Updated: Oct 13, 2020
Transitioning from a Fast Track Bond Program to a Standard Bond program can seem arduous, however, here are some important reasons to do so and steps to follow.
The importance of a contractor upgrading their bonding capacity:
The cost of the bond itself. Fast Track programs are designed for a contractor that has occasional bond needs and are typically charged higher rates. These programs vary in single and aggregate limits depending on the surety. Standard program rates are often significantly less, enabling you to be more competitive when bidding which in turn can create better margins on contracts.
The contractor wants to grow. Any contractor wishing to grow and take on larger public projects of longer duration will need to convert to a standard bond program at some point. Generally, contracts of $2 million and greater on a single basis require a standard market.
How to transition from a Fast Track bond program to a standard bond program: Standard bond programs require more credible financial information and sophisticated cost systems. A contractor can increase their bonding capacity with a standard bond program by following these key steps:
Having a strong partnership with your key financial advisers. These include a professional surety agent who understands the underwriting criteria requested by the surety, a CPA which has construction accounting experience, a bank that understands and is friendly in the construction space of lending and last but not least forging a relationship with a surety which will not only give you good rates and capacity but as important or maybe more important stand the test of time if/when the markets harden.
Increase the quality of your financial statement presentation. Although CPA prepared financials can be more expensive than standard accounting, they will most definitely add credibility to the information provided. A CPA, preferably a construction-oriented CPA, will be able to help you understand the importance of excellent internal cost systems and can provide the percentage of completion format preferred by sureties. This can assist in shining the best possible light on you the contractor and your internal controls. This cost can easily be offset by the money saved in rate if done properly. Money saved by converting to a standard surety program will more than pay for the addition of professional CPA services.
Grow working capital and corporate net worth. Having the discipline to build up your balance sheet to reflect working capital (current assets-current liabilities) sufficient for your desired program by forgoing large bonuses or unnecessary equipment purchases is crucial. Once this is accomplished, distributions can be done as desired. This will show that you are determined to take the necessary measures to see long term success.
Providing proof of internal controls. Having internal controls that can manage the collection of receivables, track individual job costs, and control inventory flow is indicative of the success of a contractor. Having regular practices of job site inspections, clear documentation of change orders, records of subcontractors insurance, written safety policies, protection of materials and equipment, can all play a role in the profitability of a contractor and improve the sureties long term outlook on them, which can add to capacity and reduce rates.
Providing details about the job to be performed. Details for the surety can be the difference between approval and not. Underwriters, when maybe on the fence, utilize the narrative provided by you and your agent is trying to make the support make sense. Your willingness to fulfill underwriting requirements will greatly improve your chance of obtaining further surety support.