Tips to Maximize Bond Potential

Tips to Maximize Bond Potential

A surety bond is a type of guarantee in which the surety upholds a construction contractor’s promise to an owner that a project will be completed and bills will be paid.  As the surety is extending this guarantee, the contractor’s character and creditworthiness are most important. CPA prepared financial statements, including a balance sheet that can support capital and reflect solid performance, is also vital.  A surety will evaluate and adjust each line of the balance sheet in order to determine financial strength and to calculate bonding limits. Liquidity and net worth are key measures. Here are a few tips in preparing your balance sheet to maximize bonding potential:

  • Cash – high cash balance at year-end will increase liquidity and a balance sufficient for operations throughout the year will show good cash management. Increase collection efforts close to year-end and deposit payments by the end of the year. Likewise, do not pre-pay or early pay any vendors in order to preserve cash.
  • Accounts and Retentions Receivable – amounts over 90 days will not be counted in full, if at all, as current assets. Clean up the accounts receivable aging by writing off any accounts deemed uncollectible and make efforts to keep balances current.
  • Costs in Excess of Billings (Underbillings) – since this represents work completed but not yet billed, it should be minimized. Large underbillings can be a red flag to the bonding company as they could mean unrecognized losses. Bill as much as possible by year-end, if the contract terms allow.
  • Fixed Assets – net book value of property and equipment will be included as a noncurrent asset and non-operating assets such as leasehold improvements will be discounted or taken out altogether. Evaluate and set depreciable lives and salvage values based on actual experience to ensure assets are not being depreciated too quickly. Match the purchase of new assets with long-term debt and do not use an operating line of credit.
  • Billings in Excess of Costs (Overbillings) – should be reasonable and balanced in relation to open work. Overbillings should also be reflected as cash in hand, otherwise, it could indicate amounts received for one job but spent on another job, demonstrating poor job cash management. An industry benchmark is a net overbilled position equal to 2% of sales.
  • Liabilities – proper current and long-term classifications are important as this affects the current ratio and working capital. Make sure any debt covenants have been met or waived, otherwise the debt is callable and therefore considered current in its entirety.

I would encourage contractors to work together with their CPA and the bonding agent, as a CPA can assist in clarifying any concerns the bonding company may have.  An experienced CPA specializing in construction accounting can also add credibility.  We currently have a team of seventeen individuals dedicated to our Construction Industry practice group, including two Certified Construction Industry Financial Professionals …how can we put our expertise to work for you?

By Amy McEldowney, CPA, CCIFP

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