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Construction Insurance Bulletin


By February 1, 2012No Comments

Construction firms must have a financial plan in order to keep up with competition, capture surety support and grow through partnership. In today’s market, it is crucial to perfect this strategy as quickly as possible. This is especially true because of the large number of requests for proposals designed to benefit small businesses. However, these RFPs come with risks. Steep liquidated damages and consequential damages leave small businesses with no choice other than blending with larger businesses to maximize surety support.

To guarantee the bonding they need, construction firms must adopt several best practices. The following are some examples of essential best practices:

  • Establishing a continuity plan that is funded by Life insurance.
  • Keeping a certified public accountant who is construction oriented.
  • Using job-cost accounting software to track data for financial statements.
  • Maintaining ample insurance coverage.

By using these practices, construction firms can increase their surety support and company respect. In addition to the surety, this idea also applies to any team partner.

Importance of a Construction-Oriented CPA. These certified public accountants are able to provide valuable insight into a field that has an extremely difficult pre-qualification process for surety bonding. In addition to their insight, CPAs can assist in a financial statement’s required accrual-based percentage. They also know who the key players are, and they always provide helpful information about the negative effects of profit fade for contractors. Since profit fade is a detriment to sureties, contractors must submit CPA-created financial statements for jobs exceeding $350,000. Approval is based on personal credit. There are varying rules for large projects and small businesses. To learn more about these rules, discuss them with us.

Working with a Stronger Contractor. Bond capacity is the amount of work a contractor can finance at one time. This number is the amount required to complete all un-bonded and bonded jobs. Sureties typically offer bonding credit up to one and a half times the amount of the largest completed job, and they usually offer about 20 times the working capital as capacity. This is because general contractors typically finance very little of their total workload. Subcontractors are normally offered about 10 times the working capital for sureties. However, there are exceptions. An escrow agent controls the funds from projects. He or she receives the funds from the owner, pays the suppliers, pays the subcontractors and then pays the prime contractor. There are special rules for indemnification and joint ventures.

The SBA Bond Guarantee Program. This is an alternative surety option available to contractors. It is designed to establish small business contractors’ bonding credit by guaranteeing up to 90 percent of the bonded risk. In order to participate in this program, small businesses do not have to participate in the SBA’s small disadvantaged programs or 8(a). There are two different plan categories. Plan B is for corporate sureties that are maintaining, underwriting and approving bonds on behalf of the SBA. Plan A includes bond accounts that are submitted to both the SBA and corporate surety for approval. To learn about the advantages and disadvantages for small or large businesses, discuss them with an agent. Since the SBA’s program might change, it is important to learn the up-to-date information from our office.