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R&R Insurance Blog

Build Bonding Credit With Construction Funds Control

Posted by Jay Zahn

BondingContract Bond underwriters traditionally screen potential bond customers (contractors) on the basics of 3 C’s Capacity, Character and Credit. The 3 C's are usually defined as:

  1. Capacity: to complete the work, the resources of manpower, equipment and track record of completing work in the category of the work contemplated.
  2. Character: the background and history of the contractor are positive indicators leading the bonding company to believe the construction company will endeavor to complete the work contemplated.
  3. Credit: A combination of financial statement and borrowing history which builds a case that the contractor has sufficient working capital, equity, profitability, and a bank relationship which all will assist the contractor in completing the work contemplated.

It takes a combination of these 3 basic measurement elements to potentially qualify for a bond. Recently with shrinking profit margins, and available work, we are encountering contractors who are strong in relation to capacity and character, but whose credit has eroded over the last few years.

In cases where credit has eroded, surety professionals at R&R Insurance will suggest the use of funds control to secure bonds for contractors seeking bonds in Wisconsin.

Funds control simply stated is a system of parking a job’s revenues in an escrow account allowing the bonding company to be sure that the stream of revenues are going to satisfy job costs associated with the project at hand. Once costs are validated, project revenues are then disbursed by the escrow agent who uses those funds to pay the suppliers, subcontractors, and contractor at regular intervals throughout the duration of a project. This ensures that at the end there is a reasonable expectation that job costs are satisfied and profits can be realized.

Wisconsin contractors interested in improving any of their 3 C's or Wisconsin contractors interested in fund control options should contact Jay Zahn, Surety Specialist at R&R insurance Services.

Topics: eroded credit, Jay Zahn, Bonds in Wisconsin, Business Insurance, contractor, Wisconsin bonds, contractor credit, Funds control, Construction, Bonds, Contract Bond, credit has eroded, surety professionals

SBA Assistance With Bonds For Contractors

Posted by Jay Zahn

BondingThe SBA has in place a Surety Bond Guarantee Program which helps contractors qualify for bonding. This offer will reduce risk for the bonding company, and will enable more contractors to qualify. R&R bonding division is available for any bonding needs or questions you might have. Contact our bond knowledgebroker Jay Zahn for more information.
This plan offers assistance to contractors, but, the procedures must be followed and the forms must be completed to navigate through the system to receive proper results.

Topics: Surety Bond Guarantee Program, Jay Zahn, surety, Guarantee, knowledgebroker, Surety Bond, bonding, Construction, Bonds, R&R, bonding for contractors

Bond Thresholds Now $150k!

Posted by Jay Zahn

In the United States, the law requiring contract surety bonds on federal construction projects is known as the Miller Act. This law requires a contractor on a federal project to post two bonds: a performance bond and a labor and material payment bond.

What’s important to know is that the threshold at which these bonds are required has recently been changed. Here is an excerpt from the July/August issue of The NASBP Pipeline, one of our Bond news sources:

Federal Miller Act Increases to $150,000 effective October 1, 2010

As noted in the Federal Register that was issued Monday, August 30, 2010, the Federal Acquisition Regulation (FAR) Councils have instituted the Consumer Price Index increase to the Federal Miller Act that will be effective October 1, 2010. This raises the current threshold for all payment and performance bonds when agencies acquire federal construction contracts from $100,000 to $150,000.

There are varying limits for State and Local Bond requirements. If you have any questions about this change or any other Bond related issue, please contact our Bond Specialists at 262-502-3829 or email Jay Zahn at Jay.Zahn@rrins.com.

Topics: Business Insurance, Bonds

Surety Bonding: Managing a Changing Economic Climate

Posted by Jay Zahn

Business plans are criticalConstruction is a complicated industry that faces ever-changing conditions. 2010 will be no exception as contractors will be feeling the pressure of a struggling economy, increased costs, minimal work and increased competition. Those who are not prepared will feel significant pain and could ultimately fail. The following provides some suggestions for managing the year ahead:

  • Work with a team of construction oriented professionals you can count on to assist in decision making. A bond agent well versed in contract bonding should be a priority. If your agent is not knowledgeable or does not have the market to fit your company's needs, then there is little other professionals can do to help with you bonding needs. A CPA that specializes in construction is a must. Attorneys, bankers and insurance agents are also key advisors.
  • Work to provide a strong relationship with your surety and provide full disclosures. This means communicating good and bad news to your surety bond agent and underwriter if or when problems begin. If possible, many sureties will work with the contractor to help it through the problem. The surety is a critical partner though good times and bad and can help owners and contractors manage the changing economic climate. Bottom line, the surety wants you to succeed as much as you do.
  • Have a bank line of credit available to support the company's business plan.
  • Evaluate your bank. Contractors should critically evaluate the strength of their bank and that bank's knowledge of and "commitment" to the construction industry. When credit tightens, banks that do not have a deep commitment to contractors may pull back from an entire industry, regardless of the underlying credit worthiness of their customer.
  • Bond subcontractors, especially when they represent a key trade, a significant portion or sole source of the work, you are unfamiliar with their company, or there are questions on their availability, capacity, ability or financial strength.
  • Don't take on more than you can manage. Stay within your capabilities. Think twice before you consider work outside your known geographical area and niche.
  • Do what you do best. Protect your top talent, who will manage projects well no matter what the market conditions are.
  • Don't "buy" a job to keep employees busy—adjust overhead and maintain profit margins. Bid the job, not the competition.
  • Don't be too anxious to fill your backlog. You have a choice on what projects to chase and what owners to work with. Evaluate the risk. Sometimes a contractor's best job is the one it does not get. One bad project can tear down a company.
  • Demonstrate discipline in applying appropriate margins to the risk profile of work and refuse to accept unreasonable and inequitable risk in contracts. Understand the contract, and push back for amendments where warranted.
  • Construction is cyclical and contractors should prepare for the pent-up demand that will build during recession. Protect your core resources and be ready to bid work when the economy rebounds.
  • Update your business plan accordingly. If you don't have a business plan, it is imperative you develop one as it is critical every company have a "road map," goals or objectives.
  • Showing signs of a weak balance sheet? Strengthening can usually occur by reducing revenue and overhead, as well as concentrating on collecting receivables and liquidating portions of equipment and inventory.
  • Evaluate the quality of a potential client. Your bond agent should be able to assist here as well.

It is a variety of successes that make a good contractor, and it is a process that continually evolves. Successfully managing your business in both good times and bad is critical to your survival.

Topics: Bonds