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THE BOND NEWSLETTER
I have been
thinking about writing a bond newsletter for a long time now. I didn’t know if I would have the time or maybe it was just
plain procrastination on my part, but I’m going to give it a shot.
We will send this quarterly newsletter to
our existing and prospective clients and other friends related to the construction industry, as well as posting it on are
website.
History and business cycles seem to repeat themselves. As Dickens wrote “these are the best of times
and the worst of times”. In the 1990’s the surety industry as a whole was probably doing some crazy things to chase new business
production. In many cases they were giving away the store. It has inevitably caught up to them and now the pendulum has swung
to the conservative side. This might be the toughest bond market in nearly 30 years. Many surety companies have either exited
the market completely or merged with other companies. We do not have nearly as many markets we once did. The cost of doing
business has gone up, especially as it relates to Reinsurance and bonding companies have tightened up their underwriting.
The three “C’s” of underwriting- Character, Capacity and Capital used to be important. Now Capital greatly outweighs
the other two. While contractors are supposed to be honest and experienced, money is most important. Contractors today, more
than ever, need good quality CPA prepared financial statements, with a strong balance sheet and profit and loss statement.
While there are many of you that are in a strong position, there are many that need to work on this. The key is to have an
experienced bond agent to handle you account and a good CPA who understands contractor accounting. The statement needs to
be a % of completion statement and if you are doing jobs over $400,000.00 or so, it needs to be a “Review” statement, not
“Compilation”. A quality CPA prepared financial statement is key to a solid bond line.
Another key to a solid bond
line is a good flow of information, especially current work on hand schedules and interim financial statements. This allows
the bond agent and company underwriter to monitor your progress during the year.
Many contractors think getting bonds
is like calling for an auto policy, it is not. Surety bonding is a credit function, much like dealing with a bank. Most of
the time the banker has a much better collateral position than the surety company, so good quality information allows the
bonding company to do more for you.
That is enough for this newsletter. I probably have bored the heck out of you.
Remember there is great opportunity out there to make money right now, but be real careful to know who you are working for,
whether it is an owner or G.C. Send your notice to owners, check financing, and check reputations of the owner, even if it
is a public body. Be careful or you will get burned. All it takes is one bad job to put you under or cause you many sleepless
nights.
If you need bonds, give us a call. If you know someone that needs bonds or might not be happy with their current
company, I hope you will give them our name. Call, fax, or email myself or my son Michael if you have any questions or comments
or if we can help you in any way. School is starting again, so watch out for the kids and have a great month.
-Art
Broder
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