To come up with this list of what's worrying bond underwriters, I collected reasons from several that I know. Thank you to all who responded. They work for all sizes of bonding companies and with all sizes of contractors.
The things that keep them awake at night should be the SAME reasons contractors lose sleep. Here they are:
1. A contractor with too many "news."
Like new territory, new type of work, new client (especially the well-known demanding clients), etc. Underwriters can handle one or two, but too many "news" keep us up at night.
2. Contractors not getting enough work.
OR getting too much work.
OR getting work too cheap (all can be equally troubling).
3. Declination appeals (unless there's new information that makes the appeal sensible).
4. Toys!! You know what I mean, either too much equipment if it’s a civil contractor, or any contractor’s new boat, oversized new home, new motorhome, or new spouse, or new divorce (at least in community property states like Texas), and the working capital and net worth drops because of the new toy.
5. Late, last minute large requests over my line of authority with only partial information to go on.
6. Late financial statements - usually a sign that something is not good.
7. Severe deterioration in balance sheet due to loss, distributions, or “investment” in something not related to the bonded construction operations
8. Poor financial reports. When the interim statement shows one thing and the yearend ends up very different. Once you have found that you can't rely on interim financials it's hard to become comfortable with them in the future. So even thoughthe interim numbers may look good the bad year end and unreliable interims don't help.
9. Account with historically good balance sheet suddenly turns to poor balance sheet make-up, and has a HIGH bonded backlog, especially after being told a contractor has been operating profitably during the current reporting period.
10. Low cash / high underbillings, consistently being maxed out in their bank line of credit.
11. A large unexpected loss. If the contractor knows they are going to have a loss let us know. No one likes unpleasant surprises.
12. Not having continuity plans, or thinking the bonding company is their continuity plan
13. A large goodwill asset unexpectedly shows up in the financials (they bought another company, and didn’t bother to mention it to their surety ahead of time) and suddenly after adjustments you have no net worth.
14. Large distributions that decrease working capital and net worth. Money in the company has to stay in the company if the owner wants bonding capacity.
15. Large profit fades are always areas of concern.
16. Large equipment or property financed with short-term debt.
17. Debt, Debt, Debt.
Bond underwriters must not get much sleep! And these are the same things that SHOULD keep contractors awake at night.
We’ll go through some of them in more detail in future blogs. For now, if you’re a contractor and you’re having problems getting your bonds approved, maybe you need to see if you’re keeping YOUR underwriter awake!
And if you’re an underwriter, and you know of a sleep ruiner your fellow underwriters missed, let us know.