However, before your surety will issue additional bonding to your company, it’s going to ask you to supply significant documentation detailing the firm’s financial health. As a part of the evaluation process, the surety will ask to see your financial statements, appropriate interim and annual schedules, and schedules of contracts in progress, contracts completed, backlog, and disclosures about the extent to which contract billings are used as bonding collateral.

Provide Timely Statements

Respond to your surety’s requests for financial information as quickly as possible. Better still, be proactive and make your financial statements available to your surety on a regular basis.

Review Your Accounts Receivable

Your surety may be alarmed by any large variation in the level of accounts receivable. You’ll need to take steps to institute a prudent collection policy if you want to keep this from happening. Review older receivables regularly and establish workout arrangements with customers that are slow to pay.

Focus on Cost Accounting

Your surety wants to feel comfortable about how you estimate and manage job costs. That’s why you should expect your surety to carefully review your estimated and actual gross profit on a job-by-job basis. Your goal should be to minimize “profit fades” -- the decline in profit margin from the time a contract begins to the time it is completed. Of course, you’ll want to be certain that your accounting systems are functioning properly before you give your surety financial information.

You’ll find it easier to manage estimated profits on your existing jobs if job cost information is up to date. So make certain that you update the labor and material costs you incur on projects on a weekly or bimonthly basis. Your accounting controls should be in place so that accounts payable and payroll costs are reported properly.

Reveal Transactions Between Related Parties

Your financial statements should disclose any related-party transactions. It’s important that you are upfront about detailing the nature and terms of any agreements between persons with potential conflicts of interest.

Be Prepared To Detail Personal Finances

The surety is likely to request information about your personal finances. If you invest in real estate, you may need to disclose to the surety the related financing arrangements, cash flow, occupancy rates and lease information. In addition, you should inform the surety of any personal guarantees on loans. Your surety also may want to review your insurance coverage -- especially life insurance. Life insurance cash surrender value can enhance your company’s adjusted working capital, which is an important factor analyzed by sureties. Because the surety is depending on your actions in the future, inadequate personal insurance can limit the company’s bonding capacity.

Whatever the outcome of an attempt to secure additional bonding, the fact that you are paying closer attention to your financial statements also provides you with information that is valuable for the effective management of your construction operations.

Work-In-Process is provided by Somerset for our clients and other interested persons upon request. Since technical information is presented in generalized fashion, no final conclusion on these topics should be made without further review. For additional information on the issues discussed, please contact Ken Hedlund, Jay Feller, Steve George, Chris Mayfield or Rebecca Ogle  of our Construction & A/E Team. This document is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

Somerset CPAs, P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.IndianaConstructionCPAs.com
info@somersetcpas.com