Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
Most of our contractor bond accounts are provided a single bond/aggregate capacity program to determine the size of projects they can bid and the amount of capacity that is available in the program for future projects. The most effective way to ensure you have available capacity for an upcoming bid is to communicate with your bond agent well in advance of the bid date to ensure the project will be approved by the bond company. On certain occasions, an upcoming project may put you over the top of your approved capacity. This is the time your agent must work hard on your behalf to represent to the bond company why this project makes sense to add to the program.
Here are several useful strategies to make this happen:
1. Prepare a work in progress schedule on a quarterly basis and provide updates as work progresses to give your bond agent the best estimate of your cost to complete as of a certain period. This is important because the bond company will allow additional runoff to subtract from your current backlog to free up capacity prior to the actual start date of the new project.
2. When submitting your bid request, include a job cost breakdown on the new project and list the percentage of labor, materials, equipment, subcontractors, overhead and profit. Provide additional explanation of any key elements (for example, if a certain subcontracted trade represents a large portion of the project) and risk transfer protocols used to pre-qualify this particular subcontractor.
3. Have a status report completed by the owner whenever a bonded project is completing. Your agent can provide you this document. The bond company uses this information to remove that project from your backlog.
4. Have a discussion with your bank to determine if they can increase your line of credit to ensure available cash in support of anticipated costs during the initial few months of the new project.
5. Consider loaning personal money to the company for a short time period to provide additional working capital or equity. The loan may need to be subordinated to the bond company to ensure it is not paid back until certain conditions are met.
Both your agent and the bond company only generate income when they issue bonds to support your projects. Therefore, all parties involved want to try and find a way to allow you to add good projects to your bonded backlog.
If you would like more information to discuss additional ways to increase your bond capacity, please contact me at (619) 937-0165 or mgaynor@ranchomesa.com.