The Infrastructure Investment and Jobs Act recently passed by Congress and signed by President Biden allocates a total of $1.2 trillion over the next 10 years. $550 billion of that is new funding for construction, which will be spent in the first 5 years. Various sources estimate that California will receive approximately $44.6 billion during that 5-year period, which equates to $8.92 billion of additional money allocated toward construction per year. How significant is that? In a word: VERY.
In 2020, California public works construction starts totaled approximately $28.7 billion. Adding an additional $8.92 billion of spending would equate to a 31% increase in public works construction spending.
The federal infrastructure funding is expected to be allocated to California in the following areas:
- Roads, Highways & Bridges – $30 billion
- Public Transit – $9.5 billion
- Water Infrastructure – $3.5 billion
The increase in federal public works spending comes at a time when California is projecting to have a $31 billion budget surplus. Governor Newsom recently said, “We are going to substantially increase our one-time investments in infrastructure,” with the budget surplus, which has the potential to only add to the public construction funding.
More Work Requires More Bonding Capacity
All of the work funded by the federal infrastructure bill will require bid bonds, and performance and payment bonds. This means for you to take advantage of the unprecedented increase in California construction, you will need to make sure you have the bonding capacity. While there some things you can do to raise your bonding capacity immediately, other steps take more time and should be planned for proactively. Let’s take a look at both.
5 Ways to Increase Your Bonding Capacity
- Retain earnings in your company – Every year when you earn profit, you face the decision of whether you would be better off keeping the money in your contractor company or using it personally. Most surety companies put more weight on money left in the business when determining the size bid bonds a contractor qualifies for. Therefore, choosing to keep more money in the company can result in immediate gains in your bonding capacity.
- Limit fixed asset purchases like equipment or real estate – This is not to say owning equipment or real estate is a bad thing. However, sureties primarily base the size surety bonds they will approve on working capital (cash and receivables minus payables and debt). So, when you buy equipment or real estate, it can reduce your working capital. This is where a surety agent can guide you on what you need to consider before making any large purchases. While a surety agent’s role is certainly not to tell you how to run your business, they can help you make informed decisions about how to best reach your goals particularly with surety capacity.
- Use personal assets held outside the company to your advantage – If you have a strong personal net worth, work with a surety company that gives you credit for your personal assets. As mentioned previously, most sureties put more weight into assets held in the construction company, but there are some sureties that base approvals for performance bonds by combining company and personal assets. It takes a surety expert to know exactly which surety companies to go to in these instances, and CSBA has that knowledge and the relationships to help contractors with strong personal assets.
- Increase your bank line of credit – Surety companies want most contractors to have a line of credit from a bank that is available to use in case of emergency such as a bad job or a delayed receivable. A good rule of thumb is to have a line of credit for 5% of annual revenue. If your line of credit is under this amount, start working with your bank to increase it. Not all banks like to lend to contractors, so it’s important to know which banks to talk with. A surety agent with the right connections can help with that.
- Upgrade to a CPA financial statement – If you’ve been getting bonds under $2 million, you may only provide internally prepared financials statements to your surety. To get performance and payment bonds larger than this, sureties will typically require a CPA prepared financial statement. There are different types of CPA financial statements, and a surety agent can guide you on which one is right for you. Surety companies base most of their decisions for bonding on the contractor’s year-end financial statement and since most contractors have a year end of December 31st, the timing is important to consider engaging a CPA for your 12/31/21 financial statement. Again, a surety agent can help you decide whether this would benefit your company.
With all of the upcoming opportunities, it has never been more important to make sure you are getting expert guidance from a surety specialist. At CSBA, we have internal underwriters on staff that used to work for surety companies and know exactly what they require. Our underwriters serve as advisors taking the time to understand your business and goals, then guiding you step-by-step to get the increased bonding capacity you need to achieve your goals.
We invite you to contact us today to find out how we can help you get from where you are now to where you want to be.