahead
First you’ll want to consider what type of opportunities you’ll have in the coming year for work. Take a step back and consider the bigger picture, asking yourself questions such as, “Do I expect the market to be more or less competitive” or “Do I anticipate my revenue and backlog increasing or decreasing”, and perhaps more importantly, ”What are my goals for the company and do I plan on pursuing larger projects?” This will give you an idea of what kind of bonding capacity you will need to support your business plan.
End-of-Year Financials
Next you’ll want to call your surety agent to understand what the surety will need in order to support your bonding capacity. As you likely know, company financials are a large part of getting surety bonds, but your end-of-year financials become very important for your bonding capacity the following year. Surety companies primarily base your bonding capacity on the year-end financials, as it’s the most accurate and realistic view of a contractor’s financial situation. This is primarily due to the year-end financials including all the expenses that don’t happen regularly throughout the year, such as bonuses, distributions, and contractors having done their tax planning.
Bond Premium Calculator
Use this free tool to calculate an estimated cost for your performance and payment bonds.
Is a CPA Prepared Financial Required?
Surety companies typically want to see contractors engage an outside CPA to prepare their financials once they start needing bonds over $2-3 million. If you already have a CPA but they aren’t specialists in construction, it may benefit your bonding capacity to hire a construction-oriented CPA to prepare financial statements. Your surety agent should be able to provide recommendations.
Other Steps You Can Take
Beyond preparing your financial statements, there are several other steps contractors can take to prepare for their upcoming bond needs. Increasing your bank line of credit can be pivotal as it gives you the access to liquidity to cash flow larger jobs or backlogs. Sureties often want to see this equal somewhere around 5% of a contractor’s backlog. Retaining more money in the company instead of making distributions to build up the capital is another important step, and your surety agent can provide guidance on how much retained capital the sureties will look for.
Now is the time to sit and ask yourself where you want your business to go, what things you need, and how you can get there more easily next year. You don’t have to go it alone, and this planning ahead is where your surety agent can prove to be the most valuable.
We at CSBA have over 225 years of combined surety experience and 4 members of our team were underwriters for major surety companies, which gives us insights into how to prepare for the next year from large surety providers. We take pride in helping our contractors prepare for the next steps in their business and view ourselves as partners in making that road an easier one. If you’re interested in planning ahead and clearing the way for all your business can be, we encourage you to speak with one of our surety experts and really ring in the new year.
Get a payment bond quote now
We want to know more about how we can help your construction company get the right contractor bond for your next project.
