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Building a Solid Surety Relationship

Owners of even the most qualified and financially strong construction companies want the security that surety bonds provide to make sure their project is completed. Because no matter how good things are going for a construction company, a bad turn can sometimes occur — especially in today’s volatile economy.

Surety bonds can be critical to secure a project as real estate lenders are requiring them on many projects today. They provide assurance to the owner that the contractor will deliver the work and pay everyone from subcontractors to laborers to suppliers. This means the relationship between the company and the surety must be cultivated into a strategic partnership. Developing and maintaining mutual trust, respect and accountability is essential for a strong relationship.

There is no replacement for open and timely communication in a surety relationship. Being proactive in managing the relationship, specifically when it comes to sharing information about a company’s financial condition, is essential. Surety companies today may request more information and scrutinize details that have been discussed in recent years. Withholding information may damage the rapport both parties have created.

To develop a strong partnership, companies must keep the surety apprised of all operations. Financial stability and ability to meet future obligations must be acknowledged and documented. A company’s ambitions, as well as short- and long-term business goals, and how they intend to accomplish them must be properly communicated.

An excellent practice is meeting with your surety and other professional advisors on a regular basis. These meetings may include sharing job-status reports with the surety which demonstrates a company is achieving its goals. The reports should reflect all bonded and non-bonded jobs undertaken and provide evaluations that are reliable and conservative.

A surety isn’t only attracted to good finances. The reality is that high-quality financial statements reflect more than the bottom line. They also demonstrate qualities of the company being insured such as character and management style. A construction company can perform a variety of other tasks besides generating strong financial statements. These include: minimizing risk by remaining within their financial and technical capabilities; a demonstrated strategic planning process; controlling growth and lowering overhead to increase profitability; and effectively managing and justifying business risks.

Sharing your plans for the future is also significant. Talking about the highs and lows of the company and sharing a business plan for the next year or two will help a surety objectively calculate risks. Taking a surety representative to see construction projects will also help exhibit skills and further enhance the relationship. In addition, first-hand discussion with a company’s customers is an invaluable validation of a company’s capabilities.

In addition, surety companies look for contractors who can do more than complete projects. They also want knowledgeable owners who run profitable construction companies. The surety needs to ascertain that a company will grow and generate profit from its acquired workload.

A solid surety relationship is essential for all companies, including those just getting started in the construction business to the successful industry members looking to expand their bonding capacity.

For more information, please contact Thomas J. Menk, CPA, Director, Construction Services Group — Pittsburgh, at 412.281.1566 or tmenk@alpern.com.