January 19, 2007

Opinion

Simple steps to maximizing your surety credit

Surety is a form of credit, much like banking. Having spent the past 20 years in both the surety and banking industries, I have developed an appreciation of the characteristics demonstrated by the most successful contractors. Many of these traits happen to be the key areas surety underwriters focus on, and if put into practice, should result in greater credit being made available.

The foundation of surety is prequalification. Sureties evaluate the three Cs of credit in their assessment of a contractor – character (integrity), capacity (ability to do the work, track record) and capital (working capital, net worth, cash). A contractor must inspire a fourth C in the underwriter – confidence. If my confidence level in the abilities of a contractor is high, I am going to support the contractor to the maximum I can. Here are some things you can do to maximize your support:

Planning - The most successful contractors plan for their success. They develop annual and often longer-term business plans and execute them effectively. They plan for the future by establishing well thought out succession plans. Planning effectively, and sharing those plans with your surety underwriter and banker, is a big plus.

Stick to Your Knitting – Focus on work you know your organization can handle. Variables to consider include scope of work, resource allocation, size of jobs and geographic location. The best contractors demonstrate discipline and self control in the work they pursue and will not “bet the company” on any one job.

Build Net Worth and Working Capital – The most successful contractors are those who have built a strong foundation by adding to their financial resources each year. Working capital, a measure of the liquidity of a firm, is a true sign of strength and demonstrates a contractor’s ability to deal with the inevitable short term hiccups involved in the business. Most sureties will simply calculate net worth and working capital and apply a leverage factor to determine the maximum support in terms of bonded and un-bonded aggregate costs they will grant a contractor. A basic rule of thumb is the higher your working capital, the more surety support you will get.

CREDIT TIPS

Mike George

Avoid Reliance on the Bank – With few exceptions, general contractors should have net cash balances and not borrow (except to finance fixed assets). Subs will tend to borrow as they often have to finance labour and material and wait to get paid. Sureties tend to have a negative view to companies that regularly borrow near the maximum of their operating line of credit. The bottom line is that if you rely heavily on the bank you have given up some of the control and flexibility of your organization and you are now reliant on the bank to continue to lend you money. If they have a change of heart, you are in trouble. Don’t allow the bank to take cash collateral to secure your line as it simply defeats the purpose of having a line of credit. Note that the bank will margin your receivables and will often write off anything over 90 days (as will your surety) so collection of over-dues is a key.

Keep Your Company “Clean and Simple” – Complex and confusing organizations with different year ends and numerous inter-company transactions do not inspire confidence in your underwriter (and they are far more work for us to understand). Clean and straightforward organizations get the most support. If you are going to invest in opportunities outside of your construction business, keep them separate from and without compromising your bread and butter contracting business.

Practice Prudent Risk Management – Reduce and spread your risk by signing good contracts, ensure the company you are working for can and will pay you, bond back your own sub-trades and major suppliers. Take as much risk out of your jobs as you can and protect your margin. We are seeing an ever increasing pass through of risk down from owners and their consultants to contractors, and prudent risk management control is a must. Ensure your business is adequately insured, including key man life and critical illness insurance payable to your business in the event of your untimely demise or illness.

Keep Disputes and Litigation to a Minimum – Litigation is expensive and with uncertain outcomes the only sure winners tend to be the lawyers. Construction is all about disputes and excellence in dispute resolution is a differentiating factor for the best contractors. Sureties do not like to issue lien bonds and hate getting dragged into disputes.

Build the Best Team of Professionals You Can – Surround yourself with experts in all facets of your business. This includes your surety and insurance broker, your accountant, lawyer, banker and underwriter. I find that the best contractors draw on these resources almost like an external board of directors and use the advice of truly knowledgeable people in helping shape and direct their business.

Provide Information – Most professional sureties expect to receive accurate and timely quarterly updates of financial statements, work on hand reports, listings of accounts receivable and payable from their active accounts. Advance notice of large upcoming tenders is also a plus. The better the information flow to your surety the more comfort they will have with your program and the more support you will get.

Get to Know Your Surety Underwriter – Insist on getting to know your surety underwriter, and especially the decision makers within the surety company. Our comfort with a contractor tends to increase with familiarity and if we can get together face to face it will maximize your support.

Mike George is president and co-founder of Trisura Guarantee Insurance Company. He is immediate past chair of the Surety Association of Canada, previously served on the board of directors of the Toronto Construction Association and is immediate past chairman of the Construction Institutes’ Accreditation Committee.

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