Even if your construction company doesn’t yet need to be bonded, it pays to look at what bonding companies require. Because a bonding company intends to see that your business is healthy and functioning well, their requirements can be a standard to follow.
Some liken the bonding experience to requesting a loan from the bank. And we’ve all heard the adage, “A banker is someone who will lend you money if you can prove you don’t need it.”
Yet, the truth is a bonding company protects each party involved in a construction project, including the contractor and the client.
Focusing on Performance Bonds
The three main types of construction bonds are bid, payment, and performance. In this article, we will be covering the preparation necessary for obtaining a performance bond.
A performance bond is a type of surety bond used by investors involved in construction projects. Their focus is to protect against disruptions or financial loss. The bond ensures a construction project’s bills will get paid. That’s the simple part. The less than simple part is the process involved in obtaining the bond.
What Bonding Agents Want
A bonding agent looks at a contractor’s proven project track record. They are looking for what they refer to as “the three Cs.” The three Cs are:
Character – A person of integrity
Capacity – The bandwidth to complete the job at hand, such as tools, equipment, and workforce
Capital – Credit history and enough cash flow to meet payroll, obtain supplies, and cover contingencies
Using the three Cs helps bonding companies see that a contractor has integrity, can manage well, runs a profitable business, and is capable of meeting obligations.
Start the Process Early
Just as no competitive athlete walks onto the field without the benefit of proper training, continual practice, appropriate clothing, and the correct equipment, no construction contractor should darken the doors of a bonding agency without being prepared.
From a financial standpoint, the bonding agency will look for:
Financial statements of the previous year
Ongoing compilation for the current year
The Basic Financial Documents
Typically, the documents required will include the following:
Balance Sheet
Showing all that your construction company currently owns – the assets and equity, and what your company owes – the liabilities.
Income Statement
Is a record of your revenue and expenses, the net profit, and is set within a specific period of time.
Schedule of Receivables
A report that lists all amounts owed by customers.
Schedule of Payables
A listing of all the vendors that your company owes
Further documents that may be required are:
Personal financial statements of owners
Proof of federal and state tax filings – both business and personal
Bank statements and a reference letter from a financial institution
The Bottom Line
Yes, the bonding agency will be looking at your bottom line. They will want to see your most recently prepared financial statements, including WIP and accounts receivable aging. Having a place for everything and everything in its place in your accounting systems is your best strategy when seeking a performance bond.
If you have further questions concerning financial documents and the bonding process, feel free to schedule a complimentary discovery meeting at 866-629-7735.
Construction Contractors look to The Profit Constructors to provide advocacy in dealing with:
Clients and customers
Employees and subcontractors
Vendors and service providers
Governmental entities
Working with The Profit Constructors gives Construction Contractors the means to organize their operations in ways that help them:
Remain informed
Avoid hassles
Reduce risks
Be future-ready
Ready for action? Or want to know more? Get in touch today to schedule a complimentary discovery call. 866-629-7735