Exit Strategies for Construction Companies

Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.

For years, I’ve heard various clients explain their plans to ensure both retirement and business continuity as their key people plan to exit the workforce. Depending on the company, some plans have gone well, and others not quite as well. And, some plans are ever evolving. Typically, this process will take a lot of time and thought, and rethinking in order to make sure it is done right.

If are planning your exit strategy and your company works with a surety, please do not wait to bring this to the attention of your agent. Both your agent and surety might be able to provide some valuable insight based on what they have experienced or other resources. Certainly, it is important to bring the surety into the conversation early. Surprises, as we often experience and talk about, are typically not the best way to manage communication.

So, let us visit some thoughts on various options and strategies.

I continue to be very fortunate, in my long career in this industry, to be connected with some really bright people in so many areas that can assist my contractor clients with planning of various types. The thing with continuity planning, though, is that a lot of people do not seem to want to either think about it or take the time to plan for it. It will go so much more smoothly, if they do. With the right plan and the right consultant, a lot of peace of mind can follow.

Often times, for small to medium companies, we have seen plans to hand the company off to the next generation. But how do you do that without a good plan for the transition, considering management, mentoring and, importantly, tax strategies?

We have, of course, seen large companies be purchased by even larger companies. Mergers and acquisitions have been happening for years. Private equity acquisitions continue to be popular. And, ESOPs (employee stock ownership plans) continue to be in the mix.

For some, a visit with their CPA and an attorney might be all they need to lay out a plan, but this should be done well in advance of a formal transition date.

For others, where does one find a good resource to lay out the various options to put the best strategy and plan in place? I am happy to connect you with John Ovrom with Exit Consulting Group and his team to start a conversation and planning process. Or, another option is perhaps you have peers as members of your trade associations who can share their story and experience.

As you consider a retirement or transition strategy, the first thing you will want to have in order is your financial information. Any planning is going to be based on the equity/value of the company, and, strategies for how to buy out an owner over a specific period of time, and who will be taking charge, of what and when, will determine the timeline.  

Before you begin the process, pull together a few items:

• Updated accurate financials

• Valuation of the company by an outside source, such as your CPA

• Organizational charts for management and key positions

• Projections for the financial impacts of working capital and equity of the company

And, decide on the following:

• What compensation do you want to get out of the company and what are your terms?

• Key team for ownership and management

• Timeline to put a plan in place

All of these items will be important tools for your surety when you start these important discussions.

A company is only as good as its management and people, as we all know. Oftentimes, a business owner thinks the day to day business operations would continue in the event of their absence. That said, regardless of whether the plan is to retire and sell the company or something tragic happens, all businesses should know what might happen when the inevitable comes.

I have heard of some companies testing the waters with a mock death, of sorts, where   employees are aware it is only a drill. But the idea is to see how smoothly operations would really run if an unplanned exit should occur. It helps to answer questions like who handles the relationships with key business partners, inside and outside staff, etc.?  Having that peace of mind matters to everyone involved. So, this tool could be used by any business owner, whether that succession/transition is on the horizon today or not.  This may sound a little extreme, but for some, it could prove to be enlightening and assist with any weak links in what a transition plan/exit strategy might involve.

If you have any questions on any of this, feel free to reach out to me at awright@ranchomesa.com, (619) 937-0164, or John Ovrom at jovrom@exitconsultinggroup.com, (619) 202-6888.

Private Equity and Bonded Contractors: Building a Foundation through Communication

Author, Andy Roberts, Surety Group Leader, Rancho Mesa Insurance Services, Inc.

Private equity firms have been actively purchasing construction companies. For the firms that are acquiring the construction companies that perform bonded work, it is highly important that they know there is a stark difference between how surety companies underwrite standard construction bond programs and how they underwrite private equity-owned construction bond programs. Matt Gaynor discussed this in detail in a previous article. Because of these differences, it important that the firms involve their agent and surety company early in the acquisition/due diligence process. This is to ensure the firms know the specific information that the surety company will want to see in order to advise regarding the impact the acquisition will have on the bond program.

As noted in the previously linked article, the financials from private equity-owned companies often carry more debt due to acquisitions, which often leads to a net loss on the income statement. It will be important that the firm can present a pro forma financial so the agent and surety can see how much the debt and goodwill will impact the statement going forward. If there is significant degradation, it can impact the amount of support the surety company may offer. 

Additionally, review of the work in progress (WIP) and backlog to identify how much of the work is bonded, or will need to be bonded, will be equally important. If the company that is being acquired relies on bonded work as their primary revenue source, an inability to get bonds after the acquisition would be detrimental to the business. For the current surety partnered with the company being acquired, it is important to know what their appetite for writing bonds is within the private equity space, and also how long the current management/ownership team will be staying on board to help with the transition. This last point is of the most importance, because the longer the involvement of the previous team, the smoother the transition tends to be.

For the private equity firms that are acquiring companies that rely on bonded work for their revenue, open and clear communication is critical between the firm, their surety agent and surety company. Knowing the questions that will be asked and what information the surety will want to see will help determine if the contractor can continue to get bonds post acquisition.

For questions on this or any other surety matter, please contact me at (619) 937-0166 or at aroberts@ranchomesa.com.     

Maintaining Strong Banking Relationships Supports Surety Bonding Capacity

Author, Josh Hill, Account Executive, Rancho Mesa Insurance Services, Inc.

Having a good relationship with your bank can pay dividends for your business when obtaining bonds from your surety. Managing that line of credit appropriately can be a resource of available working capital which surety carriers likes to see, but when it is not utilized as expected by your bank, it could become a substantial detriment to your operations and ability to secure bonds.

Many established businesses are well versed in what their bank expects from them and what they need to provide in order to keep their line of credit in place, which surety companies like to see. However, many smaller companies who have been in business only a handful of years have not necessarily thought about what they need to do to keep their line of credit in good standing and renewable for the foreseeable future.

Not keeping a line of credit in good standing often happens when banks are focused upstream on middle market companies where their seasoned bankers are dedicated to that space. Newer companies or smaller revenue businesses (i.e., $10MM or less) are often serviced by less experienced bankers that may not coach their clients on bank expectations as outlined in their loan documents to keep that line of credit in good standing.

A common pitfall I have noticed among less experienced bankers in my previous 18-year career as a commercial loan officer was that smaller businesses often did not understand that their revolving line of credit needs to actually, revolve. The line is designed to support short term working capital but when your business is in growth mode, that will deplete working capital and often the line of credit gets utilized to help alleviate cash constraints.

The problem, the line of credit gets maxed out and it stays there becoming, permanent working capital. If this occurs, when the line of credit comes up for renewal, banks will typically look at two solutions; the first is to term out balance on the line of credit over a 3 or 4-year period creating a hefty P&I payment to retire the debt in full; or, if the company is lacking collateral and/or cash flow, they may decide to turn the client over to their special assets division where they will work out a less favorable repayment plan possibly looking at the assets of the business owner(s) for repayment.

No one wants to find themselves in a situation where they need to worry about their ability to obtain bonds from their surety. That is why it is important to have a dedicated banker who understands your business and proactively communicates bank expectations so that as a business owner, you can renew that line of credit at each maturity date. This keeps the surety happy and it will keep you, as a business owner, focused on your business and not a potential workout with your bank. 

If you are a business owner who feels they could benefit from a good relationship banker or has questions about how to build your bonding program, I can be reached at jhill@ranchomesa.com or (619) 798-2819.

The History, Importance and Value of Surety Bond Requirements for Contractors

Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.

Surety bonds, in the world of construction, guarantee that the obligations of the contract will be properly completed and all costs paid.

The concept of surety – which is a guarantee of one party for another party’s debts or obligations – literally goes back to ancient times. Whether the story you might find is a farmer in Mesopotamia in 2750 BC promising that another farmer will deliver on their obligation – or more recently (1600s) a guarantee that a ship would safely arrive at its cross-ocean destination with the goods promised – civilizations have long realized that an instrument of protection was important to ensure something was delivered as promised.

Here in the US, Congress passed the Heard Act in 1894 requiring surety bonds to guarantee completion of any projects funded with federal dollars. This was revisited and updated in 1935, under the Miller Act, which you may have heard of. Today’s federal requirements require a form of surety guarantee (i.e., corporate or individual surety bonds) for any construction projects over $150,000.

Individual public agencies (e.g., states, cities, universities, school districts, etc.) set their own guidelines for bonding thresholds. These have been referred to as “Little Miller Acts” for the local jurisdictions.

When it comes to private construction projects, it is not mandated by law but, rather, determined by an owner or often a lending institution whether they want a guarantee from the general contractor to the project owner. This serves as a form of insurance that guarantees job completion and payment of all associated costs, thereby ensuring the project is finished without any liens.

The surety process itself is a useful tool for owners, general contractors, and contractors needing bonds in order to be considered a good risk.  Which means they have proper processes in place to ensure a productive and, in the end, profitable project.

The processes that are typically needed for a contractor to get the best support, and often rate, from their surety relationship, all serve the contractor well in their overall business, too.

The process might be seen as a prequalification of a contractor’s ability to perform, but it also can set a contractor apart from competition who cannot claim to be bondable.

To some, the surety processes (e.g., producing trackable financial information, perhaps annual financials prepared by a CPA, getting a bank relationship in place for a line of credit, etc.) may seem to be an extra burden for some business owners, a benefit to the contractor is that it provides the business owner with certain accountability tools to make sure their jobs are managed properly, and accounted for properly, and allow them to see their businesses flourish. This is a tangible value to the contractor, and we, as surety professionals, appreciate being able to facilitate these processes and witness that success.

While you can see that the history of suretyship really started to protect the owner’s dollars at stake in the project, it has also served construction companies well to help them manage their business and related performance indicators.

To see how Rancho Mesa can assist with your surety needs, contact me at awright@ranchomesa.com or (619) 486-6570.

Liquidated Damages: What Every Contractor Needs to Know

Author, Andy Roberts, Account Executive, Rancho Mesa Insurance Services, Inc.

For a surety agent and underwriter, there are specific provisions within a contract that are important. One of the more critical provisions, references Liquidated Damages (LD). Often overlooked by contractors, LDs represent important elements of the contract that can cause significant financial losses on a project. So what are LDs; why are they important; and, what can contractors do to make sure the LDs in their contracts are fair?

Liquidated damages are daily charges within a contract that come into effect when there are delays on a project. The amount of the charge is spelled out within the contract, usually as “$X amount per day,” and are put into place to compensate the project owner for losses they may experience when a project’s completion is delayed. While that seems straightforward, this provision is very important and contractors need to understand what can happen if LDs are enforced on a project because of their delay.

If an owner is assessing liquidated damages on a project, the concern is that the contractor is going to start minimizing profits and depending on the amount, it could happen very quickly. Additionally, as those profits drop, cash flow can become an issue. This will lead to a potential default due to the financial distress which would trigger the surety’s involvement. There are a couple of ways contractors can mitigate their exposure to liquidated damages.

First, contractors should try to limit their exposure by capping the amount of the damages that can be assessed. We often see flow down provisions within subcontracts, where the higher LDs are used and it doesn’t make sense for the sub-contractor to take on that risk when their contract amount is significantly smaller than the prime contract amount. Second, contractors should try to negotiate terms that would limit their exposure to the damages that they cause.

While the liquidated damages provision within construction contracts is often overlooked, the daily amount that can be assessed can quickly become significant and should be considered prior to signing a contract. 

Should you have more specific questions about LDs within your contract, give me a call at (619) 937-0166 or email me at aroberts@ranchomesa.com.

A Contractor’s Best Practice Approach to Price Escalations in the Current Market

Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.

Historically, market conditions and economic factors have contributed to both contractors and subcontractors having to deal with price escalations. Today, the uncertainties of how the tariffs will impact the construction industry is causing many to rethink their pricing models and contracts.

I engaged the input of a couple of our colleagues in the legal realm here in San Diego– Luke Thompson of Thompson Law & Consultation and Jeffrey Baird with Finch Thornton and Baird, to get their take on price escalations. And, I thank them for their feedback on presenting some information that might be meaningful to our audience who are unsure how to handle the rising costs.

One notable observation regarding today’s construction industry suggests that some companies pursue their backlog of projects without proper consideration of profits. Many contractors have concerns about an uncertain flow of money in both the public and private sectors, so they are taking these jobs without proper evaluation of the profitability of the job and the balance sheet.

The construction industry certainly learned some lessons during COVID for dealing with cost increases from project delays, primarily from supply chain issues that impacted budgets for both labor and materials, and schedules. Both public and private owners, did, however, often recognize that there needed to be some flexibility with schedules and prices as a result of these impacts from supply chain problems. 

General contractors may work to include protections in their prime contracts with the owners to address price escalations. Educated subcontractors will also make sure that they confirm these provisions in the prime contract, and that these flow down in their subcontract.

So, here we are today with some lingering questions about the effects of the supply chain and market conditions. And in 2025, the discussion now also includes potential impacts from tariffs. Contractors are now wondering what products might the tariffs affect? How do we adapt to the on again/off again news and chatter about the what, when, and how much cost increases might come from tariffs on various products?

In gathering some feedback, I have been told that some contractors are now submitting their proposals with language regarding long-lead items and material escalation warnings due to tariffs.

Savvy subcontractors are also requesting copies of the prime contracts to review the escalation provisions to make sure they have some protection, and if not what they need to negotiate into their subcontracts to ensure that they are protected. Thorough contract review and modifications will always be important regardless of the market conditions.

Steel, wire and certain other commodities regularly fluctuate in pricing. That said, it is prudent to keep a watchful eye on such items, and have good communication with suppliers, general contractors, and project owners to manage pricing changes and expectations.

Historical data that suggests vendors will honor prices represented in the purchase orders and offset the loss by making higher margins on future orders when the market settles down. However, if we have learned anything about this industry, nothing is that predictable. 

So, your best practice strategy is to pay close attention when talking to your vendors, and review your contracts and subcontracts closely to make sure you have the most reasonable protections as possible. Having an attorney review each contract is typically money well spent.

Feel free to reach out to me for a referral to an industry partner in the legal realm. I can be reached at awright@ranchomesa.com or (619) 486-6570.

And again, I thank Luke Thompson and Jeffrey Baird for their contributions here.

Forty Year of Surety Bonding: A Look Back

Rancho Mesa President Dave Garcia and Matt Gaynor, Director of Surety look back on Matt’s career in the surety business and how it has evolved over the last 40 years, as he prepares for his upcoming retirement.

Dave Garcia: Hi, this is Dave Garcia. You're listening to Rancho Mesa’s StudioOne™ podcast where each week we break down complex insurance and safety topics to help your businesses thrive.

Today I'll be joined by Matt Gaynor who's our Director of Surety with Rancho Mesa. We're going to take a look back at Matt's career in the surety business and how it's evolved over the last 40 years as he prepares for his upcoming retirement in June.

Matt, I still can't believe you're retiring, but welcome to the show.

Matt Gaynor: Always great to be in the studio, Dave.

DG: Well, okay, Matt, let's go back. Let's wind the clock back and tell our listeners a little bit about how you got started in surety.

MG: So I worked in accounting for Merrill Lynch out of college and a friend I'd previously worked with started telling me about a career that involved both accounting and construction. So I joined Reliance Surety at their home office in Philadelphia, Pennsylvania in 1986 as a trainee.

DG: Wow, 1986, that's the year before I started in insurance, so you've got me by a year. So when you look back at when you first started in 1986, what are some of the things you observed about the way things were done back then?

MG: Well, first off, I started working in a company reading manuals, and for the first maybe four to six weeks, you're reading these boring insurance manuals and one other trainee that started with me we found out had narcolepsy.

DG: Oh my gosh.

MG: And he would fall asleep like after an hour reading so after a couple weeks they had to let him go because they said you know you can't really do this.

DG: No matter how much coffee he had right?

MG: No it wouldn't change it.

The next thing there was the biggest thing is communication. We only had a landline at our desk which for today's people that have cell phones and all they can't even imagine that and there was no voicemail. So if we got a call from our contractor client or from one of our branches, you just had a message at your desk that said, "Call this person back."

And there was no voicemail that said, "Here's what we want to talk about,” or any of that. So that's really been a big change.

DG: I can relate to that. I remember, you go out for a meeting, you come back in, you've got all these little notes on your desk of who phoned and what the phone call was regarding, and there was just a stack of paper, then you just had to literally dial them back, right, with the rotisserie dial.

MG: That's right, exactly. And you had to remember all these phone numbers, remember, there was no computer to look things up, you had everything written down on a sheet of paper somewhere.

DG: Yeah, you had to have your little business black book, so to speak. What about submissions, Matt? How did those, how have those changed?

MG: Yeah, that segues into how paper trails were created back then. I mean, we got all our mail through the U.S. mail. If you got something, I don't know when Federal Express was even started, but if you got something through Federal Express, it better be pretty important because the company wasn't going to spend the money to send something through Federal Express.

Now, fax machines had just come out. So when you received the fax, again, it had to be a pretty big deal, but the fax would go away from the paper so you had to make a copy right away because you were afraid the ink that came through the fax machine would just disintegrate and you couldn't read it in a few days. So that was a big change just the paper.

So think of that, it would take five days, six days for the submission to come through the mail and then you took a week to underwrite it. So it would take two weeks, which nowadays that's 30 minutes.

DG: Right, exactly. You know, I used to work for Xerox back before I was in the insurance industry and I sold those fax machines that had the disappearing ink. So yeah, I know exactly what you're talking about. How did it work on your files?

MG: Yep, so everything was done by hand. So when we would get the information in, you had to do a work in progress computation and you had to print it out very carefully because someone else had to read it. So they would just pick up the paper file and read it and look at your notes there. Now the year–end summaries we recorded on Dictaphone and a funny story with that was the first time I had to do one, my boss said, "Hey, go in a separate office and do this because you're going to feel really weird talking into this machine."

So the lady who typed up my first submission is laughing and laughing as she's reading it because I'd said like, start a sentence, I'd say, "Oh, damnit,” or something, and she'd just be like, “Oh, you made another mistake.”

So it was very overwhelming to record something on a Dictaphone.

DG: Yeah, I don't think people today can appreciate that. You know, they don't, it's so easy now to tape and record and delete and whatever. But back in the day, you know, you're talking into like a little cassette recorder kind of thing with a mic, and then you hand that little cassette to somebody and then they listen to it and type it. I mean, that turnaround time was immense.

MG: The amazing speed that she could type that at too, it was as she was hearing words, she's typing. I was overwhelmed by it.

DG: Well, let's talk about some of the softer side, paychecks, vacations, sick days. We're two older guys, so it's different today, but how was it back then for you, Matt?

MG: So every second Friday, around three o'clock, they handed you a paper paycheck and they did us a favor because there might have been like four or five banks. We were on floor 20, like downstairs either in the bottom of our building or another building because we were in central Philadelphia. So they would let us go down and cash it. So there was no direct deposit or any of that. So you'd say like, "Give me 15 or 20 dollars of cash and put the rest of this into our account."

That would pay all the bills and from that, so that was kind of weird. Vacation was two weeks until I got five years with the company, so you only had two weeks. And of course, if you couldn't make it like one time, we had a guy that was going to install a carpet at our house, so I had to take the day off. And he calls me 10 o'clock and says, "I cut my finger. I can't come."

Well, I'd already taken the day, so you lose that day. You didn't like get it back. But the other thing was sick days, which is really funny because you only got three and you really had to sound sick because you had to call your boss at around seven in the morning or eight o'clock and say, “Hey I feel bad today.”

So you had to really sound sick because he was on the other end saying, like, “Are you really sick or not?”

But that came to pass because when I worked for another company for ten years I only had one sick day in ten years with that company. Well back then you just came into work if you were a little bit sick.

DG: Yeah right yeah I know it was a different world for sure very different. Absolutely. What about bond premium rates and dress codes and things like that?

MG: So the irony is over 40 years, bond premium rates really haven't changed that much. It's an archaic system where there's a preferred rate, there's a standard rate, and then there's a higher rate. But you would think it would go to a flat rate like 1% or 2% or whatever, but they've never done that over the years.

So it's all filed by state, which I assume insurance rates are also filed that way. But you had a manual that was handed to you and it had every state in there and it had all these rates. And to this day, I still have that manual.

DG: Really?

MG: Yes. And it describes just about all the different bonds. So I probably could give you the rate for like 5,000 bonds from that one little manual. Yeah, it's kind of crazy.

DG: Let's talk about dress codes 'cause it certainly has changed from the time I started working to now, how about you?

MG: Yeah, there was no casual Fridays for anything, no such thing. You had to wear a suit and tie, sport coat and tie at least. So when I got my first job, I went to, I think probably whatever was Men's Warehouse back then, bought a couple sport coats, a couple ties, and maybe two suits, and then you just had to keep them clean.

But a funny story with that was I used to iron all my shirts, and they had to spray starch that you could put on, but I decided one time, I’m going to take it to the dry-cleaners. And I said, "Do extra starch."

And the lady looked at me like, "Are you sure?"

And I got that back. I felt like I was putting cardboard on my face.

DG: Yeah, exactly.

MG: But you had to prepare every morning and you had to look decent. You couldn't go in looking sloppy or anything. Because think of it, any day you could be meeting a new account, so you had to make sure you made a great impression on them from the first time.

DG: And it was just common practice back then, you know, it's, I know in my Xerox days, it was a uniform, you know, blue suit, gray suit, white shirt, blue shirt, red tie, blue tie, that was your options. And, but everybody, you know, yeah, okay, you know, just it kind of shifted your mentality too. I don't know if you felt the same, but you know, when I put that suit on every morning, I went from being a dad or whatever to being a business person, and it just kind of shifted your perspective a little bit. So a little harder now, don't you think, Matt, with everybody's walking around with golf shirts on, at least we haven't gone to shorts in the office, right?

MG: Right, yeah, that would be crazy.

DG: But were you in the Pittsburgh branch at all?

MG: Yeah, so when I started at Reliance, after three years, they wanted you in the home office, they wanted you to go to a branch. So they offered us Louisville, Orlando or Pittsburgh and Pittsburgh was a six-hour drive and we just had our second daughter. So we decided on that. A lot of people said why not go to Orlando because Disney World, you know, it would be fun there and I went to visit the Louisville branch a great branch but again, we thought just being six hours away was close enough yet far enough to be away so went to the Pittsburgh branch and my manager said, “Hey if you want to get out of the office, you got to play golf.”

So that's where I really started picking up golf.

DG: Okay.

MG: Yeah, so I would play in a different tournament, just say the AGC or whatever they had. And I really, as you got it, like you get bitten by the bug and you want to improve and you want to get better. So those three years, I really played a bunch of golf.

And the other story that sticks out in that branch was they gave you a company car after like a year in the branch and they gave me this Chrysler with this terrible color, and my wife Donna says to me, like, "Turn that in, I don't want you driving that."

And I'm like, "Donna, I'm just happy to have a car."

Like, I'm not going to tell them I don't want this color or anything like that, no. But the good part was when I went back to the home office, they gave me a stipend to buy a car, because they said, "Okay, you had a company car,” and you could use it for your personal time, too. You didn’t just use it for work time. So it was a big positive for working for the company.

DG: Sure. How have some of the other things changed, Matt, like the bond reporting initiatives and things like that?

MG: Yeah. So nowadays, again, we can make a copy on a computer and it's no problem. But back then, they had these carbon pages. So our administrative assistant would take three pages and stick these carbon, which if you got on your fingers, it was all messy and all. So she had to do it exactly. And if she made a mistake, she could probably use some whiteout to fix it, but making two mistakes, they just threw it out and started over again. So it was a lot of work just to, because one copy was for the agent, one was for the home office and one was for the branch.  So they had to have these copies here, you know, so that's the way they did it.

DG: I know. It's just crazy to think back like, but that's how it was. It wasn't antiquated at the time. And then did you become a senior contract underwriter at some point?

MG: Yeah. So then when I went back to the home office, one of the big positives was that I was trained with five other people. We all started together and I was the only one that accepted the three year transfer to a branch. So when I came in, I came in as a senior contractor over all them. So because they didn't get that branch training, which was important because you had to deal with contractors and agents directly so it really boosted your career from that.

But when I got back, I had three branches that I was in charge of and one funny story was we were down at Alabama meeting a road contractor and they were like all excited to do the home office guys coming in to meet me. So they baked a cake for me. So we're sitting there and they gave us these little bottles of coke because back then, you know, down in Birmingham…

DG: Coca-Cola, right.

MG: Yeah, right, yeah, yeah, Coca-Cola. And they give us a piece of cake and it was like really warm and all that. And they expected that by me eating that, I would approve a bigger line of credit for them and all that, but yeah, they went out of their way to really, the hospitality was great, but it just goes to say that they did, you know, extra work just to try to get us to like

DG: And they thought a cake and a Coke were going to…

MG: That a cake and a Coke, we're going to prove that job. I might have approved that job but it wouldn't have been because of the cake.

DG: Exactly right. Well, how did you, when did you make your change from the company side to the agency side, then how did you find your way to us here at Rancho Mesa?

MG: Yes, so after being in a branch and getting to deal with agents and contractors directly, it was tough to go to the home office and sit behind a desk. So after probably two and a half years of that, I decided, let's go to the agency side and try something new. So I had two stints, one company, 10 years, one seven. And then in 2011, I joined Rancho Mesa’s surety operations.

And it was a blank slate because as you know, we didn't have an operation at that time. And you kind of said, “Hey, here's the keys.”

DG: Yeah, it was a complete gut feel and faith, you know, because we know we wanted to add that such a vital side of our business, but we for years never found the right person to lead it. And then when we met you, we're like, okay, this is the person that can take us from zero to where we are today.

So, let me stop now and just say thank you for those wonderful 14 years, but talk a little bit about how it's changed over that time for you.

MG: Yeah, so we might've had like five little accounts but fortunately through your insurance operations you were able to introduce me to a lot of your current clients and they had a need for bonding so it was a great fit but over that 14 years our department's grown to five employees six if you count me but we have three producers and we have two people that do the data work for us.

We have over 150 surety clients that do like decent size bonds but another 100 that might need a bond each year like a license permit or a contractor's license bond or whatever so in theory we have over 250 surety clients. During that time our smallest bond—because bonds are all over the place—was we issued a thousand-dollar bond and the minimum premium is a hundred dollars but we've also issued a 60-million-dollar bond so they're all over.

DG: Yeah, that's a big range right there.

MG: Yeah, it is right.

DG: Yeah. Do we just do work in California or do we do bonding in some of the other states?

MG: So we're licensed, as you know, in 50 states. We've done bonds in 15 states, but we've also done bonds in Canada and Guam. Now, when I say done bonds, like in Guam, we're not allowed to issue bonds. You actually have to have a relationship with an agency over there. And through the years we've just developed that and we work with them and they're happy to help us with that.

DG: So what do you think are some of the most significant things that have changed in the industry?

MG: Yeah. So speed of transaction, that's got to be the top thing. As I previously mentioned, we didn't have computers and every transaction involved paper. But today, if I need an updated financial statement, I can call our contractor or email them, and within 15 minutes, they can put something together. In 1986, that would take several days, but I was just thinking today, I asked someone for their bank statement, and they just went into their Bank of America, whatever, and pushed a button and sent me something. Well, back then, they would have had to call their bank, stop, drove over, got there, and then got actually a copy of a statement, and would have had it figured away either. They could have faxed it, but probably would have mailed it to me. So that's kind of, yeah. So what we can do nowadays is so much quicker, which is sometimes good and sometimes bad.

Because sometimes, like we just did a bond yesterday, for a bid today, and we had one day to get it together. So we had to do first overnight Federal Express to get it there by the time so they could deliver it. Now, we don't complain about that. I'm just trying to get across how it's changed in this environment.

DG: You know, it's changed and expectations have changed, right? We live in a society now where they want it now. You know, they don't want to wait. Nobody wants to wait for anything. And we adapt as an agency, as a surety department. We just adapt. We use technology to try to help us with that. But when there's guys like you and I that remember pads of paper and pencils and checking the mail for different things, it's completely different today than it was. Not that it's bad. It's probably better. But it's just something that the new people to the industry never knew what it used to be like. So they're a little bit spoiled, right, Matt?

MG: Right, yeah.

DG: Yeah, they don't know why that's old timers you just have to go through.

MG: That's right.

DG: So what would you tell someone who's just starting their career about working in surety?

MG: Yeah, I would say it's a great industry to be involved with. I mean, the work involves finance, reading contracts, and a basic understanding construction because I know a little bit about what our clients do, but I would never be able to explain or do what they do.

Most important are the relationships with our contractor clients and our surety partners. I mean, over the 40 years, I developed lifelong friendships with a lot of the people I've worked you know, some contractors, I would invite them to my daughter's wedding. I mean, we just get so close because you learn so much about them and you forge a great relationship. So it's an incredible industry to be part of.

DG: Yeah, well, hats off to you, Matt, because you're a big part of developing those relationships. You're approachable, you're knowledgeable, you're timely. So I think those people, like the trust in you allows for those deep friendships to occur. So congratulations to you, congratulations.

Everybody listening. I've tried to talk Matt into hybrid retirement, which I'm not a big hybrid guy, but I was hoping that would just stay, but he's not, he's really ready for retirement, so he'll be retiring June the 30th of this year, but he's not leaving, he'll be in town, he'll be here, I'm sure we'll get out and play around the golf, but Matt, I just want to thank you, not just for today, but for those 14 wonderful years and your guidance and counsel that you provided me to help grow Rancho Mesa.

So Matt, thanks for joining me today in StudioOne.

MG: Yeah, thanks Dave. I appreciate you hosting and I enjoyed it.

DG: Thanks everyone for tuning in to our latest episode produced by StudioOne. If you enjoyed what you heard, please share this episode and subscribe. For more insights like this, visit us at RanchoMesa.com and subscribe to our weekly newsletter. Thank you.

Shaping the Industry's Future with SDSU’s Construction Management Program

Surety Account Executive Andy Roberts interviews ⁠Thais Alves, Chair of the Construction Engineering and Management Program at SDSU, about her journey to academia, the growth of SDSU's construction management program, and the role industry support plays in shaping future leaders in construction.

Andy Roberts: Hello everyone and welcome back to Studio One. I'm Andy Roberts, a Surety Account Executive here at Rancho Mesa and also your host for this week's podcast. Today, I have the joy and honor of being joined in studio by Thais Alves, who is a professor and the Chair of the Construction Engineering and Management Program at San Diego State University. Thank you so much for joining me today.

Thais Alves: Thank you Andy. I appreciate the invitation and the opportunity.

AR: Yeah I was super excited when you said you were on board for coming in here and letting me ask you some questions and, you know, get to be on this side of it. So you know first off I think it'd be good to kind of tell us a little bit about yourself like where you're from, how you got here, just any background information you like to share with us and the listeners because you know I mean we've kind of connected over the last few years but that's usually just out on campus and getting ready to do the presentation and stuff like that.

TA: Right. I feel that I get to talk more about you than you get to talk about me. Yeah, so I'm originally from Brazil and this is a joke that I play with my students. I asked them where this accent is from and I get a few, you know, guesses. I was trained as a civil engineer and when I was in civil engineering during my time in the major, I thought I was going to be a structural designer, a geotechnical designer, and then at some point I got to see construction. And then that changed, like I had discourses towards the end of my major back in Brazil, and I got to intern in a construction site and work with people on the field and then started doing research, and then my career has been academic through and through and I went through my masters back in Brazil then I came to my PhD in Berkeley and all along the research that I developed was always related to people in the industry so I didn't have a lab on campus. I say that my labs are the construction sites, the organizations and this led me to where I am today because over the years as I did my research and advanced whatever theory I was working on, I met a lot of people along the way and this serves me very well today. It helps me to meet people like you, like Anne Wright. It helps my students get jobs, the program gets funded. So I think over the years, I just kept accumulating this human capital in these contacts and the network that I have today and I appreciate that. So that's how I got here and I've been at SDSU since 2009. So this is year 16 for me.

AR: Yeah, but it goes fast.

TA: It does and I mean, it's amazing to see how we have grown in different ways here, which I guess we are going to talk about later. But I feel that every step of my career prepared to the next one. When I was working back in Brazil at some point, I was asked to create a program there, and I went through the process of creating the program. And fast forward to 2017, I was asked to create the construction management program in addition to our construction engineering program. So one thing leads to the other.

AR: Yeah, absolutely. What's the difference like between, kind of, academics in Brazil versus stateside?

TA: So interestingly enough, and again, this is one of those things that your network leads you to places that you never know. When I finished my PhD program at Berkeley, I went back to Brazil and I started working there. And the place where I was working at, it's a city in the northeast of Brazil, it's called Fortaleza. And the industry was extremely supportive of the research of that group. They cannot financially back the schools there, like we have the support here, but they would support our research. So there was always this sense that you were working with people in the industry all along the way. Then when this opportunity came up here, I felt that I was very uniquely positioned because I came to an environment that was very similar to what I had worked with before and at that group back there.

AR: That's really nice.

TA: So I think the fact that there are academics that they have their lives on campus and they don't need to get out of school or to their labs to talk to people right they do research they teach and they stay there. In my line of work this is impossible.

AR: Absolutely. Yeah.

TA: So if I don't talk to people like you, if I don't invite people like you to come to my classes and build this network, I think this doesn't work, doesn't work for me, doesn't work for the students either.

AR: Well, and it's probably really beneficial for the students to be out participating in the network as well and kind of seeing, you know, I find the industry very exciting and, you know, we're always building stuff around San Diego and, you know, it really and it helps their perspective to see stuff in real life.

TA: Yeah, and I think here, the community here in San Diego is absolutely phenomenal. I mean, I think, I see other CSUs, right? I see my colleagues in UCs and the CSUs, and when I tell them the kind of support we enjoy here in San Diego, they get so jealous, right? Because we have AGC supporting our program, it's beyond belief, like all that they do for us and all the support that we enjoy from AGC, the leadership, the staff, the board, also we have the support of NECA who's also a strong backer of our program. We see this here as like a very unique place to be and this reflects in terms of the relationship that the industry also has with our students. So for example, every week or every other week, the students bring folks from the industry to speak. So yesterday there was a company speaking in one of our student chapters. Tomorrow there is another one. And everybody, because we are in a metropolitan area, it's very easy for everybody to drive to SDSU and present. So I feel that we are extremely blessed, not just in terms of support, but where we are. It gives us access to construction projects, to professionals like you and so many other opportunities.

AR: Yeah, well, it's really beneficial, too. I mean, you think about it, like, especially on AGC, like, you know, San Diego is one of their better, bigger, you know, more involved chapters, you know, kind of nationwide. And same thing with NECA, too. Right, so it's really beneficial for her to have those kind of involvement, you know and those types of organizations backing you and helping you out.

TA: Yeah, and the other point is you know, we've been pointed the fact that these are special chapters These are groups of people who have been recognized nationally and I can also I cannot forget CMAA also has been with us in the program since the very beginning and so much so that the chapter we have one of our major chapters is called AGC and CMAA. So it's a chapter that pulls these two organizations together and CMA has also been along with us. Our chapter has received awards in the past. The local CMAA chapter has received awards, SDSU as a partner has received awards. In other words, we work well together and I think there is this symbiotic relationship that people want to be associated with us and we want to be associated with them and we grow together. I think that's very important.

AR: Yeah, well, it's just so nice too on those like, you know, the AGC and NECA, there's so many owners that are really, really involved in those organizations. I mean, I've seen taking a real vested interest in what's going on at San Diego State and it's really exciting and it's really great to see like the community really participate and want to see that grow because, you know, it takes time out everyone you know their day to do that kind of stuff but they see the long-term value in it and you know when we come and speak in your class and you see all the different internships that all the kids have with all the different companies and it's really exciting. And you know you see the excitement from them too when we ask that question of like who are you working for this summer, who did you work for? And you know, they all want to raise their hands and tell us all about it.

TA: Yeah. And I mean, come August, I'm going to be emailing you and Megan and Anne to come back and present to them. And it's, it's very rewarding to see the interest in the local companies like they want to hire from our program. And we also receive very good feedback when we hear from them about the students who are going to work in the local market. And most of them, they stay here in Southern California. Their plan is to stay in San Diego. If they can find a job here, they will stay here. And then the next choice is to stay up to L.A. in Southern California, and some of them stay go up north, back where their families are. But most of our students, they stay here. So that's one more reason for the local industry to support the program because they don't have to go and recruit people from elsewhere and make them get used to the way we live here. And of course it's a very expensive area. So whoever wants to be here, they already know how this area works, how it functions, they know the industry. So that's very important too.

AR: Yeah, Well, so kind of you know, we've seen what the support is kind of done with the program like how like where's the program come? Like how did it start originally and like when you came in on? 2017 you said.

TA: 2009.

AR: 2009. Okay. Oh 2017 was when you did the construction management portion of it.

TA: Yes.

AR: So like how is it transformed from when it started to like where it is now?

TA: Yeah, that's a story that I told a few times, but it's interesting how the industry came together and it all started with Pete Phelan's and the Phelan's family. He came into the university and said, "Hey, you guys have a civil engineering major here, but we should have construction-related majors."

And during that time, the university looked around and said, "You know, if you want that construction major, I guess you're going to have to fund it,” or something along these lines. And they hired somebody who started the program, Professor Ken Walsh, and he was a very important figure to start this whole program, because I think he came here in 2004. So over 20 years ago, he started the program. The Phelan's family named it, so they made a big gift, and our program is named J.R. Phelan's Construction Engineering Management Program, and when you look at that, the program is housed in the College of Engineering, so they had to start with construction engineering first. So in 2008, I believe, was when the first class graduated with a construction engineering degree, so between 2004 Ken Walsh came in here and started everything, and in 2008, the first class graduates. And fast forward to 2017, I'm in my office on a Friday afternoon. And if you are in your office on a Friday afternoon, you're going to pick up calls that maybe you should push to Monday, right? I have had several of those. It's like, “Should I pick up this phone?”

AR: You see that caller ID, you're like, I don't know about that one.

TA: Yeah. So I get a call from my Dean, the Dean of Engineering. And he said, "Look, the industry is asking when we are going to start a construction management program."

And he had talked to other people and he didn't find whoever was the person who was going to push that. And he said, "Do you want to do it?" And I'm like, "Yes, I will do it."

And actually when I was hired, in my interview, I was asked if I had any interest in starting a program and at the time when I arrived that program should have some relationship with the College of Business because there was some real estate component to it but when we got to 2017 and I got that call the dean said this program has to be in the College of Engineering and it's going to be a more engineering you know based kind of curriculum. He said I want the students to take classes in the College of Engineering, and you can put classes elsewhere, but it shouldn't be the bulk of the program. So this was 2017, and the program didn't get into the system for the CSU system until 2020. So it took three years for the program to show up online so that the students could apply. And then 2021, we got the first class admitted as construction management majors. So I was excited. I was, you know, so happy we have this picture of our first time we got that class together. We have the, it was during the COVID years.

AR: I was going to say, that's got to be a little challenging because everything was kind of all shaken up and not running as normal then.

TA: So we were in class in 2021, but everybody was wearing masks. So we have this picture of the first class in 2021, everybody's wearing masks and they're going to graduate this year. So I have to dig that picture and compare who made the four years, made the four years. But interestingly enough, there were several students who were around and they knew this major was coming. They were calling me and emailing me during the pandemic and they were like, "When is this major going to start? I want to start taking courses so that when it's officially the catalog, I'm going to jump in.”

So what happened was we graduated our first class in three years because of that.

AR: Oh yeah, they've done a bunch of the pre-kind of stuff.

TA: So I have this student number one that I remember, he was so insistent and I was like, "We don't have a major yet," he said, "but I'm going to start taking the classes."

And when the major is out, I have the classes ready and he graduated last year, he's working for Hensel Phelps. And it was James, his name is James Snoke. It's a shout out to him. I say this, he's the first construction management student who jumped in even though there was not an official major.

AR: Was he on the engineering side or was he somewhere else within the school like college?

TA: I don't know if he came as a business major and then he decided that whatever he got in as a major, he was going to follow the flow chart of the new major. So he met with me and he said, "What courses do I need to take so that when these start I'm already on track?" So because of him and others who came in those first few years, I had to put classes in place much faster than what I had to do for the class that is graduating now in four years. Because these guys were ahead of the curve.

AR: They're ready to go.

TA: So last year we graduated 14 students and this year we are going to graduate double that number, about double. So it just shows how the program is growing. You probably saw that when you presented that.

AR: Absolutely.

TA: Right, the class was very small when we had to change. Like you came to three different classrooms because the class…

AR: Each one’s bigger and bigger and each time you walk in, like, oh, man, there's a lot more people here to talk to.

TA: Yeah. And I mean, the more the merrier, right?

AR: Absolutely. Well, and it's really nice to when we go to do that, because the first time I did it, you think about, oh, it's college kids. Like, what's their interest level going to really be like? But everyone in there is so invested in this major and what they're doing. And they're so engaged. It makes it a lot of fun to come in there and they're always asking questions and you know seem to really, maybe not, I don't know if it's enjoy the right word but I appreciate that we're there to talk to him about something and what they take away from it So it makes it fun on our end too.

TA: Yes, and you know yesterday I was talking to somebody who has a son who wants to switch into construction management and I wrote to that person This is somebody who is in the industry and the son wants to join the industry, he's in a different major, he's not finding his path and wants to join construction management and I said, you know, through the transfer. So this person's going to have to apply and transfer like any other student who'd be admitted. So I told him that I like to think that our program is also very nurturing. We have such great support from the industry, right? These people want to see them grow, they're going to give them tough love when tough love is needed, but they are very nurturing. And I like to think that our faculty is like that too. So we are there, I'm there every day and I have another colleague who shares the office where we stay and my other colleagues are there, but she and I, we have this special bond that we are like, don't give me excuses, do your homework and like we are there and we are not accepting excuses. And another shout out, her name is Nancy Lakrori. I don't know if you have met her yet, but she's a phenomenal instructor. And she's very tough, very stern, but the students love her because they go through that and they know that they are learning for life, right? So having people like that in our program, it's very important because the students see that we are invested in their education. We are not just going there and talking, turning our backs, and collecting a paycheck. Like, we are there. For me, my work is not done until I see them walking on that stage and graduating. And hopefully, I'm going to be able to help them find a job. So I'm there all along the way.

Some students take more advantage of that than others. I think some of them, they are like, "Oh, I'm going to figure out my own way." But some of them, they take advantage of this mentorship and they get engaged in the clubs and competitions. And so that also makes a big difference for them.

AR: Yeah, absolutely. And I mean, I can even see when I'm in your class, just how, you know, with how engaged they are and just a lot of them feel so free to come and just talk to you and seek out your advice and help, which is really nice and it shows that you care, which is really important.

TA: In our office, like the faculty, we are five faculty who are focused in construction engineering and management, and we enjoy the support of the entire department that is civil construction and environmental engineering, so the students take courses with different faculty in this department that has 20 different people, but five of us, we are focused on that office, in that office, we are construction related for the most part. So they see that we are there for them. And I have colleagues who are more interested in research and the students can focus that on research and do like cutting edge research here. But the fact is we want to see that they feel that they are supported and we are there.

AR: Yeah.

TA: Right, we are there for them. I think that's very important.

AR: Yeah, no, it absolutely is very important. So, you know, you said, you mentioned it's doubled from last year. Like how do you see, what do you see for the future? Like with enrollment and interest, I mean, it seems to me, interest is only going up.

TA: So that's a great question. So we accept students from two main sources, like either they come because they applied to get into SDSU or they are already at SDSU and they show up in my office and they say, “My dad is in business in some business area of finance or something like this and I did that because my dad told me to do it but I want to do construction management.”

So they show up at my office like that right so the problem is some of these students they entered SDSU entered SDSU through a very tough process. It's hard to get into the college of business. But some of them are trying to find easier paths to get and go there and say, now I want to get into your major. And you're like, not so fast, right? If you don't have the math and physics preparation, which you need more for construction engineering.

TA: Absolutely, especially if you're in like a business or like a finance, if you take a finance class, it's just a sort of that type. It's a big difference.

TA: Yeah. So if they want the engineering one, they have an even tougher path, but they also need that preparation for construction management, which some of them don't seem to know. So they have to spend two years taking courses and getting good grades to show that they can advance in the College of Engineering, right? We are not saying that the rigor is up or down or different or—they have to be good in STEM courses because that's what they are going to keep taking and they are going to follow classes with other students in engineering. And at some point the engineers, they take a turn and they do more design and the construction management students take another turn and they go and do more management. But they have to be prepared to advance and so to your point going back so this is the explanation of how they come in so we were having so many students who were already at SDSU who wanted to join our major they talked to their friends and they hear about the industry and all that and they want to switch majors and in the beginning we were accepting because the major had space in the classrooms. Well we don't have any more. So now I'm trying to keep the program at 200 students. We have 175 for construction engineering and construction management, out of that 120 are construction management, 55 are in construction engineering, but we have 20, 30 students at any given time that they are trying to take those classes in the first two years and they are appearing some of our classes, right? So right now we have 200 people. Our advisory board wants to grow the program and I'm like, we cannot because who's going to staff the classes?

AR: That was going to be my next question.

TA: So we maxed out, like the class that you saw, that's the maximum. So we are counting that these classes that we used to have 15 people and now they have 60, that's it, right? We can't, so this generated a lot of discussions because the students would come as undeclared and they said, “Oh, now I want to do construction management.”

And maybe some people who are going to be listening to this podcast know somebody who wants to be in one of these majors and the right way to do is if they don't get in as a freshman, go to a community college, do the first two years in a community college, reach out to me, we can talk about how this person can start transitioning to SDSU until they apply and they transfer. That is a sure bet.

AR: That's great to know. That's really great to know and great to put out there.

TA: Yeah. This is very important because I receive messages and the students contact me about that and I think community colleges are so cost so cost efficient. They are not going to pay the big tuition of the big schools, and they take care of those core classes in the beginning, and there is an additional advantage. When students are in a community college, they can go to SDSU and take one course per semester, and they pay a fee, I think it's like $50. Don't quote me on that, but it's a small fee. It's not the full tuition for the course, but they can do what is called cross-enrollment. So for example, I teach a course that is called construction and culture, is construction engineering 101. And I have a lot of students who are in community colleges, and they are taking that course through cross-enrollment, but they get to know how we function

AR: That's fantastic. That's a great program.

TA: It's really good. And I have students, they are so in awe because I start my classes talking about internships and scholarships and clubs and events that are coming. So they are in awe that they have the opportunity to participate in those events even though they are still in the community college stage, right? And the same internships that I post for my students is posted to everybody and they start getting engaged with the industry early. So I love that kind of arrangement that we have the Freshman and we have the students who are going to be transferring already getting used to the system.

AR: Absolutely. I mean, that's just a great way to set this program up and them up for long-term success.

TA: Absolutely. And I cannot tell you how many great examples there are of students who they start on this path and they are so focused. Some of them are more mature. Some of them come from the military. They are veterans. And when you start talking to them, you see the wheels turning. And by the time they transfer, they are like 10 steps ahead of the people who are not involved because they were paying attention and they were taking advantage of this opportunity. So that is, I think it's a great, it's a great program.

AR: Yeah, that's awesome. I mean kind of last question I have for you is like what kind of support can we give you or what else can the industry as a whole do to really support this program?

TA: Well, I think the first one is keep hiring our students keep backing up these pro these projects that are happening here, right? So that they happen as they should but we have an advisory board who is the backers, the supporters, the financial backers of the program, they are part of our advisory board and we are going to have a meeting next month and usually they ask me for a wish list, right? So they tell me what they want to see and we tell them what we need and we kind of negotiate where we can go with what we have. But I think the first one is I hope the industry keeps supporting the program by hiring our students, but also supporting the program financially. I mean, we just had the news that we were going to have three years of 10% cuts in our budget. And then this was in February. Last month, we heard the cuts are not going to be 10%. They're going to be 12% now.

AR: Oh, no.

TA: So any help, any help in any capacity, of course, I appreciate you all coming and guest-speaking because that is golden. They are having that already in school versus having to learn about surety and insurance and all later, right? So when they have this chance to learn in class, I appreciate immensely that the industry is so supportive in coming and guest-speaking. We have teams that are mentored by the local companies here also and it's very important that we have people who volunteer their time to keep training our students. This is this like internships, jobs, mentorship during the program, guest speaking and of course financial backing. Any amount it's well received because we are facing a very tough budget right now.

Like from the state side, we have been hearing about it and now we know how deep the cuts are going to be. And we want to keep the program the quality of instruction, the experience that the students have. And one thing that I think it's beautiful is our students, they fundraise for their activities too. They just don't sit there and wait for the money to show up, right? So I think they see how I work with the industry, they see how much support they receive, and they nurture these relationships as well. And that's something that I work a lot with them, how to work with the local industry, the local supporters, and just help them help us, right? It goes both ways. They want to hire; they want to be hired.

AR: Yeah well, they need to put that investment in. If they want to hire, you know, quality workers that know what they're doing, it makes sense for them to put that time investment in to make sure that the program's doing well and they're getting the instruction that they need.

TA: Yeah. And it's the it's phenomenal as you go around and you visit projects and you meet former students like we meet our former students and I think a testament to how well I think we do in this nurturing and mentoring and creating this community is that they graduate and they want to keep helping, they want to be associated with us. They want to come and get speak and mentor and offer internships and I love it. I mean, what's not to love about that? It's a phenomenal place. I really appreciate the support of the industry. I appreciate your support and Rancho Mesa's support in going and presenting to my students because that's going to make them prepared, that they're going to be better prepared for what's coming.

AR: Yeah. Well thank you for saying that I mean, I really enjoy that day. It's super fun to see that you know, it makes me feel a little old when I'm walking around the college campus now, but outside of that I love that day. So thank you so very much for taking the time and coming to talk to me today this has been really wonderful.

TA: Thank you and thank you and thanks to Anne Wright for introducing us and nurturing this relationship and Megan Sanker who's always with us in that presentation so I want to thank all of you it's very much appreciated and the students see that they appreciate that too so thank you.

AR: Yeah you're welcome.

Contractors’ Guide to Navigating Cybersecurity Maturity Model Certification

Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.

In true government fashion, the Cybersecurity Maturity Model Certification requirement, more commonly referred to as CMMC, is a mouthful!  While most companies are familiar with or are working on compliance with this requirement by now, we felt it was appropriate to share the history of this certification with our audience.

I have enlisted the help of a long-time friend and trusted resource of mine, Mandy Irvine, founder and CEO of Hoop 5 Networks - IT and Cybersecurity Solutions. As experts in this field, she and Russell Emig, Hoop 5’s Certified Chief Information Security Officer have provided much of the following information.

Why Did CMMC Became A Requirement?

The CMMC framework was born out of the need to protect sensitive information within the U.S. Department of Defense’s (DoD) supply chain. Historically, the DoD relied on a set of cybersecurity requirements embedded within the Defense Federal Acquisition Regulation Supplement (DFARS). However, rising cyber threats and increasingly sophisticated attacks against defense contractors highlighted the inadequacy of those measures.

Evolving Threat Landscape. Over time, cyber-attacks grew more frequent and severe, targeting companies that managed Controlled Unclassified Information (CUI). The traditional self-attestation model for cybersecurity controls proved insufficient.

Unified Standard. CMMC was introduced as a unified framework to ensure that every organization within the defense industrial base meets a baseline of cybersecurity practices. This move helps safeguard not only government data but also the integrity of the broader supply chain.

Who Needs to Comply?

CMMC compliance is not reserved solely for technology companies; it extends to all entities within the defense industrial base.

Defense Contractors and Subcontractors. Any company that bids on or holds DoD contracts and handles CUI must comply with the relevant CMMC level.

Broader Business Ecosystem. This includes manufacturers, IT service providers, and even logistics firms that support the DoD. Essentially, if your organization is part of the defense supply chain, CMMC compliance is on the horizon.

The framework is structured into multiple tiers, ensuring that each organization implements security practices appropriate to the sensitivity of the data it handles.

What to Expect Regarding Compliance

Preparing for CMMC certification involves a structured process that may require substantial changes to an organization’s cybersecurity posture.

Assessment and Gap Analysis. Organizations typically begin with a thorough assessment of their current cybersecurity measures to identify gaps relative to CMMC standards.

Implementation of Controls. Depending on the required CMMC level, companies may need to implement a range of controls from basic cyber hygiene (like access control and incident response) to advanced measures for more sensitive data.

Third-Party Certification. For higher maturity levels, a formal assessment by an accredited third-party organization is necessary. This external validation ensures that the implemented controls are effective and align with DoD requirements.

Operational Impact. Beyond technology, compliance may affect business processes, training programs, and even contractual relationships. Preparing for CMMC is an investment in the future stability and credibility of your business within the defense sector.

Consequences of Non-Compliance

Failing to meet CMMC standards can have far-reaching consequences for companies involved in the defense supply chain.

Loss of Contracts. The most immediate risk is exclusion from bidding on or maintaining DoD contracts. For many companies, this loss of business could be devastating.

Increased Cybersecurity Risk. Without adherence to robust cybersecurity practices, organizations are more vulnerable to breaches. A successful attack could lead to the compromise of sensitive data, resulting in financial losses, legal ramifications, and severe reputational damage.

Regulatory and Financial Penalties. Non-compliance may trigger increased scrutiny from federal regulators. Over time, this could result in additional sanctions or penalties, further straining business operations.

CMMC represents a significant shift in how the defense industrial base approaches cybersecurity. Its history is rooted in the necessity to counter a landscape of evolving threats, and its requirements extend to a wide array of businesses involved with the DoD. Preparing for compliance is a comprehensive process that, while challenging, is essential for securing contracts and protecting critical data. Conversely, the risks of non-compliance underscore the importance of investing in robust cybersecurity measures.

Understanding the intricacies of CMMC will be crucial for organizations looking to secure their place in the future of defense contracting.

For questions about the CMMC, contact the team at Hoop 5. They are ready to be of assistance and support if needed.

Beyond a Single Bond: How We Help Contractors Stay Ahead of Their Surety Needs

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

We recently issued a very large bond for one of our contractor clients which prompted a discussion during the underwriting process about potentially moving their account to a surety carrier with a larger capacity. However, after enjoying a seven-year relationship with the current bond company and receiving an early indication that they could support the larger bond request, this provided us with an initial understanding that we might be okay staying with the current carrier.

Most bond companies will provide their agency partners, like Rancho Mesa, with a range of support for their typical bond programs. For example, they may indicate they are looking to support established contractors with single bonds up to $40,000,000 range and work programs up to the $80,000,000 range with the caveat that they can go higher for specific accounts.

So, once we had the initial indication, the next step was to talk to our contractor client about the potential size of their future projects that might require bonding over the next few months. Based on that discussion, we realized it was actually time to find a bond company with much larger capacity to fit our client’s future needs. So, the discussion turned from support for this particular large bond to ensuring we had support for larger capacity both today and in the future.

We successfully placed the contractor with a larger carrier by focusing on really understanding the client’s business over the long term instead of just considering a particular bond at a particular time. The additional communication was key. 

If you would like more information about ways to ensure you are placed with the best bond company to fit your needs, please contact me at (619) 937-0165 or mgaynor@ranchomesa.com.

Utilizing Your CPA's Expertise with Nick Balaity

Author, Andy Roberts, Surety Account Executive, Rancho Mesa Insurance Services, Inc.

Andy Roberts, Rancho Mesa's Surety Account Executive, is joined by Nick Balaity, CPA with ⁠Aldrich CPA + Advisors⁠, to discuss the tax law outlook for 2025 and offer insight on contractors’ business decisions in the coming year.

Andy Roberts: Welcome to StudioOne™, I’m Andy Roberts, a surety account executive here at Rancho Mesa and joining me today is Nick Balaity, who is a CPA and partner at Aldrich CPA and Advisors.  Thank you very much for joining me in the studio today.

Nick Balaity: Yeah, thanks for having me, man. I've never done a podcast before so this is pretty exciting for me.

AR: Yeah, it's going to be fun. And we have a few really great topics that we're going to get diving into. But before we get started, Nick, why don't you give us a little background about yourself and what you do at Aldrich?

NB: Yeah, thanks. Yeah, so I've been working with contractors on the accounting side for probably 13 years or so at this point. The last eight of which I've been with Aldrich been a partner there for about four years. Getting to work with contractors is pretty awesome just because they're mostly salt to the earth people and blue collar guys and gals and so they're really easy people kind of to work with for the most part.

But Aldrich is a West Coast based firm. Primarily our big offices are in San Diego and Portland, Oregon. And then we organized by industry group. So I'm in our construction group. I head up our California group. And then we have other industries that, you know, manufacturing, real estate things like that. So yeah, I focus just on contractors. I'd say 85% of what I do is just working with contractors.

AR: Yeah, that's fantastic. I know we've worked together on a few and you guys always do just a wonderful job. So, you know, let’s dive into what we're going to talk about first, which I think is a really important topic, especially with, you know, administration changes or some uncertainty. So we're going to dive into some tax law updates and strategies and kind of discuss what might be coming next year. As I'm sure you're probably sitting down with your clients and doing some tax planning, to figure out what 2026 might look like, what changes might come.

NB: Yeah, it's a funny year to do it because, you know, we go into these meetings at year-end tax planning and we're kind of telling them, “Hey, this is the strategy for this year, but it might be different next year.” So, the 2018 Tax Cuts and Jobs Act that went into place when Trump was last in office, those provisions are set to expire at the end of 2025. And so the question is like, what will change if those expire?

 So the kind of the big things that'll change that people should be aware of is the overall the rates are going up. So, like your top federal rate is going to go from 37% to 39.6%. Not a huge jump, but definitely noticeable, especially if you're at the higher levels. And so the qualified business income deduction also expires. So if you have any pass through entities, so like S Corps, partnerships, LLCs, you were getting and still are getting a 20% deduction on your federal taxable income. So if you had an income of a million bucks, you'd be getting a $200,000 deduction to bring it down to $800,000. That got us to what are effective top rate of 29.6%. You know, 37% minus the 20%. So 29.6% kind of was the top tax rate, which was great. That's kind of some of the lowest rates we've ever seen in recent memory. That's all set to expire at the end of 2025 and going into 2026.

 So really, the question has been, what is the Trump administration going to do when it comes in, especially now that the Republicans control both sides of the House and the Senate? And so I think what we've seen so far from the administration is they are looking to extend most of those provisions and make them permanent, is kind of what they want to do. Really, it becomes a question of budget reconciliation, what they can do, but we're anticipating that those will get extended.

 I think there's a section of our clients that are like, “Are taxes going down?” Maybe, I don't know if there's an appetite to actually cut it again. It feels like there's more of an appetite within Congress to just extend what we currently have. So, but the other provision is bonus depreciation, that's been coming down. It's been going down 20% percent every year and that's going to go to zero. They want to bring that back at 100% as well and make that permanent too. So yeah, so I mean, if all that happens, you know, we'll be kind of looking at kind of the same as we have, but if not, which we'll get an idea of, you should be reaching out to your CPA and starting to look at what strategies you can do as you go into 2026.

 AR: I mean, that's what makes it really important to have a resource like yourself if you're a contractor and an owner to talk about this kind of stuff when you're sitting down so you can plan for your business. What do you think the timeline looks like for when we might have a finalized answer on some of this stuff and what they're going to do? Just best guess.

 NB: Yeah, if they're going to do something, they'll have to do it within the first few months, I would think, for it to be effective. I mean, there have been retroactive tax law changes. Everything I've read is they're going to make it all effective, 01/01/25. So if they're going to do that, you would think they would do it in 2025. But man, Congress is typically a jumbled up mess. So it's very hard to know exactly when it's going to happen.

 AR: If they do a retroactive to 01/01/2025, do you have to go back and amend returns?

 NB: As long as those changes are in place before we file the 2025 return, which would be like, you know, February through April of 2026, yeah.

 AR: Yeah, it's good information right there. That's a lot of work on your guys as well.

 NB: Yeah, for sure. You know, a lot of just keeping our ear to the ground.

 AR: Yeah. So, with those, now that we've kind of talked about that, so let's kind of look at what some strategies contractors can do, you know, when they're doing their taxes for what they, you know, to decrease their income and stuff. So let's look at some pros and cons of maybe like cash basis versus percentage of completion on your end.

 NB: No, that's always like one of the first things we do when we meet with a client or a potential client, a prospect is figure out what their method of accounting is for tax and just try and evaluate if that's really the best fit for them. A lot of times it can be, "Hey, we're already on this method," and so to switch might not make sense. It might cost us a bit in the short run, but generally what we see a lot of is, you know, smaller contractors that are first starting out and growing will be on cash basis.

 Cash basis can be really advantageous as you're growing your business because as we know, construction is a very capital intensive business and so the more cash you can retain, the better. So typically as you're growing, your AR balance is also growing. You have more and more accounts receivable outstanding and cash allows you to defer that income on that AR until it's actually received. And so as you're growing, it keeps more cash in the business. As you flatten out, you know, if you reach that kind of cruising altitude, it'll, you know, you'll be deferring, you know, that AR, but then it'll be coming back into the next year and you're typically deferring a similar amount. So it kind of gets, it should in theory level out to kind of closer to where book would be, but you're still managing that all the time. So a lot of times we'll see clients switch over to percentage of completion method or they'll be forced to do that when they go over $30 million roughly-- it's an inflation adjusted number of gross receipts on a three-year average. The advantages of that is it's just way your plan around, you know, you're not, you're not sitting there on December 30th, and, and saying, “How much cash do I have in my account? What's my AR? What's my AP?” You're really able to manage that kind of just through your whip, you know, so you're able to kind of look at and see, okay, whatever my book income is, typically my taxable income is going to be pretty similar.

 AR: Yeah, well, it's, I mean, it's a good thing to talk about too, because we were always on our end looking at percentage of completion for what we want to see from your guys on that part, but that's different from on the tax side.

 NB: Yeah, and that's one of the advantages though, of being on cash is you can still be showing really nice profits, but you're not picking up that income yet until you actually do. So there can be a pretty big divide between taxable income and book income when you're on cash basis.

AR: So one last thing to touch on this one would maybe be, for contractors looking to buy equipment, should they buy it? Should they not? What are the advantages, disadvantages?

 NB: Yeah, I feel like it's the question we get very frequently at the end of the year, because I think, you know, there's been enough TikToks and Instagrams out there talking about, “Oh, I just bought this Escalade and now I get to write it off.” And while that is true…

 AR: You got that big cash balance in your bank account, what do you want to do to bring that down a little bit?

 NB: Right. And so, buying equipment is the question we get a lot. And kind of my two cents on this is, it never makes sense to spend a dollar to save 30 cents, you know, like if you need the piece of equipment, you should buy it.

 AR: Absolutely.

NB: If you're looking at buying it in Q1 or Q2 of the next year, maybe we say, “Hey, maybe it makes sense to accelerate that purchase and go ahead and do it now to go ahead and capture that deduction.”

 But really, there's impacts to it, right? So if you're paying cash, then you're reducing your working capital because you're exchanging a current asset for a long-term asset. If you're financing it, that'll have a little bit less of an impact on working capital because you'll have just a current portion of that debt that'll be on the books. And so it's really something to just kind of evaluate, you know, bring in your surety broker, bring in your banker, especially if it's a big piece of equipment and kind of let them know what you're thinking about doing, work with your CPA, what the impact would look like and just make sure that it's going to affect anything on your credit side or your bonding side.

 AR: Yeah, well, I mean, especially on our end where, you know, we love to see cash in the bank. You know, when we do a submission, we send in, like, we'll often send in like a vehicle list. But that's not going to give you a ton of surety credit. That's nice to show the underwriter, like, “Hey, this is where they have invested in their business,” but we also, you know, if it's going to tank that cash balance, that's going to have a direct effect on the credit you're going to get and lead to a lot more questions from underwriting as to what happened to that money because they would always rather see it sit in the account in case something happens.

 NB: Yeah, it's our CFO said this to me recently that I really like this saying; if you come to me early with a decision like this, you have a partner, you come to me after you have a judge.

 AR: Oh man, that’s great.

 NB: Yeah, I think that's really kind of the same thing here with you let your partners know what kind of types of moves you want to make and they can help guide you along the way and really help you with that. You come to them after, what's done is done, and now we're just kind of stuck with the result and we got to kind of manage around it that way.

 AR: Yeah, and we have to deal with whatever terms are going to come from that as opposed to putting a plan in place or at least putting the options out there and be like, “Well, if you do this, this is what happens or here's what happens on this side,” and let them make the decision from there, and, you know, whatever repercussions might come from it.

 All right, next thing, which I mean, I know I've been seeing a lot more and I'm sure you have as well are business transitions. I know there's a few different methods. Let's start with, you know, we were talking about what an internal buyout looks like. I mean, that's pretty self-explanatory that it's coming from like the inside, but do you see that pretty frequently or…?

 NB: Yeah. It's a timely topic. It's kind of been a big thing I feel like for the last five or 10 years as this large baby boomer generation is getting closer to retirement, you know, they're looking at, “How do I get the final value out of this business?” Or for some, it's not even about getting that final value, it's about, “How do I leave a legacy behind and a company that'll keep going on and have people there to run it?”

 AR: I feel like a lot of people are very proud of the name that they've built and they want to see it keep going.

 NB: Totally. And they should, especially some of the ones we've seen that are local that have grown to be $100 million contractors. You should be proud of that. So yeah, internal buyouts are probably the most common we're seeing right now where maybe you have a kid—a son or a daughter—that's coming into the business that has been working with you and wants to buy you out or maybe you just have some key employees that you would like to hand over the keys to the kingdom on. Really the biggest thing there is like the financing for those tend to be based on the company's profits. And so there may be some debt that comes into place related to that. And so how's that going to affect the company kind of bringing it back kind of the surety piece of it is like, you know, if we put on this big debt, what's going to happen? Also, if we, you know, if our main shareholder who probably at this point in their career has nice personal net worth is in, you know, is on the indemnity, is there someone else who's going to take that over? Are they going to stay on? How's that going to impact the bonding capability or even the bank, right? Yeah, you know, your lines of credit probably have some personal guarantees in there as well.

 AR: Well, I mean, that's like a big question we usually ask too, because typically the, you know, the son or the younger generation that might be buying the company are definitely not going to have as developed a personal financial statement as the current owner who's been doing this for 30 plus years. So like if they're willing to stay on and indemnify, that really helps our case a lot if they're going to be bringing on some debt, because just to know that there's someone else there backing the company, as these people come in.

 NB: And I mean, I would say, man, I feel like I deal with in five or six of these almost every year, where we're just trying to figure out how to make this work. So there's a thing you can get really creative. And so it's not something people should be afraid of. But they should reach out to their CPA, they’ve seen a lot of these go on and there's a lot of different ways we can skin this cat and come up with a solution that's going to work for everyone.

 AR: No, it's always I mean, it's super important to trust your advisors or your partners and make sure you're utilizing all the resources that you have around you when you're making a big important decision like this.

 NB: Yeah. And I think getting everyone as involved as possible and then also just looking at what are you trying to get out of it, right? So if we're trying to maximize cash, internal buyout might not be the best, maybe an external buyout would be better and we can kind of transition talking about that.

 AR: Yeah, let’s do it.

 NB: External buyouts, there's a bunch of different ways that can kind of look. You can sell to a competitor, or maybe someone more upstream that's trying to vertically integrate, those tend to be some of the faster moving deals that get done because they know your industry really well. They kind of already have an idea of the types of projects you do.

 You can also go private equity; which private equity has been coming into construction space more and more. It used to be they were really only interested in companies that had more of like a repeat service component or repair. You know, so, it would be like HVAC, or maybe like plumbing or in some cases electrical, but some of those don't even have service component to them. And so recently they've gotten more aggressive and there's definitely been more of a push into some more niche or specialty areas. And so they're not quite going after general contractors yet, but I can see a world where eventually they do.

 AR: I mean; we're definitely seeing it more too.

 NB: Yeah.

 AR: Like, I mean, it's happening more and more frequently.

 NB: Yeah. And so the biggest thing to know about with private equity is it's going to come with some-- it's probably going to be one of your highest offers you will get; you'll maximize value that way. But there probably will be a three or five-year period where the owner or key management are going to have kind of golden handcuffs, where they need to stay on. So it's not going to be a quick exit where you might be able to get that more with an internal buyout or potentially having a competitor come in and buy you out. Typically, private equity is going to want key management to stay on board for a little bit. So it's something to consider.

 So one of the things, you know, we talk about a lot with clients is trying to plan in advance for this. When you're starting to say, "Hey, I think I'm five years out from wanting to retire and be out," that's the time to start kind of planning, "Okay, how do we want to do this? Should we get a valuation of the company to kind of see what's it worth and figure out, you know, what's our retirement plan? Is that going to be enough? Do I need to stay working a little bit longer to make sure I have enough for my nest egg?” And so it's just kind of a, there's a whole bunch of different conversations need to happen. And then also, if we're going to look to external, how do we position the company to sale, right? So how do we make it look as attractive as possible to an outside buyer?

 I think kind of the last option that's become a lot more popular recently is ESOPs. So if you don't know what an ESOP is and it's an Employee Stock Option Plan. And basically it’s where a trust gets set up, and not to get too into the weeds, but a trust is owned by what’s essentially a 401k plan, and they own the stock of the business. And so it’s a way that you can get the ownership of your business to your employees, which is really actually a pretty cool legacy you can leave if you’re basically selling the company back to all your employees, not just key employees. But they are expensive, they cost quite a bit to run every year. There's evaluation that has to happen. There's an audit that has to happen. There's actuaries that get involved and things like that. But it can be a great way to cement that legacy and let it live on and really reward your employees who've been loyal to you over the years with ownership in the business. All this stuff just takes a lot of planning. Like my key thing that I say to every contractor is whenever you think you want to start looking at this, you know, we just need to make sure we have a runway to kind of build out that plan.

 AR: Yeah. How often do your clients come to you with the five-year runway versus like the one-year?

 NB: Pretty rarely, I would say. You know, I have a couple, clients that just really look ahead. I think it's one of those business, construction's hard when you're, especially when you're the sole owner or primary owner, you know, all that stress, you feel it. And so it can be really rewarding, but it can be really challenging just on yourself. So a lot of times we get contractors that come to us and are just like, "I'm done. I need to get out." And we can absolutely help through that situation. But in an ideal world, we would say, "Hey, let's start looking three to five years out so we can get you positioned and ready and we have your plan set up and all that."

 AR: Do most of the time when they come to you with this plan, do they have an idea already; do they want to do external versus internal? Because I know external, there's more options. Do they kind of have an idea of what they want to do?

 NB: Most of the time they do. They'll come to us and they'll say, “Hey, I do have a key employee or a son or daughter that wants to take over the business. And that's the way I really want to go because I feel strongly about that.” Sometimes they do come where they're like, “Hey, I think I

want to do an internal buy-out but I'm not sure that they're going to be able to afford it.” I just had that conversation with a client the other day and we went through process, we got a valuation done for them and they saw what it's worth. And the question was, "Hey, do I want to take a haircut and make it so that it can be bought internally or do I want to go external?" And in this case, they wanted to go external because they didn't want to leave that much money on the table, which is totally fair. You know, you built up that company, that's your value and you choose what to do with it. So, yeah, I would say most of the time they have an idea of what they want to do. My job I feel like as an advisor to them is to make sure they're aware of all the options that are out there to them and what those, how much money could be on the table.

 AR: Now, kind of circling back on like private equity because, I mean, we're seeing a bunch of that, just like you are. And I mean, it can have a pretty big effect on your financials and your balance sheet that really can actually hurt your bonding capacity, and I think a lot of people aren't totally aware of that going into it because they see this big number coming from PE, and they think it's fantastic if they just have to hang around for three to five years, but they don't understand what bringing on some of this debt or goodwill and these kinds of things to do to your balance sheet and your financials and what they can do to your surety program.

 NB: Yeah, it's one of those things that you really want to model out, right? So before that deal closes, before you sign that purchase agreement, you want to make sure that you've looked at, okay, this is the number, this is the debt, this is how the working capital is going to look post transaction. And then also like, you know, is the private equity firm going to be willing to take on the indemnity that maybe the primary shareholder was taking on?

 AR: Usually that's a no.

 NB: Yeah, exactly. It's almost always a no. So it's like, okay, are they going to infuse more capital in to make sure that the bonding is going to stay there? And so I think that's why you've seen a little bit less interest in public works contractors for PE because there is kind of that hook that they got to sign on for. And so you're seeing it a little bit more and more than ones that do private construction projects.

 AR: No, definitely. I feel like too, there's been some PE firms that I've just been reading about and stuff that they don't totally understand what they're getting into when they buy that company, when it comes to the bonding aspect, because maybe it's not major, but it's sizable and then you

present them with, “Oh well, we either need you to put a bunch of money in or someone on over there needs to sign,” and they don't want to do it.

 And you're like, “Well, then you're going to lose that aspect of the business.”

 NB: Totally, and it comes back to every time, like the best advice I can ever give a contractor is before you do any significant transaction or anything you need to be bringing in all of your outside advisors: the bank, the surety broker, the CPA, your attorney, making sure that everyone's on board and knows what's going on and we can work through all these things kind of before the transaction happens. Because it can kill a transaction too.

 AR: Yeah, it kind of goes back to what you were saying about how you need to utilize all your resources, whether it's banking, CPAs, your surety agent, your insurance agent too, what that kind of does with your policies to make sure there's, you know, you're not significantly impacting your business. You know, because I think you guys will handle like some benchmarking and some of that type of stuff.

 NB: Yeah, yeah, so we'll do benchmarking with clients. We get really good data just from our own client groups. I mean, we serve, gosh, I want to say like 400 contractors across our firm, you know, between all of our geographies. So we have a lot of internal data and then there's also external data points out there like CFMA, Construction Financial Management Association does an annual survey that's broken out by company size, geography, trade. It's really an incredible survey they put out. You can benchmark yourself against that. But then also it's just like the kind of intangible knowledge of working with a lot of contractors. What have I seen be successful? Same with your surety broker. What have they seen to other contractors that you could leverage off of, that experience that you guys have with other folks? So yeah, there's a lot of great opportunities for your CPA or bonding agent to come in and provide knowledge from kind of the outside, just from what we're seeing in other places.

 AR: Yeah, that's great. And I mean, I think the kind of last thing to kind of, you know, from my perspective to kind of input on here for, you know, any contractors listening is, you know, having a great CPA relationship is something that's invaluable to your business. So, you know, I know you and I have gotten to work a lot together over the last few years since I've kind of come into the industry. And It's always nice when we see a review from you guys that says Aldrich on the front. So yeah, no, I appreciate that.

 NB: And likewise, Andy. And Rancho Mesa has been a great partner with us too. And so to me, it's the more you can get your advisors talking together as a group and not isolated, the better, because we can come up with solutions as a group that kind of come to think about all the different angles, right? So like, I know a lot about the tax side. I know a lot about the financial side. I know a little bit about, you know, the bonding program, but that's where your expertise comes in and you can kind of give your expertise and your specialization there that you have and kind of advice on impacts, you know.

 AR: Well, and it's super nice because anytime someone's like, "Oh, well, let's talk about what's this going to do tax-wise," I'm like, "Oh, I'm not the guy for that, but I know someone that can help you there.”

 NB: Yeah, right, exactly, exactly. So, yeah, I mean, that's the biggest thing is, just keep everybody in the loop.

 AR: Yeah well I think that was a lot of really great information on this this episode so Nick, thanks very much for joining me.

NB: Yeah happy to happy to join you and thanks for including me.

Construction Change Orders: What Contractors Should Know

Rancho Mesa’s Surety Relationship Executive Anne Wright and Pam Scholefield of Scholefield Law in San Diego, discuss what affects subcontractors and prime contractors when changes occur in their contract.

Anne Wright: Welcome to Studio One. This is Anne Wright, surety executive here with Rancho Mesa Insurance. And I have again as my guest Pam Schofield. We met a couple months ago and talked about prime contract provisions and how they affect or impact subcontractors and what to look for. Very well received. So now we thought we'd try our hand at talking about change orders. We are going to talk about a few things that affect the subcontractors and prime contractors.

When it comes to changes in the contract, what you need to know, what you should look for and how you can potentially negotiate those within those contracts. So a few contracts will run from start to finish without change orders for different reasons. It could be poor plans, designs, scheduling, et cetera.

So Pam, let's remind the audience just a little bit about your background and then we'll get started.

Pam Schofield: Okay, thanks, Anne. I appreciate you letting me come back.

I started my career many decades ago as an engineer for General Electric Power Distribution and Controls Division, and at that point in time, that's when I started working with contractors in the industry. And then I ended up going to law school, and naturally I started representing contractors and subcontractors in the industry I already knew.

I had a little different perspective, but was able to develop my practice based on the skills and contacts I had from when I worked, was in the trenches with them. So I enjoy this industry, this is a great industry, and that's why I'm still here.

Now I help subcontractors and contractors, obviously with a lot of contract issues. So I'm happy to be here to share any bits of knowledge that I can.

AW: Well, you're uniquely qualified to do that, so we certainly appreciate it.

When talking about change orders, there's kind of a start to finish process with that whole thing. Again, if you enter a contract thinking there's not gonna be changes, you've probably had some different experiences than the majority of contractors out there.

So in the world of disputes, which will likely occur again for these various reasons, can we talk a little bit about how you can avoid them and what you should look for that are the key points in documenting your file and working to make sure that your change orders are recognized and ultimately approved?

PS: Sure. So you're right. If you believe that you will not have changes in a job, you either are very, very new or have had an unusual experience as a contractor. And I'm glad you talked about the contract itself because that is the most important place to look. Every contract, every subcontract has a process that you have to follow as the contractor or the sub in order to present any changes that you want. And in a change order or reason for a contractor to seek extra time or extra money is anything, honestly.

Some contracts have a list of what would trigger the contractor's responsibility to tell its customer. So when I say its customer, when a contractor tells the owner or the sub tells the contractor, the important thing there is that they want to know as soon as possible if something happened to cause more money or more time to your work. And that's the whole point, what we call the notice provisions.

And so anything I tell people, whether it's listed in your contract or not, that would cause you more time or more money, that is when to give your customer notice that, "Hey, this is happening. You've asked for a change. I've run into something unexpectedly. There's another trade in my way. The job site is not ready for my work or the owner came and asked me to do this. So let me talk about that.

Contractors should not do changed work or extra work or different work or any way you want to describe it just by a verbal request by an owner or even their own contractor. If you're a sub, you don't do anything orally. When the project's going along fine, you might get in a situation where people get casual as they get through changes, and they're paying change or all that, when it's something that's more controversial, like a big money, a delay to the project, or there's a dispute as to whether or not whatever's happening is really extra work for the contractor or sub. That's when people dig into the contract and they say, did you or did you not, as the contractor asking for extra money, follow the process in the contract.

So what I tell my clients, and when I give my own seminars, is that before you start the work, you need to know what that process is. And the reason is, is because many contracts will say, hey, you've got two days, 48 hours from whatever that event is that's causing extra money or delaying you to let us know about it. And that's a very, very short deadline, especially in the heat of construction.

And as a subcontractor, you may have deadlines in there, but because we talked last time about how the subcontract incorporates the prime contract terms and conditions, you still need to know what the prime contract requires because you don't want to cause your general contractor to miss those deadlines.

So again anything that would cause extra money or extra time is a situation where you want to start that process.

AW: And is it typical that the contract will indicate whom you need to communicate with?

PS: Often it does, not all the time. And that's very, very important because sometimes a contract will say that it has to be a vice president level or above. And as the subcontractor, you're like, well, that very rarely happens. We don't communicate at that level. It's usually the project manager or the project engineer that you talk these things through.

It's very important on a public project. So I'm really glad you brought that up because public projects often say, tell you who can authorize. And being a public entity, it's extremely important that you only do extra work when it's been authorized by the right person, because that deals with public money, obviously. And so you don't want to just go scurrying along and doing extra work, because somebody said, oh, sure, do this, or I'll sign off on it, because they may not have the actual authority to let you do that work.

So that is a very important part. Again, if it's not listed somewhere then probably a project manager but a lot of contracts these days do say who has the authority. And you need to know that out of the gate.

AW: Right, yes. Again, it's all about setting up your job file, having your checklist, making sure everybody involved with processing the work knows what those procedures are and this is important.

PS: It is very important, especially on the bigger ones.

AW: And to your point about, you know, the timelines in which you need to submit them, I have seen and or heard stories in my career about contractors, generals or subs that, you know, don't want to rock the boat, right? So they're just going to keep doing what they're doing. And like you said, sometimes it's very casual and they feel like it's a great relationship and they're moving along with the job and they'll just submit the change orders at the end of the job.

PS: Right.

AW: And especially if you're a public owner, you've got a contingency that only gives you so much money.

PS: Yeah.

AW: So you could run out of money if you wait until the end of the job, never the best practice.

PS: Right. And that's one of those, you know, no good deed goes unpunished because if you're going to wait until the end of the project, you likely will not get those paid. And that usually starts happening when the project people start talking about these changes or, things happening on the job site at project meetings. Or, they document it in a request for information and a response comes back and the contractor says, “Okay, well the engineer says that this is how to fix it. Okay, I'll go ahead and do it that way.” But if it costs extra money or time and they don't document it before they do the work or they don't get permission and writing, before they do the work, at the end of the project you're not going to. You're right because there might be a contingency for certain amounts. You may have to go to another level of authorization within the company that you're dealing with or the municipality without realizing it. And you definitely don't want to wait until the end of the project.

One of the other practical reasons, financial reasons, you don't want to wait until the end of the project as a subcontractor or as a contractor, is because you financed it. You had to pay your people. You had to pay the materials. Do you really want to drag a $150,000-$200,000 change order along to the end of the project for many, many months? I mean, you should try to get your money back as soon as you can.

And you do have to stay on top of it. And you're right. They want to be good team players. They want to be friends with the contractor, like the sub to the general.

AW: They don't want to risk not getting that next job.

PS: Exactly. They don't want to risk not getting that next job. And that is used as a carrot many, many times, like can you cut the change order in half or something. But the reality is, and as long as let's say you're a subcontractor and you're concerned because you've not done work with that general before and you finally got in the door, right? And you don't want to rock the boat. But the reality is, is that you can do the proper paperwork and document it in a very professional way. Even if you just think something's going to cost you more money. You need to start documenting it and giving that notice.

You'll call the person up to say, "Hey, this happened. I'm not sure how much it's going to do, but I'm going to be sending you an email.” or whatever the proper way is that you're communicating, “I'm just giving you heads up. I'm going to send you an email because I want to let you know this is happening. I don't know if it's going to cost me any money, but let's just document it." And if you do it that way, it tends to, again, strengthen that relationship because you're having more conversations in general.

And you're giving them a heads up. You're being very professional about it. So that's helpful. And a lot of times a subcontractor or contractor gets in the situation where a bunch of little things start happening. Like maybe an owner's rep or a construction manager has the tendency to waltz around the job site and chat with the people out there and you know the workers want to be friendlies but maybe they chat for 10 minutes maybe it happens two three times a week and there's five of your people every time it happens. That starts to add up you know, and then a month goes by you're like wow why is my labor, why are we not done with these tasks yet?

And so again giving warning that hey you know, “while we appreciate the interest of the owner's rep, I just want to let you know it is disruptive you know. How do you want us to handle this?” like if you're a subcontractor. And then start documenting it per what the contract says you have to document.

AW: Again, critical.

PS: It is critical, right?

AW: So some change orders are going to be, again, those that are presented timely and appropriately, you know, a lot of change orders just kind of happen and they get paid and everybody's fine and happy, but a lot of times they're disputed.

So what's the best practice for when it's time to dispute a change order? When would they bring in legal counsel or what do they need to know? 

PS: It definitely depends on the situation and the value. Some contracts actually have a separate change order process versus claims process. And that's where it gets a little tricky.

You may have a prime contract that just calls everything a claim. And so you go immediately to their claim process, even though you've not even submitted the first request for a change.

Other contracts have a very detailed process that you have a certain amount of time to do a request for a change order, a C-O-R, or a request for equitable adjustment, whatever it calls it. And so you really do need to look at that process. But I'm advocating and it's unusual, but if you have change orders that are worse than money, you don't have to wait to the end of the project like we're talking about. You would start following the process and then eventually, if it's not getting paid, you go, okay, what's the dispute resolution process? Do we go to mediation first? Do we have to get an arbitrator? And that's going to be up to the person so long as you've followed the steps to initiate that final way to solve that dispute.

If you're in a public arena, it's usually in the public arena, there's often time frames, like okay, if the engineer of record does not respond in 30 days, assume they rejected it. So now you have to do the next step, and that catches people off guard too, because they'll submit it and don't hear from it for months, but they don't follow it.

And so I'm an advocate of early resolution. Because if you don't, the parties start being, like they feel like they're not being treated fairly.

AW: Yeah, tense.

PS: It gets tense, yeah. And then, I mean, if it requires upper management to get involved, get them involved.

And again, you can warn the project manager you're dealing with saying, "You know, we're going to go to the next step. I don't want to, but it's been out there too long. We're financing this thing. I'm just giving you the heads up. You know, we're going to take the next step because we're following your contract and this is what I have to do.”

AW: Well, he who speaks last loses.

PS: That's true.

AW: Got to let him know what's going on.

PS: And when a contractor follows the contract step by step, it demonstrates that A, you know what the contract says and B, it really looks like you have your act put together. It's a more believable change request. So whoever you're giving the change request to or the change order request to, they're thinking to themselves, wow, this person has gained some credibility. And the more credibility you can gain when you're looking for money and extra money the better off you are.

AW: Right. It helps that owner or general contractor’s rep, too, process what the channel they've got to go through.

PS: True

AW: If you got everything documented and organized and you know.

PS: And sometimes that's the bottleneck. It's the person who you submitted yours to. Because when you're a sub, especially in a chain, let's say a design change comes down the road and they've made changes and it might affect several trades, so you feel that your part was pretty straightforward and you get frustrated, “why hasn't the general contractor submitted my change yet?”. Well they're putting all the trades together and putting in a big change order and so that's why it's important to follow that process.

AW: And communicate.

PS: Communicate, absolutely that's the number one thing so.

AW: Well to sort of recap and go back to the beginning, it's know your contract, right, set up the job file, have everything documented, and follow procedures.

PS: Exactly. Sounds easy, but it's not that easy during the heat of the moment.

AW: I'm glad I don't have to do it.

PS: Exactly.

AW: I have a lot of respect for our clients that deal with this every day.

PS: Oh, absolutely.

AW: Okay. Well, thanks again for joining us. And if anyone has any questions beyond this, I can be reached at awright@ranchomesa.com or call me at (619)486-6570. And Pam, your contact info?

PS: Yes, my email is pam@construction-laws.com. The easiest way to get ahold of me honestly these days is probably my cellphone. We do still have office phones, but my direct line is (619)818-6240.

AW: Well Thank you for sharing that.

PS: Well, thanks for having me. Have a good day.

AW: Until next time.

Alyssa Burley: This is Alyssa Burley with Rancho Mesa. Thanks for tuning in to our latest episode produced by Studio One. For more information, visit us at RanchoMesa.com and subscribe to our weekly newsletter.

Recommended Strategies to Open Capacity for your Bond Program

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

Most of our contractor bond accounts are provided a single bond/aggregate capacity program to determine the size of projects they can bid and the amount of capacity that is available in the program for future projects. The most effective way to ensure you have available capacity for an upcoming bid is to communicate with your bond agent well in advance of the bid date to ensure the project will be approved by the bond company. On certain occasions, an upcoming project may put you over the top of your approved capacity. This is the time your agent must work hard on your behalf to represent to the bond company why this project makes sense to add to the program. 

Here are several useful strategies to make this happen:

1. Prepare a work in progress schedule on a quarterly basis and provide updates as work progresses to give your bond agent the best estimate of your cost to complete as of a certain period. This is important because the bond company will allow additional runoff to subtract from your current backlog to free up capacity prior to the actual start date of the new project.

2. When submitting your bid request, include a job cost breakdown on the new project and list the percentage of labor, materials, equipment, subcontractors, overhead and profit.  Provide additional explanation of any key elements (for example, if a certain subcontracted trade represents a large portion of the project) and risk transfer protocols used to pre-qualify this particular subcontractor.

3. Have a status report completed by the owner whenever a bonded project is completing. Your agent can provide you this document. The bond company uses this information to remove that project from your backlog.

4. Have a discussion with your bank to determine if they can increase your line of credit to ensure available cash in support of anticipated costs during the initial few months of the new project.

5. Consider loaning personal money to the company for a short time period to provide additional working capital or equity. The loan may need to be subordinated to the bond company to ensure it is not paid back until certain conditions are met.

Both your agent and the bond company only generate income when they issue bonds to support your projects. Therefore, all parties involved want to try and find a way to allow you to add good projects to your bonded backlog.

If you would like more information to discuss additional ways to increase your bond capacity, please contact me at (619) 937-0165 or mgaynor@ranchomesa.com.

Exploring the Current Commercial Surety Climate

Author, Andy Roberts, Surety Account Executive, Rancho Mesa Insurance Services, Inc.

Surety Account Executive Andy Roberts interviewed Miggs Borromeo, Commercial Surety Underwriter for Merchants Bonding, and discussed the current climate of the commercial surety world in Southern California. They also covered the bonding trends most commonly seen today, and the programs that Merchants Bonding Company offers.

Andy Roberts: Welcome back, everybody to StudioOne™. My name is Andy Roberts and I’m a Surety Account Executive here at Rancho Mesa. Today, my guest is Miggs Borromeo who is a commercial surety underwriter in San Diego and working for Merchants Bonding Company.  Today, we’re going to be talking about the commercial surety world.

Miggs, welcome to the show.

Miggs Borromeo: Thanks for having me, Andy. I’m excited to be part of the show.

AR: Awesome, so before we dive in, why don’t you give us a little bit of background about yourself.

MB: For sure. Hello everyone, my name is Miggs Borromeo. I’m the Commercial Surety Underwriter for Merchants Bonding, the eighth largest surety company on SFAA. I currently handle the Southern California territory, starting from Los Angeles all the way down to America’s Finest City, San Diego. I’ve been in the industry for about a year and a couple months, so there’s a lot to learn and many more years to go, as they say. I’m originally from Maryland but moved to California a couple years ago.

AR: Fantastic. So, how did you get involved in the industry?

MB: It’s always a funny story, because it all started with my friend’s dad being the head of surety at the company I interned for back in college. One day in the summertime he gathered all the interns to talk about surety bonds. And funny enough his name is Mike Bonds, so shout-out Mr. Mike for all the introductions. But, he talked about the surety industry and what it entailed. He talked about working with contractors, analyzing financial statements, and visiting and traveling with agents. And so, I thought that was a really cool industry, especially being a college student. The only profession I really knew was financial analyst, accounting, and investment banking. So, I started doing some research and once I graduated college I applied to become a surety underwriter in L.A. But, unfortunately, COVID happened that year, so, you know, a bunch of companies were having hiring freezes, so I had to put a pause in that dream for a little. But, fast-forward to a couple years later and I moved to San Diego, and thankfully, I had a friend named Andrew Shin who is their current contract underwriter referred me to the company he was working at that provided business loans. I started as an underwriter and switched around to sales, and one day I just wanted to update my resume, so, as you know, you search on Google “surety underwriting positions”.

AR: They’re looking for them all over the place.

 MB: Yeah, exactly. So, I was lucky enough that Merchants popped up as the first link, so I clicked on it and read all about them. You know, they’ve been around for 90 years, focused on one product which was surety, so I really liked that. And then I saw that a bunch of their underwriters would travel every year for meetings and trainings and, so, I thought that was a great part of the culture, and I wanted to be a part of that. So, I applied, flew to good old Iowa, and luckily passed the test.

AR: So, basically like a dream come true, kind of circling back to what you said about your surety dream, earlier in that statement.

MB: Yeah, exactly. And, sometimes, you know, it takes a while to get to it, but I’m glad that I was able to kind of experience different roles to build up my skillsets to become a surety underwriter.

AR: Absolutely. And I feel like too, you know, I came from the insurance world where, you know, not a lot translates, but I had a good understanding of the insurance world. And that’s what really fed me into this job, and this role, and this opportunity that I’ve really grown to love. And, you know, it’s been a lot of fun that way.

So, kind of diving into your actual role as a commercial surety underwriter. You know, I know commercial surety has a vast range of bonds that kind of fall under that umbrella. You know, looking at your license bonds for contractors, or subdivision, or maintenance landscape. Can you talk to us about your experience with the variety, with all of those?

MB: Yeah, for sure. As you mentioned there’s definitely a wide variety of bonds. I look at our bond form library and there’s 3,000 bonds and, you know, it’s a lot. And there’s always new ones coming in, so I always handle different types of bonds, I never know which kind I’m going to get. But, luckily enough, Merchants has a great library that I mentioned about, where a bunch of underwriters from the past and current underwriters right now are just researching the bond types that they see, you know, summarizing guarantees, what the risk entails and, kind of, what information we need. And, it’s not only helpful for me but it’s also helpful for the agents that are seeing a bunch of different bonds that they’re not used to. We’ve gotten feedback that the library is very helpful, it helps them understand the bond. And, like you mentioned, I handle a different, wide variety from license permit to financial guarantee, so it’s just all about trying to understand what the bond is guaranteeing and what we need. Do we need credit reports; do we need financial statements; personal business indemnity? And, sometimes I see bonds that no one has seen before, so I have to, kind of, put a little more research into it; seeing the county, seeing what it entails and to see if we can support it. So, it’s been a learning experience.

AR: Yeah, well I feel too, like especially on your guys’ portal, you know, I get a request from a client for some random license bond that I’ve never heard of or seen, you can go in there and kind of figure out, “Well, Merchants is willing to write it in their portal.” So, you give a nice breakdown of everything that it is and what you guys need. So, that’s really, really helpful.

How long do you think, since you’ve been here for a little over a year, how long did it take for you to, kind of, get up to speed in this and really feel confident in engaging with agents and clients, and really knowing what was going on?

MB: I’d say it took me about nine months to year. There was definitely a lot of learning process, especially the first couple months when you have to learn about the system and really learn about the industry.

But, I think I was very fortunate enough to have a great team around me, starting from management position who’s had 15 plus years of experience, to my current teammates who have a wide variety of perspectives from the agency side and different markets, and to even our assistants who are always helping us out with our day-to-day activities. So, the first couple months was really understanding what the systems were all about. And then six to nine months we had a training program where they would sit us down and talk to us about how to properly plan the agency meetings, how to conduct them, specific questions that the agents might ask.

And so, it’s definitely a great experience to have that around me, but it’s also cool that there’s always new questions coming up, and so there’s always something to lean. And, we’re always improving, trying to improve, our technology and so, we’re always trying to focus on marketing those new things we come up with.

AR: Fantastic. How often do you have to go out to Iowa?

MB: I try to go about twice a year. One’s mandatory for the underwriting meetings, but, sometimes I like to stop by and say hello to everyone.

AR: Hopefully not in the wintertime.

MB: Yeah, no. Can’t get me out there in the wintertime, besides this time for November’s underwriting meetings.

AR: So, kind of circling back to the different bond types. So, are you seeing a lot of submissions on a certain type right now?

MB: Yeah, so, I’ve been seeing a lot of Motor Vehicle Dealer Bonds coming up, and I’ve also seen Immigration Consulting. But, it’s starting to really pick up with our Court and Probate bonds. I’ve been starting to see a lot of Non-Construction Performance Bonds, Landscaping Projects. The variety is starting to pick-up as the more visits I come in and really just tell what Merchants’ appetite is, I’m starting to see different types of submissions. And I think that’s the main idea of it, is that we haven’t had presence in Southern California, but now I’m around and I’m visiting agents, I’m letting them know that, “Hey give us a chance to review these files,” and that’s where the variety comes in.

AR: Yeah, no, absolutely. Kind of looking at the marketplace, and maybe this might be a tough question just because you guys have such a wide variety of bonds that you guys write on the commercial side, but what are some of the main challenges that you’re kind of seeing, and have you maybe seen any uptick in claims?

I know, because, especially, kind of, thinking of the license bonds for the contractors, you guys have really kind of stepped in and filled the void for a different surety that, kind of, left the marketplace. So, there’s probably been a lot more volume there.

MB: Yeah, there’s definitely a lot of claims activity that I’ve seen with the Motor Vehicle Dealer Bonds. Principles are going out of business so claims are rising. I’ve also seen challenges in the notary side. The Notary Bonds are tied in with the mortgage interest rates, and so, you know, not a lot of people are buying houses right now so there’s not a lot of need for notary.

And I’ve also seen that, just by, like, challenges, you know, I see a lot of agents talking about, they’ve been seeing a lot of smaller transactional bonds that’s been taking up their time. And so, as I mentioned earlier, Merchants is always trying to improve their technology, so we’ve recently rolled out Hub Express, where it allows agents to issue small transactional bonds with little touch. We recently updated our systems to allow California Contractor State License Bonds, so that allows agents to issue those pretty fast. And, it’s tax season so, tax repair bonds too are a big deal, it helps them out on that.

AR: Yeah, that’s fantastic. Is there anything else you want to talk about on the commercial side, or any questions you might have for me?

MB: Yeah, for sure. Before we end the show, would you happen to have any advice on any new underwriters or agents that’s entering the industry right now?

AR: What I think helped me a lot when I first got in, I’ve been doing this for six and a half years now, was I started participating in the Surety Association right away, because, industry wise, that really helps you to get to know everyone in town; all the different agents, all the different underwriters. Which, I mean, you’re already doing that so, that’s a good step. So, maybe your next step is to try and get on the board next time there’s a company position for there. I think that’s been really, really beneficial for me as well. So, I would recommend doing that.

Other than that, I would just say you’re doing the right thing in, like, getting involved in the industry and getting out in front of people. Surety is such, more relationship driven than the insurance side. So, as you’re going to start growing your book, both the underwriter side and the agent side, you just have to be out there in front of people, and building your relationships and just knowing that this is more of a longer play and not a short-term play.

MB: Yeah, I agree. Great advice. I know you mentioned joining the board, I guess until a position opens up I’ll still be the photographer for the events.

AR: Yeah, absolutely. Well, Miggs, thank you so very much for joining me in StudioOne™ today and giving us some background on yourself and some info on the commercial surety industry.

MB: Yeah, thanks so much for having me Andy, this was fun. It’s always a pleasure to see you and I’m excited for all the future events that I run into you at.

AR: Absolutely.

Building a Productive Surety Relationship

Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.

Having represented contractors and developers of all types and sizes for many years, I have plenty of examples of what works best for clients to maintain a level of surety support that helps them meet their growth goals and objectives: updated financials and proper communication.

Updated Financial Paperwork

No one likes to deal with unnecessary paperwork; however, as companies grow and they streamline certain reporting information (i.e., financial statements and work-in-progress reports), their surety relationship can grow with them. It is not all about the paperwork, however; that is only one way to measure what your business can expect in the way of surety support.

Regular file updates to annual and perhaps interim business financials (depending on the frequency of your bonding needs, including possible internal or CPA supported reports), personal financials, cash verifications, and status of your backlog is the basic paperwork that is needed to maintain a current file for an active surety relationship.

An important thing to note is that posting even the smallest of net profits at the end of the year, and making sure that your balance sheet tracks the equity from year to year, helps the surety feel confident in your ability to manage this aspect of your business.

Communication

Beyond the paperwork that is needed, communication is an integral part of the surety relationship, as with any healthy relationship.

Depending on the frequency of your bonding needs, regular communication might be limited to only a few questions each time a bond is needed. These questions are often regarding the scope of the work if you are looking at jobs that are outside of your historically performed projects or territory. The questions may include:

• Is this a typical job for you or outside your normal scope?

• Have you worked for the owner or general contractor before?

• What do you like about the job and/or what do you see as the challenges on the job?

So much of the relationship tends to be communicated on paper. Unfortunately, face to face meetings just don’t happen the way they used to. So, to the extent a client can let us know of things that impact their business, good or bad, in between financial reports or with updated financial reports, it is all for the better.

Examples of things to communicate might include:

• New work opportunities in which you do not need our services or a new client that is bringing you more work

• Increasing work opportunities and job sizes

• Moving into any new areas of work (scope or geographically)

• Hiring new staff for the office and/or field management

• Investing in new or upgraded accounting systems

• Considering a new bank relationship

• A problem job. (Let us know before we see a problem reflected in the financials and have to ask the question. Again, whether it’s bonded or not.)

This is just a quick overview of how to build a productive surety relationship. Rancho Mesa strives to support our clients and their bonding needs on a regular basis. Every relationship is a little different, but the basics of good communication and information sharing are always key to the mutual success of these relationships.

For questions about your surety program, contact me at (619) 486-6570 or awright@ranchomesa.com.

Stand Out Among the Crowd with a Surety Prequalification Letter

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

In advance of a project bid, some owners and general contractors will want to pre-qualify the subcontractors to ensure they can handle a project of a certain size. A simple and efficient way to accomplish this would be to have the surety agent that supports the contractor’s bonding program prepare a surety prequalification letter. 

As opposed to a bid bond, which carries a 10% penalty if the contract is awarded and the subcontractor does not provide the final bond, a surety prequalification letter (also known as a bondability letter) is less formal and does not carry any guarantee. 

The letter will typically include some or all of the following items:

• The name and A.M. Best rating of the bond company that issues bonds for the account. It will also confirm that the bond company is included in the U.S. Treasury List of Certified Companies and licensed in the state where the project will take place. The letter may include a reference to how long the contractor has been supported by this particular bond company.

• Single and aggregate bonding limits for the contractor to determine if they have ample surety credit to qualify for the particular project. The letter may also include information regarding the amount of surety credit currently available within the program limits. It is important that the surety agent and contractor discuss the project size in advance to ensure the letter conveys that the contractor has sufficient available capacity for the particular project.

• A paragraph where the surety agent recommends their particular contractor client for this project noting that they have not had any problems with past bonded projects schedules, budget, and workmanship.

• The letter may sometimes include the premium rates for the client contractor if that information has been requested by the owner/general contractor that requested the letter.

The final paragraph of the letter will have wording that notes “this is issued as a bonding reference letter” and should not be considered as a bid or performance bond. Additional underwriting of the contractor may be needed if the owner desires a more formal document such as a bid bond.

If you would like more information, or to discuss the client-broker-carrier relationship, please contact me at (619) 937-0165 or mgaynor@ranchomesa.edu.

Transitioning from a Credit-Based to a Standard Surety Program

Author, Andy Roberts, Account Executive, Rancho Mesa Insurance Services, Inc.

When sureties began offering credit-based programs, there were only a few surety companies who would offer this type of program and the limits were low, most often around $250,000 for a single project and aggregate. However, over the past few years, there has been an increase in the number of surety companies that are willing to offer these types of programs. The limits offered have also increased with some companies writing $1,000,000 for a single project and aggregate bond based solely on an owner's personal credit score. These programs are great for contractors that are getting started with bonded work, or don’t bond frequently and are not looking to provide the information necessary to set up a standard program. However, for contractors looking to grow and need additional surety capacity in order to achieve that goal, they should be aware of the steps that will need to be taken in order to transition from the credit-based program to a standard bond program. The first, and most important step will be the company financials.

Standard bond programs are written primarily based on the financial strength of the company. Sureties will be looking to obtain the last two fiscal year-end financial statements, balance sheet and income statement, and the most recent interim balance sheet and income statement that are available. They will evaluate the current cash position, working capital, and equity in the company to determine a single and aggregate bond limit.

In addition to the company financials, the surety will want to evaluate the personal financial statements for all the owners. Personal financial statements are an important item that surety companies will evaluate. Similar to the corporate financials, assets and liabilities will be evaluated along with the personal credit of the owners. Surety companies want to ensure that the company owners are current with their personal obligations before providing surety credit to their company. 

Another important item that a surety underwriter will want to review before providing a standard surety program, is a current work in progress schedule. Being able to provide a current and accurate work in progress (WIP) schedule will be a requirement from a surety underwriter. The WIP monitors project progress and performance over time, and plays a critical role in determining the maximum amount of bonded work that a contractor can take on at one time.     

While these are just a few things that surety underwriters will be wanting to evaluate in order to set up a standard bond program. There are other items that contractors can consider, like hiring a CPA for their year-end financial statements and getting a bank line of credit. 

For contractors that are looking to graduate from a credit-based program, increase their current surety capacity, and want to explore further strategies that can strengthen their bonding program, contact me at (619) 937-0165 or via email at aroberts@ranchomesa.com.

Subcontractors: The Prime Contract and Its Impact On Your Rights and Responsibilities

Author, Anne Wright, Surety Relationship Executive, Rancho Mesa Insurance Services, Inc.

Reviewing contracts is not everyone’s favorite thing to do. But, I would like to share some quick thoughts on why asking for and reviewing the prime contract (before you sign your subcontract, ideally) can be important for subcontractors. This can help strengthen your position if certain conflicts arise.

I have had the pleasure of knowing Pam Scholefield of Scholefield Construction Law, here in San Diego, for many years. Pam and I are both active and involved in NECA, as well as the Women’s Construction Coalition. Pam has an impressive background not just in her law practice and involvement in the industry, but in her education and prior job experience. Pam was an engineer for General Dynamics when female engineers were quite rare. She gained a valuable skillset that led her into the legal realm, and her passion for construction law and subcontractors, particularly.

I recently attended a class that Pam presented for one of these associations. The topic was contract terms. Diving into the weeds a bit, there were some key points that I’ve found to be relevant for all subcontractors. Each subcontractor can, of course, assess their own risk. I just want to address a few things that might make a difference and help you avoid certain disputes.

A few things to consider:

1. Does the prime contract always prevail if there are differing provisions in the subcontract?

2. It may prove in your best interest to incorporate your proposal into the subcontract.

3. Are things like warranty, payment terms, and liquidated damages negotiable in the subcontract?

4. When should you request a copy of the prime contract, at bid time or before you sign the subcontract?

Do not sign the subcontract until you are clear about your key issues. Those issues may be different for different jobs, but knowing about key provisions and terms up front may well prevent you from some nasty attempts at negotiations later in the job. Better contracts can translate into more profitable, and certainly more successful, projects.

Surety Bonding: Understanding the Client-Broker-Carrier Relationship

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

People from outside the surety bond industry will sometimes ask if we work for 1) the carrier (bond company) or 2) the contractor client. This is an easy one. While we are approved to issue bonds by the 20+ carriers we are appointed with, make no mistake that we work 100% for our clients. 

The thought for this article came about when a potential new client mentioned to me that he felt his broker was not working very hard on his behalf to increase his aggregate bond program. During a phone call where the client was providing the broker with a narrative of information to pass along to the bond company, the broker mentioned that he didn’t want to, “push too hard” because he had a number of accounts with the bond company and did not want to negatively affect that relationship.

Whether a broker has 1 or 10 accounts placed with a particular carrier, you should ethically treat each account individually, working as hard as possible to create the best program for your client. Our industry promotes very high standards regarding the servicing of our accounts, and the State of California requires agents to complete three hours of ethics training every two years. I am certain this is covered during the training.

Looking at this from the carrier viewpoint, if the bond company supported an account mainly because a broker placed numerous accounts with that company (yet the underwriting of the account did not meet the bond company requirements) that would open the door for them to accept undue risk of future losses. At some point, one of these accommodation-type accounts will fail and cause a loss that the bond carrier could have avoided. 

If you would like to discuss the client-broker-carrier relationship, please contact me at (619) 937-0165 or mgaynor@ranchomesa.com.

Navigating Contractor Challenges in 2024: Insights from the Surety Association of San Diego

Author, Andy Roberts, Surety Account Executive, Rancho Mesa Insurance Services, Inc.

In a recent special StudioOne™ Podcast episode, I’m joined by my three fellow board members of the Surety Association of San Diego as we explore some of the biggest challenges facing contractors in 2024 and beyond.

Challenges Ahead

As we look ahead, contractors are bracing for significant hurdles, including:

• Inflation and Material Costs

• Supply Chain Disruptions

• Labor Shortages

• Bonding Capacity Constraints

All of these issues can have a direct effect on a contractor’s bonding capacity, making it important that they get the most out of their surety relationship.

Maximizing Your Bond Program

To navigate these challenges effectively, contractors can take proactive steps to maximize their bond program:

• Work with Experienced Surety Agents

• Financial Preparation and Accounting Processes

• Transparency about Financials and Backlog

• Regular Meetings with Underwriters

By taking a proactive approach to identifying and addressing current and potential future challenges, contractors can maximize their bond program and position themselves for success in 2024 and beyond. By working closely with experienced surety agents, optimizing financial management practices, and fostering open communication with underwriters, contractors can navigate the complexities of the construction industry with confidence.