Pushing Through Job Size Issues with Your Surety Company
Struggling to get bonds for bigger construction jobs? We’ve got you covered! Learn how to push through job size issues with your surety company and take your contracting business to the next level. Watch now for practical tips and insider advice!
Topics we discuss in this episode include:
- 02:23 – Underwriter concerns and considerations
- 05:56 – Cash flow and financial risks
- 08:52 – Time and preparation importance
- 11:16 – Working capital and equity
- 14:34 – Profit management and risks
- 17:22 – Learning from rejected projects
- 19:25 – Checklist for larger projects
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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com
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TRANSCRIPT
[00:00:00] Wade Carpenter: Are you struggling to get a bond for a larger size job through your surety company? Finding it tough to get support you need for those big projects? It’s a a challenge many contractors face. But today we’ll talk about how to navigate it successfully.
Come on in, let’s talk about it.
This is the Contractor Success Forum. I’m Wade Carpenter with Carpenter Company CPAs. With me, my co host, Stephen Brown with McDaniel Whitley Bonding & Insurance. Stephen, getting bonds for growing contractors is a tough issue when they’re trying to get to that next level of a project. And I’m looking forward to hearing what you’ve got to tell us today.
[00:00:32] Stephen Brown: Well thanks, Wade. I hope this podcast helps our listeners. I’m sure every single one of our listeners who have been bonded for a construction project in the past has run into a situation where, they’ve wanted to bid a job. You as a contractor want to bid a job. And it’s two times, three times, four times, five times or more bigger than the biggest projects you’ve already completed.
So you want to sell that job to the underwriter and you want your bonding agent to sell that job to your underwriter. And it’s frustrating because you want the underwriter to understand why it is that you can and should go after this project.
And so I just wanted to talk about the things that you can do as a contractor to get the yes on the project. Yeah. Okay. We’ll support you on that. That’s what you want to hear. That’s the goal, right? Okay.
So remember, Wade, that as surety company, the most important thing than an underwriter that decides whether to let you have that bigger job or not wants to know is how are you going to do it? And what kind of profit are you going to put on it? If you’re a subcontractor, how much of this is going to be cost versus labor? What about the materials? Can you get ahold of them? Is this a type of stuff that you do all the time? Is this a long term project and how’s that going to affect, your business, your cashflow, and what’s going on with the economy?
If you’re a general contractor, they’re going to want to know, are these your tried and trued subs that you work regularly with, that you can trust to help you through it? Because a huge chunk of this project depends on the sub that you’re using. Right?
[00:02:23] Wade Carpenter: Absolutely. I think you’re unpacking a whole bunch in what you said already because I know I’ve got contractors that, they want to get to that next level. And they always think, when I just get my company to that next level, things are going to be different.
And, there’s an old saying I heard recently: it’s, you get to the next level, there’s a new devil. And being able to get to that next level, this is one of the biggest stumbling blocks I’ve had, a couple of contractors in particular, I’m thinking about right now. This is two and a half times what they’ve ever done And it’s been a struggle. And I know we’ve done things, you know they’ve talked about splitting the jobs in different phases and stuff like that. What are your thoughts on that?
[00:03:01] Stephen Brown: It’s a struggle, and the contractor is saying, I can do this. This is what I do. I can do this. A mindset of a general contractor and an engineer is, of course we can do it. Of course, we can do it. We understand all the moving parts of this. We understand the specs. We understand the timeframe. We understand the workflow of it. We understand everything there is to know about it.
Why aren’t you as a surety company saying yes? And, I imagine that it’s frustrating to a lot of our listeners to get a no. I’m sorry. I just can’t get it done. Your bonding agent’ s job is to guide you through the process.
If you have a good bonding agent, they know when to push and when to back off and how to sell this job to an underwriter. Now, does that help you? You got to help your bonding agent sell it. You have to give them the reasons why it makes sense. A good bonding agent isn’t going to just push an underwriter, for a larger job, just to be able to write the bond.
Because, here’s the thing, Wade, if that job doesn’t make sense to you and your bond agent and your underwriter, then your bonding agent’s going to take it to another underwriter to see if it makes sense to them. You’re going to a new underwriter, pushing the edge of an envelope on something that another underwriter has said no to.
And you’re starting from scratch and odds are by the time this has happened, it’s two or three days before the job bids, right? And you’ve already put a lot of time and energy into pursuing this job. You’re excited about it. And you don’t have all the facts and information about the job in yet. You don’t have your sub prices in.
So you can’t give full information. Firm, clear information to your bonding company, the nuts and bolts of the project. You don’t even know the size. We have a job that’s bidding tomorrow that we have a number of our clients bidding. And it has gone anywhere from 6 million to 14 million. Up and down.
[00:05:08] Wade Carpenter: Oh, that’s a
[00:05:09] Stephen Brown: spread.
Yeah. With everybody up and down. And the reason is there’s a one particular sub supplier that is 60 percent of the project.
So our customers would say, this is an easy project. This is something we can do. There’s just a lot of it that we have to do, that we have to pull out.
And the bonding company is saying, all right, this job is bigger than any project you’ve ever done by a multiple of X times, and you’re depending on one sub for everything that you haven’t worked with before, Even though you can finance the project, you’ve got the money to say yes to the project, even though the project is local and it’s a project that you can do, you’ve got the right amount of labor to do your part of it, 60 percent of that job depends on a sub.
And even though you bond back that sub, that sub gives you problems. Then you get into time issues, liquidated damages. Then you have to decide if it’s the only game in town, whether you’re going to fire that sub or not. So it’s a huge stretch for a new relationship with the surety company to say yes to this job.
I get it. I used to be a bond underwriter, Wade. I understand how underwriters think, how they process things. And as a general rule, in a new surety relationship, they will go up to two times the biggest job you’ve already done. And so, there you go. \
Will they do more than that? Will they do three times? Will they do four times the biggest project? They might. It just depends on how much of that you control and how much of it is what you’ve done in the past, but on a larger scale.
Make sense?
[00:06:52] Wade Carpenter: Yeah. And let me back up because you’ve thrown a lot into what you said there, too. And just backing the whole truck up an underwriter. Obviously, we don’t want to, pay a bond claim on a job, but fundamentally, what are these guys looking? I know what I would say. But why are they so concerned about somebody jumping to this next level? What are they concerned about?
[00:07:14] Stephen Brown: They’re concerned about everything from your ability to manage the project. They should be comfortable with that already, but the bigger the project, the more management issues are involved. So the more you can talk with your bond underwriter, have a meeting with your agent and your bond underwriter, have your agent set that up to explain exactly what you want to do and how you want to accomplish it is everything.
That’s number one. If you haven’t done that and you haven’t given your agent time to chew on this and help develop a game plan for getting it approved, then the answer is probably going to be no. And even though different surety markets, they go through hard markets and soft markets where all the sureties are making money and they’re going to be a lot looser on their ability to say yes.
There’s always something that you can do. One thing that a relationship that will allow you to get the bond on a larger project is the SBA bond program, and also funds control. Or some form of collateral to get the project over the hump.
But that’s usually talking about a situation where they really understand that it’s a short term, larger project, and it’s a lot of what you do all the time.
So you say, what’s the trick to getting this done? I can do this, I can do this. It’s everything, Wade. From the current financials, showing your current cash position, equity in your company, the equipment you’re gonna need to do the job, the labor, the project superintendents that you’re gonna use and their experience on this particular type of project, and your subs, if you’re a general contractor.
And the location of the project. So these are all the main things that you have to really fine tune to help get this bond pushed through. And like I said, I can’t stress enough, Wade, the more time you have to talk this through the better.
Because it’s okay to say, I don’t know what the project’s going to amount to. We believe based on the information that we’re seeing now and not having all our subprices in, it’s going to be a X amount size project, 10 million.
Then you get the bonding company on board with saying, yeah, this looks like something you should pursue. And it looks like something you can make money. We support you in this.
And then as you get closer to the bid date and you say, this sub and this sub really surprised us and threw out some numbers that we were amazed about, but we really want to work with them and use them. We still want to bid the project. We’re going to put a lot of profit in the project. And we want to go with this particular sub.
We have other sub prices as well. It’s going to be, instead of 10 million we told you it was going to be, it’s going to be 20 million. Can we still bid it? Odds are, if your financials are in place and you’ve already done the grunt work to have the underwriter say yes, then it’s a matter of them just taking it on up the line and saying, hey, look, this job bids on X and X date.
We’re getting our sub prices in. This job is going to be twice what we got it approved for. And they’ll say, okay, they’ll ask a bunch of questions about why it escalated and they’ll probably say, yes, if the numbers are there. They don’t want to lose you as a client by saying no to something that makes sense to them.
[00:10:36] Wade Carpenter: My mind still goes back to some horror stories. I can think of some contractors that bid jobs that were twice their price and they could not cash flow it. They haven’t thought about the effect of retainage sitting out there for a couple of years and not getting that cash flow. And I think, I’m assuming they look at that. Can you cash flow it? Can you afford to do this thing?
And again, I’ve seen contractors throw themselves right out of business. And so I know I’m loading a few things into this question, but, is there rules of thumb that they look at from, I know the traditional bonding rules, but throw out some of these things that they should be thinking about.
[00:11:16] Stephen Brown: Okay. First of all, your comments, the reason I enjoyed them so much is, a bonding agent can bond you out of business. If you have enough cash in your account, a bonding agent can bond you right out of business. I’ve always said about getting an attorney or an accountant that knows the construction industry.
You could be paying for bad advice. And if you’re just got a bond agent that’s gonna ram rod a bond through, and you have a claim on it, first of all, they’re not gonna last very long in this business as a bond agent. And number two, they’re gonna put you out of business. What do they care? They got the bond approved. That’s how they get paid.
So every part of why the project makes sense, from the retainage to the timeframe and how well it fits, this is why I really want to push for this. This is right up our alley. Is everything to getting the bond approved and, like you were saying, the nuts and bolts, rule of thumb, two times your biggest job you’ve done before is something that’s a pretty, fairly, it’s not an easy sell, but it’s a sell that a experienced bonding agent can get pulled off for you if all the elements fall into place.
So the number one rule of thumb is time to absorb the fact that you’re asking for this. that’s 80 percent of it to me. Please give me a heads up. Let’s talk.
[00:12:42] Wade Carpenter: I know a lot of times they run into the standard working capital rule of thumb and the equity rule of thumb. Do those still apply or can we get around some of that? Depends on the contractor?
[00:12:53] Stephen Brown: That’s a great question, Wade, because, so many times you say, look, I’m subbing out 60, 70 percent of this job. They’re bonding back. What risk do you have bonding company? Instead of looking at a 10 percent working capital case, we can stretch this into a 5 percent working capital case.
And what I mean by that again, Wade, is a 10 percent case means if you have a hundred thousand dollars worth of working capital current assets, minus current liabilities on your financial statement, you get 10 times that amount in bonding, or a million dollar bond. So that’s just a very simple explanation of a working capital case.
So here’s a job that’s gonna push your working capital case from 10% to 2%. How do you get around that? A huge part of that is the financing issues about this job. The retainage. This is something that, every part of this goes into getting the job approved. And as you can see, there’s more and more questions involved.
This helps you decide, am I really right on wanting to bid this job? Or is it worth it to me to bounce it off my professionals and see what they think? And sometimes your professionals may be wrong and you’re right. Other times they may be right and you’re wrong. But when all of you are on the same page, usually you’ve made a good decision, or at least you don’t wake up wishing.
Maybe after the job bids and you could have made a huge profit on it. You might have some money morning quarterbacking, but, as a general rule, you should just move on, because there’s so many parts. That’s why we ask on these jobs that we get a full copy of the specs. We review the contract. We look at the insurance requirements. We look at the timeframe, the retainage. The paid is paid clause, if you’re a subcontractor, how that’s worded.
And understanding when and how you get paid. And then tying that into the particulars of this job. Is this a job you can front load profit wise? Is this a job that’s going to suck a lot of capital in the early stages? When will you play catch up? And also, the most important thing, Wade, is the profit that you project on the job.
Are you maintaining that throughout the project? That’s what the underwriters want to see. Is that on all your projects that you’ve done that have been larger, or where you’ve taken a leap in the past, you’ve been able to manage that profit. The reason is, when you have a problem happen, when you have a subcontractor go under or cause problems, then you are losing money, guaranteed.
Whatever you thought the project amount was going to be, you’re losing money. So if the profit margin is small, you’re losing money a lot faster because of that situation.
So I know I’ve gone over a lot fast way, but I wanted our customers to know that saying no to a certain job from a underwriter just involves that you haven’t done your background work and you ought to all be on the same page.
[00:15:58] Wade Carpenter: Sometimes the no is probably some of the best advice you could have gotten. But, you know, you sort of went where I was going to go with this is can you get around these traditional rule of thumbs on working capital and equity and stuff like that.
But, again, sometimes if your professional is telling you, this job is going to put you out of business, I think that’s really good advice. And you may be really disappointed in not being able to get to that job.
But a lot of times there’s more wisdom in that than you can think of. And you may be pissed off about the fact that they may say no about it, but when you really think about it, and again, I’ve seen too many people stretch themselves beyond their capability. I think that’s where they’re going with it, is we’re trying to make sure that you can do this job. And fundamentally, you probably know how to build it, but do you know how to manage it? Do you know how to cash flow it?
[00:16:50] Stephen Brown: That’s exactly right. I have a project right now that I was thinking about of a customer of mine, and it was a couple of engineers that wanted to build a parking garage, a large parking garage down in Miami. And they had not done projects down there before, and it was three times their largest size. And the home office underwriter had to get involved because the project was so big.
And the home office underwriter, our regular underwriter and I talked and talked and talked about it. And the home office underwriter was very much against it before the project started, but they wanted to hear why it made sense. Prove to us why we’re wrong.
A good home office underwriter, knows the construction trade and they understand larger projects because they’re involved day in and day out. This project is bigger than my, as a bond agent, the underwriter I work with all the time, it’s bigger than their capacity to approve. So it goes to what we call the home office underwriter.
And this home office underwriter listened carefully, said no, and explained why they didn’t think they should do it. Didn’t just say, no I’m not doing it, but they said I’m really against this and here’s why, and here’s what you’re not seeing on the project.
And so my contractor said, we consider you and your bonding company team members. Members of our team, and when the whole team doesn’t agree we’re gonna go with your wishes and we’re gonna not bid the project.
And so the bond wasn’t approved, didn’t bid the project, and to this day, these guys, which are engineers, of course, you know, we could have done that job. We could have made money on it.
But they are proud of the fact that they were able to say to the bonding company, we consider you a team member and we truly value you. And it’s not worth that relationship to change companies or to fight you over this.
And, as I look back, this was maybe 15 years ago, Wade. When I look back on it, it was a great decision in the relationship of this contractor and this surety, which is stronger than ever. And when we’re talking about project scopes going five, six, 10 times your biggest job, and it makes perfect sense, they’re the ones saying yes. We support you.
[00:19:14] Wade Carpenter: So to wrap this up, can you give our listeners, give them a checklist? What are the things they need to do if they’re going for a job that’s a little bigger than they’ve ever done? What should they do?
[00:19:25] Stephen Brown: Okay, number one is start talking to your bond agent about it. Give them a ring. Just say, hey, there’s a project that came out that’s on our radar. I’m going to send you the specs on it. We think it’s going to be about a so and so size job. But we really want to go after it, and here’s why. Just start the ball rolling.
And a good bond agent will immediately build up a case to get that bond approved. That’s our job. You want to bid the job, our job is to get the bond approved. And so a good bond agent will say immediately, all right look, if we’re going after this and we’ve got this amount of timeframe, I’m going to need, have you closed out the month of so and so? Can you get me some in house numbers? What’s your current work on hand right now? And then when can I get the underwriter to come meet with you? When are you free for that?
I need the financial information first and then I need to make sure you’ve thought out why it makes sense and then I want to bring the underwriter to talk to you about it.
[00:20:28] Wade Carpenter: This has been great. I know I have contractors all the time that are struggling with this. And I know our listeners out there are probably doing some of the same things. For our listeners, I hope you got a lot of value out of today.
If you’ve got any thoughts or feedback on what we discussed today, we’d always love to hear your questions or comments, drop them in.
Thank you for listening to the Contractor Success Forum. Get more information at Contractorsuccessforum. com or the Carpenter CPA’s YouTube channel. We’d appreciate it if you consider liking, subscribing, sharing, and following us every week as we post a new episode. And we will look forward to seeing you on the next show.