INDUSTRY INSIGHTS | SPRING 2010 EFFECT

Help Your Bonding Agent Help You

by Craig Olsen

Do you remember the scene from the movie Jerry Maguire (1996) when sports agent Jerry Maguire is in the midst of a contract renegotiation for his client, football receiver Rod Tidwell? Tidwell’s unruly behavior makes it difficult for Maguire to get the team’s management to negotiate, much less reach an agreement. He pleads with his client, “Help me help you!” It’s a memorable scene, and for the construction contractor and bonding agent, there are parallels.

Obtaining bonds in this economy is difficult, as the sureties are more cautious than ever and underwriting standards are tighter. Like the movie, here’s where a good working relationship with an agent becomes important—in this case, a quality bonding agent. The bonding agent can showcase the positives and explain the negatives as a contractor presents a case for creditworthiness to the underwriters.

So if there were ever a time for contractors to meet more frequently throughout the year with their bonding agent, this is it. There are several areas where you can help your bonding agent make the case for creditworthiness.

Improve equity

Believe it or not, new IRS rules can actually help you improve equity. New regulations were passed that may allow you to carryback net operating losses up to five years. Carrying back losses to years of strong income will maximize the tax refund. The following steps will enhance this approach:

• The regulation rules are complex; professional advice may be necessary to maximize the benefits from the net operating loss carrybacks.
• Owners of flow-through companies (S corporations and partnerships) should contribute the refunds back into the company.
• Include the tax refund or capital contribution as a subsequent event footnote in the financial statements.

Make conservative estimates on contracts

Bonding agents and underwriters analyze the company’s ability to estimate profit on contracts. Every year, they compare the estimated profits of contracts in process in the prior year to the actual profit when the contract is completed. A history of meeting or beating the estimated profit will improve the rating of the company.

Have a strong banking relationship

Financial institutions are tightening credit requirements and eliminating or reducing credit lines. The surety will want to understand the company’s ability to obtain and keep credit lines. Contractors should be talking to the bank early and often to understand the bank’s intentions. It is important to communicate this with the surety and the bonding agent. Another concern is the fiscal strength of the contractor’s financial institution. The number of banks on the Federal Deposit Insurance Corporation's (FDIC) “problem list” is at a 15-year high. Even a good company could have a difficult time obtaining credit at a new bank if its own bank fails. This is why it is important to understand the financial strength of the company’s bank and communicate this to the bonding agent.

Develop a management succession plan

The surety is at risk on all bonds issued until the contracts are complete. If there is a change in ownership or management in the near future, the surety could be exposed to losses if the transition is not well planned or executed. All contractors should have a succession or a business continuation plan in place, even if a planned succession is not in the immediate future.

No surprises

Bonding agents and sureties do not like surprises. Even if the news is bad, keeping them informed throughout the year is very important. Open communication allows the bonding agent to advise you of potential problems. The agent can then work with you to find a new surety or determine what will allow the company to keep its bonding capacity. To paraphrase Maguire, “Help your bonding agent help you.” Both of you will be successful as a result.