Contractors need construction surety bonds for a variety of reasons, from guaranteeing project completion to giving the project owner or general contractor peace of mind. Securing the necessary construction surety bond requires certain financial information to be provided to the surety company, which is the insurer issuing the bond. Understanding what a construction surety bond is, the required financial information, the differences between financial statements, and what makes construction accounting unique is vital to ensure a smooth bonding process.
What is a Construction Surety Bond?
There are four main types of construction surety bonds: a bid bond, a performance bond, a payment bond, and a warranty bond. Each of these bond types generally involves an agreement between the principal (your business), the obligee (the general contractor or owner of the project), and the surety (the company issuing the bond). Here’s a brief description of the four main types of construction surety bonds:
Bid Bond
This type of bond guarantees that you are submitting an accurate bid that will be followed by a performance and/or payment bond.
Performance Bond
This bond is generally paired with a payment bond and guarantees that your business will perform the necessary obligations laid out in the contract.
Payment Bond
A payment bond ensures that all outside resources, such as laborers, subcontractors, and vendors, will be paid on time, resulting in no liens on the property of the project owner.
Warranty Bond
The warranty bond covers any warranty requirement in the contract, which is usually 1 year but can be longer.
Contractors will need to go through the underwriting process, which is similar to the underwriting process when applying for a bank loan. Keep in mind that you may need to obtain more than one type of construction surety bond depending on the requirements of the project. Working with a surety agent can help you uncover which bond types are needed for your business.
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What are the Financial Information Requirements for Construction Surety Bonds?
Similar to applying for a loan or credit card, your business will need to provide certain financial information to an underwriter. The level of the information required for construction surety bonds is based on the project size, the total number of bonds currently outstanding, and your business’s past experience. Here’s a brief summary of the average requirements:
- Bonds under $750k – Due to the lower threshold, these construction surety bonds usually only require a 1 or 2 page application that is based on the personal credit of the owners. Past job experience will also be considered.
- Bonds over $750k but under $2 million – This next range requires more detail, including financial statements for both the owners and the company. Internal financial statements may be accepted if they are accurate and reliable.
- Bonds over $2 million – Any bonds over the $2 million threshold will require more detailed financial information, which may include hiring a construction CPA. Due to the dollar amount of the bonds, surety companies require a third party to verify the financial information along with a report that tracks job performance.
Additional items may be required depending on your profitability on past projects and the specifics of the current project, making it important to walk through the details with a surety bond agent.
What are the Different Types of CPA Financial Statements?
For construction surety bonds over $750k, you are generally required to remit financial statements. For bonds over $2 million, many surety companies will require your financial statements to come from a Certified Public Accountant (CPA). Accurate financial statements are vital and there are different levels of assurance that outside CPA’s can provide, and the three main types of assurance levels are:
Compilation
A compilation expresses no assurance on the financial statements. Instead, the accountant simply compiles the information you give them and checks for any obvious errors or misstatements. The accountant relies on the information you give them to be accurate. This assurance level works great if you have a strong internal reporting system. Due to the lack of assurance CPA’s provide with these types of financial statements, surety companies will only rely on them for smaller bonds up to the $3 million range. However, if you use a high-quality construction oriented CPA, a surety may be willing to stretch beyond this range based on their expertise and reputation. CSBA has strong relationships with construction-oriented CPA’s and can guide you to firms that can help grow your business.
Review
Moving up the scale is a review. A review provides some assurance on the financial statements through analytical procedures and inquiries of management. With this financial statement service the CPA will certify that the financials are free from obvious misstatements. This gives surety companies a lot more confidence in the reliability of the information, which is why reviews are the most common form of CPA statement contractors provide to their sureties. Reviews are a more expensive option, but they are important if bonding construction projects is a big part of your business.
Audit
The highest level of assurance CPA’s provide is an audit. With this service CPA’s state that they have reviewed your internal controls and financial statements, resulting in no material misstatements or instances of fraud. Audits dive into the specifics of account balances through testing. At the end of the audit, your business will be issued an opinion on the presentation of the financials. A clean opinion means everything checks out, but if there are mistakes, the auditor may disclaim the financials as being incorrect. Generally, audited financial statements are only required by bond companies when contractors are doing revenue of $100 million or more.
Are CPA Prepared Financial Statements worth it for Bonding?
The first step for smaller and growing contractors is to get your internal accounting in order. This will give you as the business owner the timely and accurate information you need to run the business, but it can also help significantly with bonding. This may require getting outside construction accounting experts to help, and CSBA can provide those resources. This generally costs much less than hiring a CPA but can have a big impact on your bonding capacity. Read our article about how accurate internal financials can boost your bonding capacity to learn more.
Once you starting needing bid bonds or performance and payment bonds above $2 million, having a quality construction CPA can be vital. They can help you with best practices for accounting and discuss tax strategies for minimizing your tax liability and improving your cash flow beyond providing CPA prepared financial statements.
Many contractors look at accounting as just another expense they want to avoid, but for contractors needing surety bonds, it is really another tool to help you run a profitable business and get the bonding capacity you need.
Next Steps
Understanding the financial information and financial statements you are required for construction surety bonds is critical to obtain the needed bonding on time and for the proper amount. Bonding can be confusing and choosing the right type of financial reporting to support your construction surety bond needs can be even more confusing.
The good news is that our team at CSBA is ready to help your contracting business figure out what type of CPA financial statement is right for you. We have extensive accounting resources to help your internal accounting team prepare for upcoming financial statement services or understand which type of construction surety bond you need. For more information, reach out to talk to one of our team members today.
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