Utilizing Your CPA's Expertise with Nick Balaity

Author, Andy Roberts, Surety Account Executive, Rancho Mesa Insurance Services, Inc.

Andy Roberts, Rancho Mesa's Surety Account Executive, is joined by Nick Balaity, CPA with ⁠Aldrich CPA + Advisors⁠, to discuss the tax law outlook for 2025 and offer insight on contractors’ business decisions in the coming year.

Andy Roberts: Welcome to StudioOne™, I’m Andy Roberts, a surety account executive here at Rancho Mesa and joining me today is Nick Balaity, who is a CPA and partner at Aldrich CPA and Advisors.  Thank you very much for joining me in the studio today.

Nick Balaity: Yeah, thanks for having me, man. I've never done a podcast before so this is pretty exciting for me.

AR: Yeah, it's going to be fun. And we have a few really great topics that we're going to get diving into. But before we get started, Nick, why don't you give us a little background about yourself and what you do at Aldrich?

NB: Yeah, thanks. Yeah, so I've been working with contractors on the accounting side for probably 13 years or so at this point. The last eight of which I've been with Aldrich been a partner there for about four years. Getting to work with contractors is pretty awesome just because they're mostly salt to the earth people and blue collar guys and gals and so they're really easy people kind of to work with for the most part.

But Aldrich is a West Coast based firm. Primarily our big offices are in San Diego and Portland, Oregon. And then we organized by industry group. So I'm in our construction group. I head up our California group. And then we have other industries that, you know, manufacturing, real estate things like that. So yeah, I focus just on contractors. I'd say 85% of what I do is just working with contractors.

AR: Yeah, that's fantastic. I know we've worked together on a few and you guys always do just a wonderful job. So, you know, let’s dive into what we're going to talk about first, which I think is a really important topic, especially with, you know, administration changes or some uncertainty. So we're going to dive into some tax law updates and strategies and kind of discuss what might be coming next year. As I'm sure you're probably sitting down with your clients and doing some tax planning, to figure out what 2026 might look like, what changes might come.

NB: Yeah, it's a funny year to do it because, you know, we go into these meetings at year-end tax planning and we're kind of telling them, “Hey, this is the strategy for this year, but it might be different next year.” So, the 2018 Tax Cuts and Jobs Act that went into place when Trump was last in office, those provisions are set to expire at the end of 2025. And so the question is like, what will change if those expire?

 So the kind of the big things that'll change that people should be aware of is the overall the rates are going up. So, like your top federal rate is going to go from 37% to 39.6%. Not a huge jump, but definitely noticeable, especially if you're at the higher levels. And so the qualified business income deduction also expires. So if you have any pass through entities, so like S Corps, partnerships, LLCs, you were getting and still are getting a 20% deduction on your federal taxable income. So if you had an income of a million bucks, you'd be getting a $200,000 deduction to bring it down to $800,000. That got us to what are effective top rate of 29.6%. You know, 37% minus the 20%. So 29.6% kind of was the top tax rate, which was great. That's kind of some of the lowest rates we've ever seen in recent memory. That's all set to expire at the end of 2025 and going into 2026.

 So really, the question has been, what is the Trump administration going to do when it comes in, especially now that the Republicans control both sides of the House and the Senate? And so I think what we've seen so far from the administration is they are looking to extend most of those provisions and make them permanent, is kind of what they want to do. Really, it becomes a question of budget reconciliation, what they can do, but we're anticipating that those will get extended.

 I think there's a section of our clients that are like, “Are taxes going down?” Maybe, I don't know if there's an appetite to actually cut it again. It feels like there's more of an appetite within Congress to just extend what we currently have. So, but the other provision is bonus depreciation, that's been coming down. It's been going down 20% percent every year and that's going to go to zero. They want to bring that back at 100% as well and make that permanent too. So yeah, so I mean, if all that happens, you know, we'll be kind of looking at kind of the same as we have, but if not, which we'll get an idea of, you should be reaching out to your CPA and starting to look at what strategies you can do as you go into 2026.

 AR: I mean, that's what makes it really important to have a resource like yourself if you're a contractor and an owner to talk about this kind of stuff when you're sitting down so you can plan for your business. What do you think the timeline looks like for when we might have a finalized answer on some of this stuff and what they're going to do? Just best guess.

 NB: Yeah, if they're going to do something, they'll have to do it within the first few months, I would think, for it to be effective. I mean, there have been retroactive tax law changes. Everything I've read is they're going to make it all effective, 01/01/25. So if they're going to do that, you would think they would do it in 2025. But man, Congress is typically a jumbled up mess. So it's very hard to know exactly when it's going to happen.

 AR: If they do a retroactive to 01/01/2025, do you have to go back and amend returns?

 NB: As long as those changes are in place before we file the 2025 return, which would be like, you know, February through April of 2026, yeah.

 AR: Yeah, it's good information right there. That's a lot of work on your guys as well.

 NB: Yeah, for sure. You know, a lot of just keeping our ear to the ground.

 AR: Yeah. So, with those, now that we've kind of talked about that, so let's kind of look at what some strategies contractors can do, you know, when they're doing their taxes for what they, you know, to decrease their income and stuff. So let's look at some pros and cons of maybe like cash basis versus percentage of completion on your end.

 NB: No, that's always like one of the first things we do when we meet with a client or a potential client, a prospect is figure out what their method of accounting is for tax and just try and evaluate if that's really the best fit for them. A lot of times it can be, "Hey, we're already on this method," and so to switch might not make sense. It might cost us a bit in the short run, but generally what we see a lot of is, you know, smaller contractors that are first starting out and growing will be on cash basis.

 Cash basis can be really advantageous as you're growing your business because as we know, construction is a very capital intensive business and so the more cash you can retain, the better. So typically as you're growing, your AR balance is also growing. You have more and more accounts receivable outstanding and cash allows you to defer that income on that AR until it's actually received. And so as you're growing, it keeps more cash in the business. As you flatten out, you know, if you reach that kind of cruising altitude, it'll, you know, you'll be deferring, you know, that AR, but then it'll be coming back into the next year and you're typically deferring a similar amount. So it kind of gets, it should in theory level out to kind of closer to where book would be, but you're still managing that all the time. So a lot of times we'll see clients switch over to percentage of completion method or they'll be forced to do that when they go over $30 million roughly-- it's an inflation adjusted number of gross receipts on a three-year average. The advantages of that is it's just way your plan around, you know, you're not, you're not sitting there on December 30th, and, and saying, “How much cash do I have in my account? What's my AR? What's my AP?” You're really able to manage that kind of just through your whip, you know, so you're able to kind of look at and see, okay, whatever my book income is, typically my taxable income is going to be pretty similar.

 AR: Yeah, well, it's, I mean, it's a good thing to talk about too, because we were always on our end looking at percentage of completion for what we want to see from your guys on that part, but that's different from on the tax side.

 NB: Yeah, and that's one of the advantages though, of being on cash is you can still be showing really nice profits, but you're not picking up that income yet until you actually do. So there can be a pretty big divide between taxable income and book income when you're on cash basis.

AR: So one last thing to touch on this one would maybe be, for contractors looking to buy equipment, should they buy it? Should they not? What are the advantages, disadvantages?

 NB: Yeah, I feel like it's the question we get very frequently at the end of the year, because I think, you know, there's been enough TikToks and Instagrams out there talking about, “Oh, I just bought this Escalade and now I get to write it off.” And while that is true…

 AR: You got that big cash balance in your bank account, what do you want to do to bring that down a little bit?

 NB: Right. And so, buying equipment is the question we get a lot. And kind of my two cents on this is, it never makes sense to spend a dollar to save 30 cents, you know, like if you need the piece of equipment, you should buy it.

 AR: Absolutely.

NB: If you're looking at buying it in Q1 or Q2 of the next year, maybe we say, “Hey, maybe it makes sense to accelerate that purchase and go ahead and do it now to go ahead and capture that deduction.”

 But really, there's impacts to it, right? So if you're paying cash, then you're reducing your working capital because you're exchanging a current asset for a long-term asset. If you're financing it, that'll have a little bit less of an impact on working capital because you'll have just a current portion of that debt that'll be on the books. And so it's really something to just kind of evaluate, you know, bring in your surety broker, bring in your banker, especially if it's a big piece of equipment and kind of let them know what you're thinking about doing, work with your CPA, what the impact would look like and just make sure that it's going to affect anything on your credit side or your bonding side.

 AR: Yeah, well, I mean, especially on our end where, you know, we love to see cash in the bank. You know, when we do a submission, we send in, like, we'll often send in like a vehicle list. But that's not going to give you a ton of surety credit. That's nice to show the underwriter, like, “Hey, this is where they have invested in their business,” but we also, you know, if it's going to tank that cash balance, that's going to have a direct effect on the credit you're going to get and lead to a lot more questions from underwriting as to what happened to that money because they would always rather see it sit in the account in case something happens.

 NB: Yeah, it's our CFO said this to me recently that I really like this saying; if you come to me early with a decision like this, you have a partner, you come to me after you have a judge.

 AR: Oh man, that’s great.

 NB: Yeah, I think that's really kind of the same thing here with you let your partners know what kind of types of moves you want to make and they can help guide you along the way and really help you with that. You come to them after, what's done is done, and now we're just kind of stuck with the result and we got to kind of manage around it that way.

 AR: Yeah, and we have to deal with whatever terms are going to come from that as opposed to putting a plan in place or at least putting the options out there and be like, “Well, if you do this, this is what happens or here's what happens on this side,” and let them make the decision from there, and, you know, whatever repercussions might come from it.

 All right, next thing, which I mean, I know I've been seeing a lot more and I'm sure you have as well are business transitions. I know there's a few different methods. Let's start with, you know, we were talking about what an internal buyout looks like. I mean, that's pretty self-explanatory that it's coming from like the inside, but do you see that pretty frequently or…?

 NB: Yeah. It's a timely topic. It's kind of been a big thing I feel like for the last five or 10 years as this large baby boomer generation is getting closer to retirement, you know, they're looking at, “How do I get the final value out of this business?” Or for some, it's not even about getting that final value, it's about, “How do I leave a legacy behind and a company that'll keep going on and have people there to run it?”

 AR: I feel like a lot of people are very proud of the name that they've built and they want to see it keep going.

 NB: Totally. And they should, especially some of the ones we've seen that are local that have grown to be $100 million contractors. You should be proud of that. So yeah, internal buyouts are probably the most common we're seeing right now where maybe you have a kid—a son or a daughter—that's coming into the business that has been working with you and wants to buy you out or maybe you just have some key employees that you would like to hand over the keys to the kingdom on. Really the biggest thing there is like the financing for those tend to be based on the company's profits. And so there may be some debt that comes into place related to that. And so how's that going to affect the company kind of bringing it back kind of the surety piece of it is like, you know, if we put on this big debt, what's going to happen? Also, if we, you know, if our main shareholder who probably at this point in their career has nice personal net worth is in, you know, is on the indemnity, is there someone else who's going to take that over? Are they going to stay on? How's that going to impact the bonding capability or even the bank, right? Yeah, you know, your lines of credit probably have some personal guarantees in there as well.

 AR: Well, I mean, that's like a big question we usually ask too, because typically the, you know, the son or the younger generation that might be buying the company are definitely not going to have as developed a personal financial statement as the current owner who's been doing this for 30 plus years. So like if they're willing to stay on and indemnify, that really helps our case a lot if they're going to be bringing on some debt, because just to know that there's someone else there backing the company, as these people come in.

 NB: And I mean, I would say, man, I feel like I deal with in five or six of these almost every year, where we're just trying to figure out how to make this work. So there's a thing you can get really creative. And so it's not something people should be afraid of. But they should reach out to their CPA, they’ve seen a lot of these go on and there's a lot of different ways we can skin this cat and come up with a solution that's going to work for everyone.

 AR: No, it's always I mean, it's super important to trust your advisors or your partners and make sure you're utilizing all the resources that you have around you when you're making a big important decision like this.

 NB: Yeah. And I think getting everyone as involved as possible and then also just looking at what are you trying to get out of it, right? So if we're trying to maximize cash, internal buyout might not be the best, maybe an external buyout would be better and we can kind of transition talking about that.

 AR: Yeah, let’s do it.

 NB: External buyouts, there's a bunch of different ways that can kind of look. You can sell to a competitor, or maybe someone more upstream that's trying to vertically integrate, those tend to be some of the faster moving deals that get done because they know your industry really well. They kind of already have an idea of the types of projects you do.

 You can also go private equity; which private equity has been coming into construction space more and more. It used to be they were really only interested in companies that had more of like a repeat service component or repair. You know, so, it would be like HVAC, or maybe like plumbing or in some cases electrical, but some of those don't even have service component to them. And so recently they've gotten more aggressive and there's definitely been more of a push into some more niche or specialty areas. And so they're not quite going after general contractors yet, but I can see a world where eventually they do.

 AR: I mean; we're definitely seeing it more too.

 NB: Yeah.

 AR: Like, I mean, it's happening more and more frequently.

 NB: Yeah. And so the biggest thing to know about with private equity is it's going to come with some-- it's probably going to be one of your highest offers you will get; you'll maximize value that way. But there probably will be a three or five-year period where the owner or key management are going to have kind of golden handcuffs, where they need to stay on. So it's not going to be a quick exit where you might be able to get that more with an internal buyout or potentially having a competitor come in and buy you out. Typically, private equity is going to want key management to stay on board for a little bit. So it's something to consider.

 So one of the things, you know, we talk about a lot with clients is trying to plan in advance for this. When you're starting to say, "Hey, I think I'm five years out from wanting to retire and be out," that's the time to start kind of planning, "Okay, how do we want to do this? Should we get a valuation of the company to kind of see what's it worth and figure out, you know, what's our retirement plan? Is that going to be enough? Do I need to stay working a little bit longer to make sure I have enough for my nest egg?” And so it's just kind of a, there's a whole bunch of different conversations need to happen. And then also, if we're going to look to external, how do we position the company to sale, right? So how do we make it look as attractive as possible to an outside buyer?

 I think kind of the last option that's become a lot more popular recently is ESOPs. So if you don't know what an ESOP is and it's an Employee Stock Option Plan. And basically it’s where a trust gets set up, and not to get too into the weeds, but a trust is owned by what’s essentially a 401k plan, and they own the stock of the business. And so it’s a way that you can get the ownership of your business to your employees, which is really actually a pretty cool legacy you can leave if you’re basically selling the company back to all your employees, not just key employees. But they are expensive, they cost quite a bit to run every year. There's evaluation that has to happen. There's an audit that has to happen. There's actuaries that get involved and things like that. But it can be a great way to cement that legacy and let it live on and really reward your employees who've been loyal to you over the years with ownership in the business. All this stuff just takes a lot of planning. Like my key thing that I say to every contractor is whenever you think you want to start looking at this, you know, we just need to make sure we have a runway to kind of build out that plan.

 AR: Yeah. How often do your clients come to you with the five-year runway versus like the one-year?

 NB: Pretty rarely, I would say. You know, I have a couple, clients that just really look ahead. I think it's one of those business, construction's hard when you're, especially when you're the sole owner or primary owner, you know, all that stress, you feel it. And so it can be really rewarding, but it can be really challenging just on yourself. So a lot of times we get contractors that come to us and are just like, "I'm done. I need to get out." And we can absolutely help through that situation. But in an ideal world, we would say, "Hey, let's start looking three to five years out so we can get you positioned and ready and we have your plan set up and all that."

 AR: Do most of the time when they come to you with this plan, do they have an idea already; do they want to do external versus internal? Because I know external, there's more options. Do they kind of have an idea of what they want to do?

 NB: Most of the time they do. They'll come to us and they'll say, “Hey, I do have a key employee or a son or daughter that wants to take over the business. And that's the way I really want to go because I feel strongly about that.” Sometimes they do come where they're like, “Hey, I think I

want to do an internal buy-out but I'm not sure that they're going to be able to afford it.” I just had that conversation with a client the other day and we went through process, we got a valuation done for them and they saw what it's worth. And the question was, "Hey, do I want to take a haircut and make it so that it can be bought internally or do I want to go external?" And in this case, they wanted to go external because they didn't want to leave that much money on the table, which is totally fair. You know, you built up that company, that's your value and you choose what to do with it. So, yeah, I would say most of the time they have an idea of what they want to do. My job I feel like as an advisor to them is to make sure they're aware of all the options that are out there to them and what those, how much money could be on the table.

 AR: Now, kind of circling back on like private equity because, I mean, we're seeing a bunch of that, just like you are. And I mean, it can have a pretty big effect on your financials and your balance sheet that really can actually hurt your bonding capacity, and I think a lot of people aren't totally aware of that going into it because they see this big number coming from PE, and they think it's fantastic if they just have to hang around for three to five years, but they don't understand what bringing on some of this debt or goodwill and these kinds of things to do to your balance sheet and your financials and what they can do to your surety program.

 NB: Yeah, it's one of those things that you really want to model out, right? So before that deal closes, before you sign that purchase agreement, you want to make sure that you've looked at, okay, this is the number, this is the debt, this is how the working capital is going to look post transaction. And then also like, you know, is the private equity firm going to be willing to take on the indemnity that maybe the primary shareholder was taking on?

 AR: Usually that's a no.

 NB: Yeah, exactly. It's almost always a no. So it's like, okay, are they going to infuse more capital in to make sure that the bonding is going to stay there? And so I think that's why you've seen a little bit less interest in public works contractors for PE because there is kind of that hook that they got to sign on for. And so you're seeing it a little bit more and more than ones that do private construction projects.

 AR: No, definitely. I feel like too, there's been some PE firms that I've just been reading about and stuff that they don't totally understand what they're getting into when they buy that company, when it comes to the bonding aspect, because maybe it's not major, but it's sizable and then you

present them with, “Oh well, we either need you to put a bunch of money in or someone on over there needs to sign,” and they don't want to do it.

 And you're like, “Well, then you're going to lose that aspect of the business.”

 NB: Totally, and it comes back to every time, like the best advice I can ever give a contractor is before you do any significant transaction or anything you need to be bringing in all of your outside advisors: the bank, the surety broker, the CPA, your attorney, making sure that everyone's on board and knows what's going on and we can work through all these things kind of before the transaction happens. Because it can kill a transaction too.

 AR: Yeah, it kind of goes back to what you were saying about how you need to utilize all your resources, whether it's banking, CPAs, your surety agent, your insurance agent too, what that kind of does with your policies to make sure there's, you know, you're not significantly impacting your business. You know, because I think you guys will handle like some benchmarking and some of that type of stuff.

 NB: Yeah, yeah, so we'll do benchmarking with clients. We get really good data just from our own client groups. I mean, we serve, gosh, I want to say like 400 contractors across our firm, you know, between all of our geographies. So we have a lot of internal data and then there's also external data points out there like CFMA, Construction Financial Management Association does an annual survey that's broken out by company size, geography, trade. It's really an incredible survey they put out. You can benchmark yourself against that. But then also it's just like the kind of intangible knowledge of working with a lot of contractors. What have I seen be successful? Same with your surety broker. What have they seen to other contractors that you could leverage off of, that experience that you guys have with other folks? So yeah, there's a lot of great opportunities for your CPA or bonding agent to come in and provide knowledge from kind of the outside, just from what we're seeing in other places.

 AR: Yeah, that's great. And I mean, I think the kind of last thing to kind of, you know, from my perspective to kind of input on here for, you know, any contractors listening is, you know, having a great CPA relationship is something that's invaluable to your business. So, you know, I know you and I have gotten to work a lot together over the last few years since I've kind of come into the industry. And It's always nice when we see a review from you guys that says Aldrich on the front. So yeah, no, I appreciate that.

 NB: And likewise, Andy. And Rancho Mesa has been a great partner with us too. And so to me, it's the more you can get your advisors talking together as a group and not isolated, the better, because we can come up with solutions as a group that kind of come to think about all the different angles, right? So like, I know a lot about the tax side. I know a lot about the financial side. I know a little bit about, you know, the bonding program, but that's where your expertise comes in and you can kind of give your expertise and your specialization there that you have and kind of advice on impacts, you know.

 AR: Well, and it's super nice because anytime someone's like, "Oh, well, let's talk about what's this going to do tax-wise," I'm like, "Oh, I'm not the guy for that, but I know someone that can help you there.”

 NB: Yeah, right, exactly, exactly. So, yeah, I mean, that's the biggest thing is, just keep everybody in the loop.

 AR: Yeah well I think that was a lot of really great information on this this episode so Nick, thanks very much for joining me.

NB: Yeah happy to happy to join you and thanks for including me.

Exploring the Current Commercial Surety Climate

Author, Andy Roberts, Surety Account Executive, Rancho Mesa Insurance Services, Inc.

Surety Account Executive Andy Roberts interviewed Miggs Borromeo, Commercial Surety Underwriter for Merchants Bonding, and discussed the current climate of the commercial surety world in Southern California. They also covered the bonding trends most commonly seen today, and the programs that Merchants Bonding Company offers.

Andy Roberts: Welcome back, everybody to StudioOne™. My name is Andy Roberts and I’m a Surety Account Executive here at Rancho Mesa. Today, my guest is Miggs Borromeo who is a commercial surety underwriter in San Diego and working for Merchants Bonding Company.  Today, we’re going to be talking about the commercial surety world.

Miggs, welcome to the show.

Miggs Borromeo: Thanks for having me, Andy. I’m excited to be part of the show.

AR: Awesome, so before we dive in, why don’t you give us a little bit of background about yourself.

MB: For sure. Hello everyone, my name is Miggs Borromeo. I’m the Commercial Surety Underwriter for Merchants Bonding, the eighth largest surety company on SFAA. I currently handle the Southern California territory, starting from Los Angeles all the way down to America’s Finest City, San Diego. I’ve been in the industry for about a year and a couple months, so there’s a lot to learn and many more years to go, as they say. I’m originally from Maryland but moved to California a couple years ago.

AR: Fantastic. So, how did you get involved in the industry?

MB: It’s always a funny story, because it all started with my friend’s dad being the head of surety at the company I interned for back in college. One day in the summertime he gathered all the interns to talk about surety bonds. And funny enough his name is Mike Bonds, so shout-out Mr. Mike for all the introductions. But, he talked about the surety industry and what it entailed. He talked about working with contractors, analyzing financial statements, and visiting and traveling with agents. And so, I thought that was a really cool industry, especially being a college student. The only profession I really knew was financial analyst, accounting, and investment banking. So, I started doing some research and once I graduated college I applied to become a surety underwriter in L.A. But, unfortunately, COVID happened that year, so, you know, a bunch of companies were having hiring freezes, so I had to put a pause in that dream for a little. But, fast-forward to a couple years later and I moved to San Diego, and thankfully, I had a friend named Andrew Shin who is their current contract underwriter referred me to the company he was working at that provided business loans. I started as an underwriter and switched around to sales, and one day I just wanted to update my resume, so, as you know, you search on Google “surety underwriting positions”.

AR: They’re looking for them all over the place.

 MB: Yeah, exactly. So, I was lucky enough that Merchants popped up as the first link, so I clicked on it and read all about them. You know, they’ve been around for 90 years, focused on one product which was surety, so I really liked that. And then I saw that a bunch of their underwriters would travel every year for meetings and trainings and, so, I thought that was a great part of the culture, and I wanted to be a part of that. So, I applied, flew to good old Iowa, and luckily passed the test.

AR: So, basically like a dream come true, kind of circling back to what you said about your surety dream, earlier in that statement.

MB: Yeah, exactly. And, sometimes, you know, it takes a while to get to it, but I’m glad that I was able to kind of experience different roles to build up my skillsets to become a surety underwriter.

AR: Absolutely. And I feel like too, you know, I came from the insurance world where, you know, not a lot translates, but I had a good understanding of the insurance world. And that’s what really fed me into this job, and this role, and this opportunity that I’ve really grown to love. And, you know, it’s been a lot of fun that way.

So, kind of diving into your actual role as a commercial surety underwriter. You know, I know commercial surety has a vast range of bonds that kind of fall under that umbrella. You know, looking at your license bonds for contractors, or subdivision, or maintenance landscape. Can you talk to us about your experience with the variety, with all of those?

MB: Yeah, for sure. As you mentioned there’s definitely a wide variety of bonds. I look at our bond form library and there’s 3,000 bonds and, you know, it’s a lot. And there’s always new ones coming in, so I always handle different types of bonds, I never know which kind I’m going to get. But, luckily enough, Merchants has a great library that I mentioned about, where a bunch of underwriters from the past and current underwriters right now are just researching the bond types that they see, you know, summarizing guarantees, what the risk entails and, kind of, what information we need. And, it’s not only helpful for me but it’s also helpful for the agents that are seeing a bunch of different bonds that they’re not used to. We’ve gotten feedback that the library is very helpful, it helps them understand the bond. And, like you mentioned, I handle a different, wide variety from license permit to financial guarantee, so it’s just all about trying to understand what the bond is guaranteeing and what we need. Do we need credit reports; do we need financial statements; personal business indemnity? And, sometimes I see bonds that no one has seen before, so I have to, kind of, put a little more research into it; seeing the county, seeing what it entails and to see if we can support it. So, it’s been a learning experience.

AR: Yeah, well I feel too, like especially on your guys’ portal, you know, I get a request from a client for some random license bond that I’ve never heard of or seen, you can go in there and kind of figure out, “Well, Merchants is willing to write it in their portal.” So, you give a nice breakdown of everything that it is and what you guys need. So, that’s really, really helpful.

How long do you think, since you’ve been here for a little over a year, how long did it take for you to, kind of, get up to speed in this and really feel confident in engaging with agents and clients, and really knowing what was going on?

MB: I’d say it took me about nine months to year. There was definitely a lot of learning process, especially the first couple months when you have to learn about the system and really learn about the industry.

But, I think I was very fortunate enough to have a great team around me, starting from management position who’s had 15 plus years of experience, to my current teammates who have a wide variety of perspectives from the agency side and different markets, and to even our assistants who are always helping us out with our day-to-day activities. So, the first couple months was really understanding what the systems were all about. And then six to nine months we had a training program where they would sit us down and talk to us about how to properly plan the agency meetings, how to conduct them, specific questions that the agents might ask.

And so, it’s definitely a great experience to have that around me, but it’s also cool that there’s always new questions coming up, and so there’s always something to lean. And, we’re always improving, trying to improve, our technology and so, we’re always trying to focus on marketing those new things we come up with.

AR: Fantastic. How often do you have to go out to Iowa?

MB: I try to go about twice a year. One’s mandatory for the underwriting meetings, but, sometimes I like to stop by and say hello to everyone.

AR: Hopefully not in the wintertime.

MB: Yeah, no. Can’t get me out there in the wintertime, besides this time for November’s underwriting meetings.

AR: So, kind of circling back to the different bond types. So, are you seeing a lot of submissions on a certain type right now?

MB: Yeah, so, I’ve been seeing a lot of Motor Vehicle Dealer Bonds coming up, and I’ve also seen Immigration Consulting. But, it’s starting to really pick up with our Court and Probate bonds. I’ve been starting to see a lot of Non-Construction Performance Bonds, Landscaping Projects. The variety is starting to pick-up as the more visits I come in and really just tell what Merchants’ appetite is, I’m starting to see different types of submissions. And I think that’s the main idea of it, is that we haven’t had presence in Southern California, but now I’m around and I’m visiting agents, I’m letting them know that, “Hey give us a chance to review these files,” and that’s where the variety comes in.

AR: Yeah, no, absolutely. Kind of looking at the marketplace, and maybe this might be a tough question just because you guys have such a wide variety of bonds that you guys write on the commercial side, but what are some of the main challenges that you’re kind of seeing, and have you maybe seen any uptick in claims?

I know, because, especially, kind of, thinking of the license bonds for the contractors, you guys have really kind of stepped in and filled the void for a different surety that, kind of, left the marketplace. So, there’s probably been a lot more volume there.

MB: Yeah, there’s definitely a lot of claims activity that I’ve seen with the Motor Vehicle Dealer Bonds. Principles are going out of business so claims are rising. I’ve also seen challenges in the notary side. The Notary Bonds are tied in with the mortgage interest rates, and so, you know, not a lot of people are buying houses right now so there’s not a lot of need for notary.

And I’ve also seen that, just by, like, challenges, you know, I see a lot of agents talking about, they’ve been seeing a lot of smaller transactional bonds that’s been taking up their time. And so, as I mentioned earlier, Merchants is always trying to improve their technology, so we’ve recently rolled out Hub Express, where it allows agents to issue small transactional bonds with little touch. We recently updated our systems to allow California Contractor State License Bonds, so that allows agents to issue those pretty fast. And, it’s tax season so, tax repair bonds too are a big deal, it helps them out on that.

AR: Yeah, that’s fantastic. Is there anything else you want to talk about on the commercial side, or any questions you might have for me?

MB: Yeah, for sure. Before we end the show, would you happen to have any advice on any new underwriters or agents that’s entering the industry right now?

AR: What I think helped me a lot when I first got in, I’ve been doing this for six and a half years now, was I started participating in the Surety Association right away, because, industry wise, that really helps you to get to know everyone in town; all the different agents, all the different underwriters. Which, I mean, you’re already doing that so, that’s a good step. So, maybe your next step is to try and get on the board next time there’s a company position for there. I think that’s been really, really beneficial for me as well. So, I would recommend doing that.

Other than that, I would just say you’re doing the right thing in, like, getting involved in the industry and getting out in front of people. Surety is such, more relationship driven than the insurance side. So, as you’re going to start growing your book, both the underwriter side and the agent side, you just have to be out there in front of people, and building your relationships and just knowing that this is more of a longer play and not a short-term play.

MB: Yeah, I agree. Great advice. I know you mentioned joining the board, I guess until a position opens up I’ll still be the photographer for the events.

AR: Yeah, absolutely. Well, Miggs, thank you so very much for joining me in StudioOne™ today and giving us some background on yourself and some info on the commercial surety industry.

MB: Yeah, thanks so much for having me Andy, this was fun. It’s always a pleasure to see you and I’m excited for all the future events that I run into you at.

AR: Absolutely.

Transitioning from a Credit-Based to a Standard Surety Program

Author, Andy Roberts, Account Executive, Rancho Mesa Insurance Services, Inc.

When sureties began offering credit-based programs, there were only a few surety companies who would offer this type of program and the limits were low, most often around $250,000 for a single project and aggregate. However, over the past few years, there has been an increase in the number of surety companies that are willing to offer these types of programs. The limits offered have also increased with some companies writing $1,000,000 for a single project and aggregate bond based solely on an owner's personal credit score. These programs are great for contractors that are getting started with bonded work, or don’t bond frequently and are not looking to provide the information necessary to set up a standard program. However, for contractors looking to grow and need additional surety capacity in order to achieve that goal, they should be aware of the steps that will need to be taken in order to transition from the credit-based program to a standard bond program. The first, and most important step will be the company financials.

Standard bond programs are written primarily based on the financial strength of the company. Sureties will be looking to obtain the last two fiscal year-end financial statements, balance sheet and income statement, and the most recent interim balance sheet and income statement that are available. They will evaluate the current cash position, working capital, and equity in the company to determine a single and aggregate bond limit.

In addition to the company financials, the surety will want to evaluate the personal financial statements for all the owners. Personal financial statements are an important item that surety companies will evaluate. Similar to the corporate financials, assets and liabilities will be evaluated along with the personal credit of the owners. Surety companies want to ensure that the company owners are current with their personal obligations before providing surety credit to their company. 

Another important item that a surety underwriter will want to review before providing a standard surety program, is a current work in progress schedule. Being able to provide a current and accurate work in progress (WIP) schedule will be a requirement from a surety underwriter. The WIP monitors project progress and performance over time, and plays a critical role in determining the maximum amount of bonded work that a contractor can take on at one time.     

While these are just a few things that surety underwriters will be wanting to evaluate in order to set up a standard bond program. There are other items that contractors can consider, like hiring a CPA for their year-end financial statements and getting a bank line of credit. 

For contractors that are looking to graduate from a credit-based program, increase their current surety capacity, and want to explore further strategies that can strengthen their bonding program, contact me at (619) 937-0165 or via email at aroberts@ranchomesa.com.

Navigating Contractor Challenges in 2024: Insights from the Surety Association of San Diego

Author, Andy Roberts, Surety Account Executive, Rancho Mesa Insurance Services, Inc.

In a recent special StudioOne™ Podcast episode, I’m joined by my three fellow board members of the Surety Association of San Diego as we explore some of the biggest challenges facing contractors in 2024 and beyond.

Challenges Ahead

As we look ahead, contractors are bracing for significant hurdles, including:

• Inflation and Material Costs

• Supply Chain Disruptions

• Labor Shortages

• Bonding Capacity Constraints

All of these issues can have a direct effect on a contractor’s bonding capacity, making it important that they get the most out of their surety relationship.

Maximizing Your Bond Program

To navigate these challenges effectively, contractors can take proactive steps to maximize their bond program:

• Work with Experienced Surety Agents

• Financial Preparation and Accounting Processes

• Transparency about Financials and Backlog

• Regular Meetings with Underwriters

By taking a proactive approach to identifying and addressing current and potential future challenges, contractors can maximize their bond program and position themselves for success in 2024 and beyond. By working closely with experienced surety agents, optimizing financial management practices, and fostering open communication with underwriters, contractors can navigate the complexities of the construction industry with confidence.

Unlocking Working Capital in Construction: Options for Reducing or Releasing Retention

Author, Andy Roberts, Surety Account Executive, Rancho Mesa Insurance Services, Inc.

Retention is a very common practice within the construction industry that typically involves 5-10% of each payment to the subcontractor being withheld until the project has been completed. The purpose behind this is simple, it is designed to make sure that subcontractors satisfy their contractual agreements before they receive their last payment for the work they have done.  While this practice serves a real purpose, it can cause significant issues for subcontractors if the payments are delayed.

Regardless of the reasons why a retention payment could be delayed, whether it be overall project completion delays or if there are issues with the work performed, the delay in payment can cause significant cash flow issues.  For subcontractors that do a lot of bonded work, cash flow issues will have a direct impact on their working capital which can have a negative impact on their bonding program.  However, there are some strategies that subcontractors can employ to get their payments released sooner, like negotiating the terms of the retention release in the contract. 

Prior to signing the contract, it is important that a subcontractor review and attempt to negotiate any unfavorable retention release terms. One option is negotiating a 10% retention down to 5% in the contract.  Should that not be achievable, subcontractors can provide performance and payment bonds which might convince the project owner and/or general contractor to lower the retention amount or release the retention sooner.

Performance and payment bonds protect the project owner and the general contractor in case the subcontractor fails to fulfill their contractual obligations, which is the main reason that retention is being withheld.  Therefore, the presence of bonds on the project may allow a subcontractor to negotiate terms that are more favorable to them, potentially lowering the percentage withheld from each payment, or even getting it released at earlier points within the project.   

While retention remains a standard practice within the construction industry, it can cause significant issues for a subcontractor should those payments be delayed.  So, negotiating these terms in all contracts is vital while also using the ability to provide bonds on the project as a solution to getting more favorable terms. 

Should you have any questions about this or you are having issues with retention being withheld, reach out to me at aroberts@ranchomesa.com or 619-937-0166.

Strategies for General Contractors to Minimize Liability

Author, Lauren Stumpf, Marketing & Media Communications Specialist, Rancho Mesa Insurance Services, Inc.

In Episode 355 of Rancho Mesa’s StudioOne™ podcast, host Andy Roberts, an Account Executive in the Surety Group at Rancho Mesa, is joined by Ted Lee, a Contract Bond Underwriter at Liberty Mutual Surety, to discuss strategies for general contractors to limit their liability when working with subcontractors. Ted shares his background and experience in the surety industry before delving into the main topic.

They explore two key strategies that general contractors can use to mitigate liability:

1. Subcontractor Prequalification: Ted emphasizes the importance of how general contractors select their subcontractors. If they choose based solely on the lowest bid, there may be risks associated with subpar quality. To mitigate this risk, it's suggested that general contractors require a prequalification letter from the subcontractor's surety. This helps ensure that the subcontractor is bondable, providing added assurance to the general contractor.

2. Performance and Payment Bonds: Requiring performance and payment bonds from subcontractors offers immediate protection to general contractors. Performance bonds protect against subcontractor default, while payment bonds guard against potential liens from lower-tier subcontractors and suppliers. These bonds could also enhance a general contractor's bonding program, potentially allowing for higher bonding limits and more favorable terms.

The conversation highlights the role of the general contractor's surety in evaluating the prequalification process and bond requirements. Ted explains that this evaluation helps the surety understand and support the general contractor's risk mitigation efforts.

They also mention that some general contractors may have automatic bond requirements for certain project sizes, but for those who don't, bond companies may step in and require subcontractor bonds when needed.

In conclusion, the podcast episode provides valuable insights for general contractors looking to limit their liability and manage risk by implementing subcontractor prequalification processes and requiring performance and payment bonds. Andy and Lee also recommend seeking assistance from insurance agents with expertise in surety bonding to navigate these processes effectively.

Listen to Episode 355 below, or on your favorite podcast listening app.

Taking the Mystery out of Bonding for Public Works Projects

Author, Andy Roberts, Account Executive, Rancho Mesa Insurance Services, Inc.

Obtaining bonding for public works projects can be a complex process but understanding what bonds are, why they are required, and what information the bond company needs can take a lot of the mystery out of the process and make it seem a lot less daunting.

Bonds are a financial instrument which provide a guarantee, provided by the bond company, to the project owner (Obligee) that the contractor (Principal) will fulfill their obligations per the terms and conditions of the contract that has been awarded to them. We most often see bonds on public works projects as they are required by law but we also see general contractors and lenders require bonds in some instances. Specifically looking at public works projects, there are laws in place requiring bonds on these projects because they are funded by tax payer dollars, making it important to mitigate the financial risks associated with these projects and protect those funds.  With this basic understanding of what bonds are and why they are required, how then do contractors go about getting bonded?

Depending on the size of the project that requires a contractor to get a bond, there are a few different options. Many surety companies offer bond programs solely based on the credit of the owners, and so long as personal credit is good, the surety will offer support. The limit for these types of programs are typically maxed out at $750,000 per project and aggregate depending on the bond company. In order to go above these limits, more financial information must be obtained: contractor questionnaire, three years of company financials (balance sheet & income statements), personal financial statements from all owners, and bank statements verifying the cash amounts listed on company and personal financial statements. After reviewing all of the provided information, the bond company and surety broker can determine the contractor’s eligibility for the appropriate size bond program.

Having the ability to secure bonds can provide additional revenue sources to help a contractor grow their business. This makes it important for contractors to seek out an experienced bond agent that can not only guide them through the process but also educate them so that the process is not overwhelming.

If you have any questions or would like to start putting your own bonding program in place, I can be reached at aroberts@ranchomesa.com or 619-937-0166.

Matching Contractors with the Right Bond Company

Author, Andy Roberts, Account Executive, Rancho Mesa Insurance Services, Inc.

Like any great match-maker, a surety bond agent needs to fully understand both parties in order to match the contractor with the right bond company. 

In a previous article, we explored key factors that a contractor should consider when hiring a surety bond agent, highlighting experience, some additional value adds, and agent appointments. Agent appointments are an important factor to consider, because one of the most important roles of a surety bond agent is making sure that their clients are paired with the right surety bond company. In order to do this, an agent needs to have an in-depth understanding of both their client’s business and the bond companies that they work with.    

In order to properly match a client with a bond company, it is vital that the agent take the time to really understand the client’s business: review financials, review the business plan, and get a firm handle on what the contractor’s goals are for the company. Doing this will allow the agent to get a thorough understanding of the client’s specific bond needs and will help them narrow down the marketplace to a handful of bond companies that would be the right fit. While it is very important to have a good understanding of the client’s business, it is equally important to have a strong understanding of each bond company’s appetite.

There are more than 100 bond companies out there and they are all a little different. They all have different limitations with regard to the size of bonds they can write. They will have different underwriting standards for when a client is required to start providing CPA-reviewed financials. They have different classes of business that they favor. Some bond companies value personal financials more than others. This list goes on, making it vital that agents have a thorough understanding of their markets, and have good relationships with their underwriters so that clients are placed with a bond company that will be a good partner for them as they look to accomplish their goals. 

It is important that an agent have appointments with a variety of highly rated bond companies while also possessing a deep understanding of those markets because contractors need to be able to trust that their agent has them placed with the bond company that is the right fit for their business. Rancho Mesa has long-standing appointments with over 20 highly regarded bond companies, in addition to close working relationships with those underwriters. 

As you look to build a successful bond program that can help your construction firm grow profitably, contact me at aroberts@ranchomesa.com or by phone at (619) 937-0166.

Managing Your Surety Relationship for 2023 and Beyond

Author, Andy Roberts, Account Executive, Rancho Mesa Insurance Services, Inc.

Over the past two years, there has been a lot of talk about a looming recession. If a recession happens, its severity remains to be seen, but regardless, it is important for contractors to be taking an active approach in building their relationship with their bond company and utilizing the services of a surety specific agent. 

Surety companies are conservative and err on the side of caution when it comes to providing bonds, which makes it imperative that the contractor build a strong relationship with their management and underwriting teams. Annual meetings should be conducted, as this provides the underwriter valuable insight into the company while also allowing them to build a more personal relationship with the contractor. Additionally, it is important that there is regular communication between all parties throughout the year regarding the contractor’s financials and performance on jobs, as this type of discussion can help build trust between both parties. This may seem pretty standard, but it is not easily accomplished unless a contractor is working with a surety broker that specializes in the bonding industry.    

The surety industry is specialized and relationship driven, which makes partnering with the right broker even more critical as the country moves into unprecedented financial times. Effective brokers know each carriers’ appetite; they have relationships with those underwriters and should be able to easily determine which surety will be able to provide a program to match the contractor’s needs. This type of knowledge and experience can greatly benefit a contractor in the event the economy begins to turn and surety markets begin to limit capacity and/or pull back from offering bond programs.    

In this most uncertain time, contractors should begin building and, in some cases, re-building their surety relationships. With considerable work lined up in Southern California over the next few years, strengthening these bond programs can allow for maximum capacity and potentially profitable growth. 

For any questions about managing your surety relationships or to discuss if we can assist with any bond-related needs, contact me at aroberts@ranchomesa.com or call my direct line at (619) 937-0166.

Employee Retention Credit

Rancho Mesa's Account Executive of the Surety Department Andy Roberts is joined by Tina Jani, CPA and Partner at Covell, Jani & Pasch LLP, to discuss the Employee Retention Credit.

This podcast is designed to provide general information as to the subject matter covered. Neither the publisher nor the presenter by and through this presentation is rendering legal, accounting, or other professional services. If professional advice is required, you need to contact your tax advisor, the presenter, or the publisher for their services under a separate engagement contract.

TRANSCRIPT

Andy Roberts: Hello everyone and welcome back to StudioOne, our safety and risk management network. I’m Andy Roberts, Account Executive in the Surety Group with Rancho Mesa and joining me is Tina Jani, who is a CPA and Partner at Covell, Jani & Pasch LLP. Today we are going to be talking about the Employee Retention Credit, which is something many contractors remain unaware of.  Welcome to the show, Tina.

Tina Jani: Thank you very much for having me. I am very excited to be here!

Andy: As I mentioned the Employee Retention Credit is something a lot of contractors haven’t heard of, but what is the ERC?

Tina: The ERC is an economic recovery program created by the CARES Act – the same legislation that created the Paycheck Protection Program (PPP).

Andy: That’s interesting that it was brought about by the same legislation that provided for the PPP but what brought about the need for the ERC?

Tina: The US government introduced the program to help businesses with employees who got affected either by full/partial shutdown rules or if the gross revenue went down by certain percentage in 2020 and 2021.

Your business may qualify for a stimulus check of up to $26,000 per employee by claiming employee retention tax credits.

Andy: You mentioned percentage. Can you elaborate what are those percentages?

Tina: Yes, absolutely! The key percentages to keep in mind are:
a. For 2020 - 50%
b. And for 2021 - 20%

What that means is you take 2019 as a base year. Then you compare your Quarterly Gross revenue for the year 2020 and 2021 with the same quarter in 2019. If your quarterly gross receipt went down by 50% in any quarter in 2020 or 20% in 2021, you are eligible for the Employee Retention credit for that particular quarter.

Please keep in mind that these are just key points. The actual rules are much more detailed and generous.

Andy: This is all great information. So when did the program start and when did it end?

Tina: The program started on March 13, 2020 and it ended for regular business on September 30, 2021. There are special rules for new businesses started after February 15, 2020 or if you are  severely financially distressed employer  that makes you eligible for the ERC for the fourth quarter of 2021 as well.

Andy: Does that mean it’s too late to apply for the ERC?

Tina: No, absolutely not. You can go back and amend your payroll tax return which is form 941. The statue runs for three years from the date the original 941 was due. You can still apply for the ERC by filing form 941X. The first statue will for Q1 2020 will run out on April 30, 2023. Businesses still have from 6 months to one and a half year to go back and amend their payroll tax returns and apply for the ERC. However, we highly recommend that businesses pay attention to this credit as soon as possible.

Andy: Do you have to prove that your business was affected by COVID to be eligible for the ERC?

Tina: No, you don’t have to prove that your business was affected by COVID. As long as you show a drop in the gross revenue and that can be because of any reason, your business is eligible for the ERC.

Andy: Can you give me an example of a client that didn’t know about the ERC until you told them and how they benefited?

Tina: It is interesting that almost every business was familiar with the PPP loans but not very many businesses are familiar with the ERC. When we started working on the ERC, we contacted all our clients including our largest client and asked for their gross revenue analysis. We made them aware of the ERC and they were eligible for two quarters, total $2.8m. This is just one example. There are numerous businesses out there who are eligible for the ERC and has not applied yet.

Andy: That was all great information and this sounds like a credit that can have a big influence on a contractor’s financial statement, which as you know, in the world of Surety Bonds is very important because a contractors financials are the driving force behind what they can qualify for when it comes to a bond program. This was a somewhat basic overview of the ERC and how it works and I know it’s more complicated and requires the help of an expert like yourself, so how would you recommend a company owner start the process of determining if they qualify for the ERC?

Tina: ERC is a very generous program that a small business owner should not ignore. The process is very simple and straightforward, especially under gross revenue drop method. Basically, you start with comparing your gross revenue. They should contact their CPA or tax professional to start the discussion I am happy to answer any questions and can be reached at my email address pjani@cjp-cpas.com or my phone 760-737-0700.

Andy: That’s great to hear. Thank you so much for joining me Tina to discuss this very important topic.

Tina: Thank you for having me.

Blockchain Technology May Further Digitalize the Surety Industry

Author, Andy Roberts, Account Executive, Rancho Mesa Insurance Services, Inc.

In my previous article and podcast, “Surety Industry Forced to Innovate,” I discussed a few technological advancements within the surety industry and how the ultimate goal would be issuing bonds to obligees digitally. While that is still some ways off, the technology is here and there are companies and organizations already exploring how blockchain technology may be the answer when it comes to fully digitalizing the surety industry.    

Simply put, a blockchain is a shared digital ledger that records transactions between parties and is permanent and verifiable. Applying this method to the surety industry, an electronic record (i.e., bond) would be created and shared with all parties to the bond, and any changes to that bond would be automatically added to the record so that every party who has access to it can see the history of the changes. This type of technology and the fact that it’s an immutable record, would alleviate the need for wet signatures, raised seals, and notary acknowledgements, which would increase the speed at which bonds can be issued, while also cutting some costs that are associated with issuing hard copy bonds. As mentioned, these systems are still being developed, but there are companies and surety organizations that are actively working to make this technology commonplace within the industry.   

The Institutes launched the Institutes RiskStream Collaborative, which has spearheaded the effort to introduce blockchain technology to the surety industry. 

“The power of attorney use case was the logical starting point and we’re excited to advance it forward. We are also excited that it will lead to many more downstream use cases, including Bond Signature and Verification,” said Patrick Schmid, vice president of the RiskStream Collaborative. 

Institutes RiskStream Collaborative started by piloting a program digitalizing the power of attorneys and this is now moving into its second phase. This initiative has garnered support from major surety associations like The International Credit Insurance & Surety Association, the Surety & Fidelity Association of America, the National Association of Surety Bond Producers. 

Rancho Mesa is committed to utilizing technology and strives to always be at the forefront when it comes to advancements and changes in order to help our clients stay ahead of the curve. And, while issuing bonds digitally using blockchain technology won’t be happening tomorrow, there are bond companies in Europe along with the Institutes Riskstream Collaborative that are testing the process. And, its participants view this as the future of issuing bonds, which makes it an important topic for us to address and monitor. 

For questions about technology in surety or your surety needs, contact me at aroberts@ranchomesa.com or call my direct line at (619) 937-0166.

Surety Industry Forced to Innovate

Author, Andy Roberts, Account Executive, Surety Group, Rancho Mesa Insurance Services, Inc.

Rarely are the words surety and technology advancement synonymous, and that’s because it’s hard to introduce advancements to an industry where so many obligees still require raised seals and wet signatures on the bonds they are receiving. However, due to some challenges that bond companies, insurance agencies and obligees have faced during the pandemic, the industry is being forced to innovate. E-signatures on bond documents are becoming more commonplace, and electronic powers of attorney and digital seals are being adopted with the eventual goal of creating a surety bond creation process that is wholly digital.  

General Indemnity Agreements executed by a contractor/principal when they are establishing a surety program with a bond company, have traditionally needed to be executed in front of a notary and the original document, with the wet signatures, provided back to the bond company. Now, more and more bond companies are moving away from this archaic practice and allowing these documents to be signed digitally. This is an important change as it shows the industry’s willingness to implement changes that are in the best interest of the principal. Another change that is being brought about is the use of electronic powers of attorney (POAs), and digital seals.

A couple of years ago, very few bond companies utilized electronic POAs, opting instead to mail agents hard copies that needed to be dated using a typewriter. While this method is still being used, more and more sureties are opting to provide their agents with e-POAs that they can print as needed. In addition to this change, digital seals are also starting to be more commonplace. These can be affixed to the POAs and the bonds themselves when they are transmitted digitally. The importance of these two changes is worth noting as they are steps towards creating a process which allows for the creation of a surety bond by solely electronic means. 

Getting to a point where contract bonds are done only electronically is still a way off, but the technologies that are needed are available, making it necessary that the surety industry continues to embrace technology to improve our processes, and to ensure we are providing bonds in the form, whether electronic or paper, that clients and obligees want. 

For questions about technology in surety or your surety needs, contact me at aroberts@ranchomesa.com or call my direct line at (619) 937-0166.

What to Consider When Hiring a Bond Agent

Author, Andy Roberts, Account Executive, Surety Group, Rancho Mesa Insurance Services, Inc.

With the passage of the Infrastructure Investment and Jobs Act, there is $125 billion of federal funds available for procurement. This provides a significant amount of federal construction work which will be put out to bid, with a vast majority of it requiring bonding. For contractors that may have never bonded before or bond infrequently, this is a clear opportunity to build revenues. With that in mind, it is critical that these contractors have a good surety bond agent on their side to help them navigate this process. Here are some questions and things to look for when evaluating if an agent is the right fit.

Experience  

It is important to note how many years an agent has been in the industry, but it’s more important to make sure they are a surety specialist. Surety bonding is a very specialized insurance product, and an agent that focuses solely on surety will have a better understanding of what the different bond companies value when they are reviewing a new contractor because each bond company has a different appetite. Additionally, agents that focus solely on surety will have developed stronger relationships with bond companies. This relationship is important because bond companies want to work with agents that are knowledgeable and have good reputations within the industry. 

Agent Appointments

Which bond companies does the agent have an appointment? This is an important question to ask, as bond companies are very conservative and the better bond companies are much more selective with the agents that they appoint. When asking this, it is also important to note how many bond companies the agent is appointed with. Having access to numerous sureties, while maintaining key relationships with the main companies, allows an agent to find the best bond company for each contractor.

Additional Value Adds

Surety bonding is a complicated industry, and if a contractor's goal is to increase their bonding capacity, it is vital that the agent provide additional services, like a detailed review of the company’s financials, and yearly analysis of a contractors single and aggregate bond limits. These services are important because they help the agent and the contactor get on the same page with regards to the current bond program, while also allowing them to game plan for the future, and set goals for how to increase bonding capacity. In addition to these in-house services, an agent should be able to recommend a good construction CPA and reputable banking contacts that know what a contractor needs to maximize their bond credit.

Bond agents play a vital role and partnership for contractors, which makes it very important that a contractor performs proper due diligence when hiring an agent. At Rancho Mesa, we have surety only specialists whose expertise is used to ensure our clients are placed with the right bond company to suit their needs. 

To answer any questions from this article or discuss if we can assist with any bond related needs, contact me at aroberts@ranchomesa.com or call my direct line at (619) 937-0166.

How Year End Financial Statement Preparation Influences Bonding Programs

Author, Andy Roberts, Account Executive, Surety Group, Rancho Mesa Insurance Services, Inc.

As a contractor looking to qualify for a contract surety bond program, your team should be aware that company financial statements will be required by underwriters in most cases. This is largely due to the fact that a company’s financials, their balance sheet and an income statement, represent the primary source of information that a surety will use when building a bond program. And, the way this information is presented goes a long way in determining the amount of credit that a bond company is willing to extend. There are a few different options for presenting year-end financials, with the two most common being internal financials and CPA-reviewed financials.  

Internal statements are prepared either by the contractor in-house, or by a hired bookkeeper, and are often accepted by surety companies for contractors that do not bond frequently and/or only bond smaller projects under one million dollars. The reason for this limitation is internal statements are not viewed as being overly reliable because they have not been prepared by a third party CPA. If a contractor is looking at a bigger job or looking to grow their bond program, then it is worth the investment to have a CPA complete a review for the fiscal year-end financial statement.    

A review from a CPA provides a deeper dive into a contractor’s financial statements and will usually include notes about the financial statements regarding revenue, accounts receivables, accounts payables, and other financial events that occurred over the course of the year. And, while there is a larger cost associated with a review, between $10,000-$15,000, as opposed to providing an internal year end statement, the surety gains a greater understanding of the company’s financials over internal statements. Additionally, they consider a CPA review more reliable and trustworthy, thereby willing to offer increased bonding capacity to qualified contractors.  

Providing CPA-reviewed financials adds additional overhead to a company’s budget, but it can be vital to ensuring the maximum bonding capacity is provided when it’s need it most. Furthermore, to emphasize the point, it is important that contractors select a competent, proactive bonding agent and construction CPA in order to map out a successful strategy for year-end financial preparation. The right partnership can help your firm build the highest possible level of bond credit as you build toward the future. 

Finding an experienced CPA with a construction financials background can be a challenge. I can help recommend someone who can assist your company.

To answer more questions from this article or discuss if it may be time to make the jump to a CPA review, please email me at aroberts@ranchomesa.com or call my direct line at (619) 937-0166.

How Improving Equity Impacts Your Bond Program

Author, Andy Roberts, Account Executive, Surety Group, Rancho Mesa Insurance Services, Inc.

In our current series of articles, we are taking a deeper look into the properties of a balance sheet that will affect a contractor’s bonding capacity. We have previously discussed bonding capacity and summarized working capital in regards to the impact it can have on a contractor’s capacity. However, another very important component on the balance sheet that surety underwriters will consider is net worth, also referred to as equity.

Equity is calculated by subtracting a company’s total liabilities from their total assets on the balance sheet, and is a measurement that is used to determine their long term liquidity. From a bonding standpoint, surety underwriters love to see equity increase year after year. They analyze each item in the equity section of the balance sheet such as common stock, additional paid in capital, and shareholders’ loans. One item that carries a particularly large amount of weight is retained earnings.

Retained earnings represents the net income or profit that a company reinvests in its business after distributions are paid to the shareholders. This is important because as a general guideline we say a contractor can qualify for an aggregate bonding capacity that is ten times their company’s equity. Thus, their retained earnings heavily influence the overall equity of the company. Contractors looking to maintain a strong bond program, or increase their bond program, will want to retain as much profit in the company as they can. This allows their retained earnings and their equity to continue to grow through the years, making it even more important to have a knowledgeable and proactive bonding agent on your side. This should be someone who understands your business and overall goals, can analyze your balance sheet, and will discuss strategies with you to reach optimal capacity.

For many contractors, building a strong bonding capacity can create opportunities for significant revenue growth. Perhaps one of the more critical elements to note as you review your balance sheet is being educated on the importance of having strong retained earnings inside your financials. You can start this process and leapfrog your competitors when you request a quick capacity analysis from our surety team. They’ll provide you with a detailed evaluation.

To answer more questions about your bonding program, contact me at aroberts@ranchomesa.com or call my direct line at (619) 937-0166 and we can get started.

A Contractor’s Guide to Bonding Capacity

Author, Andy Roberts, Account Executive, Surety Group, Rancho Mesa Insurance Services, Inc.

For contractors that do a lot of bonded work, their bonding capacity is a critical element of their business. Capacity often determines which projects a company can and cannot pursue, so it is managed very closely. However, for contractors that are new to bonding or have not bonded previously but remain interested in performing bonded work, this is likely a foreign concept to them. So, what is bonding capacity, and what items determine the amount of capacity that a surety carrier is willing to offer?

Generally speaking, a contractor’s bonding capacity is comprised of single and aggregate limits, where the surety underwriter will approve performance and payment bonds for a job, up to the single limit. The aggregate limit is the cap that the surety carrier sets for how much total bond liability a contractor can have extended at one time. Having these caps is what makes it important for contractors to have an understanding of what information sureties use when determining how much capacity to offer. Underwriters will look at personal and business credit, industry experience, as well as personal financial wealth. Typically, though the most important item a surety underwriter will focus on is the company’s financials, specifically, their balance sheet and income statement. 

When reviewing the balance sheet and income statement, two important items that an underwriter will be reviewing are the contractor’s working capital and their equity. We took a deeper dive into working capital in a previous article, but simply put, working capital represents a contractor’s current assets minus current liabilities, and this measures how much a company has available to pay its current debts. Equity, or net worth on the balance sheet, is made up of retained earnings, common stock and additional paid in capital, and these numbers provide a measure of the long term liquidity of a company. Surety carriers take a hard look at this number because they want to ensure that there are sufficient reserves to complete the work that they have issued performance and payment bonds on.    

Building an effective bonding program can take time and requires collaboration with competent, trusted advisors. Determining what type of bonding capacity you can establish and/or deserve is a key part of the process. To find out what your bonding capacity looks like, request a quick capacity analysis and I will provide you with the information you need for your company. To answer more questions, you can email be at aroberts@ranchomesa.com or call my direct line at (619) 937-0166. Stay tuned for my next article which will take a deeper dive into strategies for improving equity and how this can increase capacity.

Funds Control May Secure Project Bond

Author, Andy Roberts, Account Executive, Surety, Rancho Mesa Insurance Services, Inc.

As surety brokers, we initiate bond programs for our construction clients. Single and aggregate limits are determined in large part by their financials and experience. Often, there are jobs that exceed the single limit we have in place, or are larger than any job that our client had previously completed. When it is a job that makes sense for the contractor, it is our job to work with the bond company and find a solution so the contractor can bid the job or take on the contract. One available solution is a process referred to as funds control.

Funds control is a service that bond companies use to ensure funds involved in the project will be used for appropriate work-related expenses. This arrangement involves a third party company engaged to handle the disbursement of the funds to the different sub-contractors and suppliers on that specific project. In order for this to be set up, the contractor is required to execute two documents, a Disbursement Agreement and an Irrevocable Direction of Funds. 

The Disbursement Agreement addresses the specific terms agreed upon by the contractor and the third party company and also details the responsibilities of both the contractor and the funds control company. The second document, the Irrevocable Direction of Funds, is a one-page document that requires the project owner, or the general contractor, to send all payments directly to funds control. Once the funds are received, they are placed into a project specific bank account that is set up in the contractor’s name. The payments are then disbursed to the sub-contractors and suppliers based on the pay applications that the contractor submit to funds control. And, while this adds some additional steps and work to the process, there are benefits to funds control and good reasons why the bond company will require it on certain projects. 

For the bond company, with a third party taking control of the distribution of funds, there is a much lower risk of financial mismanagement, and subcontractors, suppliers and vendors can expect to be paid for the work that they do, which leads to a lower risk of payment bond claims being filed against the contractor’s bond. 

While adding funds control to a project adds some additional work and steps to the job, it can be a valuable alternative route and one that contractors should gain familiarity. In many cases, funds control can be the solution that helps get a surety underwriter comfortable with supporting a bond for a particular job that otherwise would not be approved.

For more information or for any questions regarding your surety needs, please contact me at (619) 937-0166 or aroberts@ranchomesa.com.

Early Warning Signs of COVID’s Impact on Surety

Author, Andy Roberts, Account Executive, Surety Department, Rancho Mesa Insurance Services, Inc.

The COVID-19 pandemic will have many long and short term effects on the surety industry. While the long term effects might not be known for years, some short term changes are already occurring. Early on, we have witnessed bond companies start to tighten their underwriting guidelines, and now we are seeing an increase in General Contractors (GC) requiring performance and payment bonds from their subcontractors. 

For contractors that do a lot of public works, or work with GCs that require bonds already, this is not an issue, as they have already established bond programs and understand the process. However, for contractors that have never been required to bond before the pandemic, they are thrust into a part of the construction insurance world that is foreign to them. So, what exactly are performance and payment bonds and why are so many contractors now being asked to provide them?

To put it simply, the performance bond is an assurance to a project owner, or in this case a GC, by a surety company, that the contractor is capable and qualified to perform the contract and protects the GC from financial loss if the contractor fails to perform in accordance with the terms and conditions agreed upon. The payment bond assures that the contractor will pay certain subcontractors, workers, and materials suppliers associated with the project. While these assurances are meaningful, GCs very often do not require bonds because of the extra cost associated with obtaining them. Bonds typically cost 1-3% of the contract price with the GC in many cases paying the corresponding premium. COVID-19 has created turmoil in the financial marketplace many ways including a tightening of available money, a lengthening of account receivables, high unemployment, and an overall slowing of the economy. With so much uncertainty surrounding the effects that COVID-19 may have on an individual  contractor’s financials, GCs are becoming more risk adverse and willing to absorb the cost of the bond to avoid subcontractor defaults in the middle of the project. In those situations the GC can then rely on the surety company that wrote the bond who will step in to make sure the work is completed.  

For contractors that have never secured a bond before, the process can seem daunting, complex, and invasive, which makes having a good surety agent and bond company vital to help make the process seamless. At Rancho Mesa, we work with a number of high quality surety markets that provide a variety of different types of bond programs, and we have the expertise to get you set up with one that works best for your company’s surety bond needs.

For more information or for any questions regarding your surety needs, please contact me at (619) 937-0166 or aroberts@ranchomesa.com.

Managing Working Capital is Key as Markets Tighten

Author, Andy Roberts, Account Executive, Surety Department, Rancho Mesa Insurance Services, Inc.

Contractors often ask us what bond companies are looking for when they are reviewing balance sheets and income statements. The answer isn’t a simple one, because there are many items that underwriters look at when determining if they will write a bond for a contractor. Typically, the first thing an underwriter will do is calculate a contractor’s working capital.

Simply put, working capital is calculated by subtracting a contractor’s current liabilities from their current assets on the balance sheet. Current liabilities are any obligations due within one year, while current assets are the most liquid like cash, accounts receivable, and items that can be converted to cash within a fiscal year. This calculation measures what is available for a company to pay its current debts, finance its current operations, and provides an indication of a company’s overall health. 

With bond companies placing an emphasis on working capital and tightening their underwriting guidelines through these uncertain times, it is critical that contractors pay close attention to their balance sheet. Managing their working capital can ensure a contractor receives the bond credit that they need. One specific area a company can focus on to accomplish this is being more diligent with collecting receivables.

Accounts receivable are listed as a current asset. However, bond companies will review the aging of a company’s accounts receivable and likely deduct any that are 90 days or more past due from the amount listed on the balance sheet. These are viewed as not likely to be received and will lower a company’s total current assets, which lowers working capital. This can directly affect the amount of credit that a bond company is willing to offer and possibly lead to bond requests being denied.

With so much remaining uncertainty in the economy, it is more important than ever for contractors to re-visit their balance sheets and take an aggressive stance with collecting receivables. These techniques can quickly build or re-build a strong risk profile to secure the level of surety credit a contractor may need for their bond program. 

As you develop your financial strategy and look to strengthen bonding options, consider Rancho Mesa’s Surety team of advisors. Contact Andy Robert at (619) 937-0166 or email him directly at aroberts@ranchomesa.com. 

Surety Tightens Due to COVID-19 Pandemic

Author, Andy Roberts, Account Executive, Surety Department, Rancho Mesa Insurance Services, Inc.

Before COVID-19, the construction industry had been enjoying one of the longest economic booms that this county has seen in recent memory. And, even though construction has been deemed essential, the industry is already seeing some effects from the pandemic, ranging from delayed material supplies, projects being shut down, and late or non-payments from project owners. Additionally, we are now starting to see some of the effects of the pandemic reach into the surety world, as some bond companies are beginning to limit their appetite and tighten their underwriting guidelines.

While some bonding companies have continued business as usual, others have made changes to their policies, with some opting to remove accounts that do not have frequent bond needs and others opting to not accept any new business submissions. While most surety carriers will not react this drastically, we anticipate them tightening their underwriting guidelines, and it is important for contractors to know that there are other options out there that might be a better fit for their bond program. This is where partnering with a Best Practices surety broker is of great benefit to a contractor.

At Rancho Mesa, we have access a variety of high quality surety markets, while also possessing a deep understanding of what different bond companies value when they are underwriting bond requests. As the markets begin to tighten, this type of knowledge becomes even more important. Certain markets will be a fit for some contractors while others will not, and selecting the wrong market can lead to financially sound contractors not receiving the level of surety credit that they need or deserve.

For more information, or for any questions regarding your surety needs, please contact Andy Roberts at (619) 937-0166 or aroberts@ranchomesa.com.