Elevating Your Surety Program with Reviewed Financials
Author, Josh Hill, Account Executive, Rancho Mesa Insurance Services, Inc.
Over the last several years, contractors have been challenged to manage rising costs, especially those companies operating in the steel and concrete industries. These rising costs in the private sector can be mitigated through escalation clauses and other price adjustment features which offers some level of protection from inflation; however, in the public sector where bonds are necessary, fixed price contracts are a more common practice which creates additional pressure on surety underwriters in their evaluation of risk.
The surety industry, while still very healthy and seeking more opportunities to support their clients with bond approvals, has seen an uptick in scrutiny evaluating contractor financials, particularly when seeking increased capacity limits 2 or 3 times greater than what the contractor may have needed in the past. Larger contracts resulting from increased costs have created the need for larger bonding capacity for many contractors. Surety markets understand this and remain supportive when provided with reliable financial information.
Providing reviewed quality year-end statements will go a long way with your surety partner to improve the terms of their support (i.e. greater single and aggregate limits or more aggressive premium rate). In fact, the cost benefit can be substantial. For example, if Contractor ABC spends $10,000 to obtain reviewed financials, they might think it is just an unnecessary expense. However, investing in reviewed financials could move them out of a 3% flat premium expense into what is often referred to as the “25 slide or standard” (a widely used rate but there are even more competitive programs available depending on credit worthiness). Let’s use a $1,000,000 project size to demonstrate this. At a flat 3.0% premium, the cost for that bond is $30,000, but if this same job were on the 25 slide, the premium would only be $13,500. The cost benefit practically speaks for itself and your surety will appreciate the higher level of reporting as well.
If you are a contractor who has a revenue concentration stemming from public work, it is important to have a well-established relationship with your surety carrier through your broker. Investments in financial reporting like this might seem unnecessary at first, but a proactive agent broker will show you the benefits that decisions like these can create.
If you would like me to review your current bonding program, I can be reached at jhill@ranchomesa.com or (619)798-2819.