Ep. 567 Elevating Your Surety Program with Reviewed Financials
Rancho Mesa's Alyssa Burley and Account Executive of the Surety Department Josh Hill talk about how utilizing reviewed financials can help contractors improve their surety program.
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Director/Host: Alyssa Burley
Producer/Editor: Megan Lockhart
Music: "Home" by JHS Pedals, “Breaking News Intro” by nem0production
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Transcript
Alyssa Burley: You're listening to Rancho Mesa StudioOne™ podcast, where each week we break down complex insurance and safety topics to help your business thrive. I'm your host, Alyssa Burley, and I'm joined by Josh Hill, account executive in the surety group with Rancho Mesa. Today we're going to talk about elevating your surety program with reviewed financials.
Josh, welcome to the show.
Josh Hill: Good morning. Thanks for having me.
AB: We're happy to have you. Now you recently wrote an article that advocates for contractors to utilize reviewed financials as a way to improve their surety program. And in that article, you mention that when a contractor is working in the private sector, they can include escalation clauses in their contracts to help mitigate rising material costs.
So why are these strategies less common in the public sector?
JH: Yeah, so the difference is when you’re looking at private work versus public work. You know, public jobs are funded by tax dollars. So they need to adhere to a budget. So if things change in the contract or the contractor comes in and says hey you know we’ve walked the site we’ve done the bid and everything but now that we started working on the job there’s things that we found that you know we need to make a change. And I’m not saying that in public jobs, you can't make a change because you can. If things arise that weren't foreseen when you're doing the planning process, typically those things can be accounted for, but it's a more difficult process to do that. There's more written work that needs to be done, approval levels through the government bodies to get that approved. Whereas on the private side, it's a little bit more fluid. So, you know, when they're looking at those sort of things, when you're managing to a budget that's paid for by tax dollars, you know, you really need to try and adhere to that because the government body is kind of being held responsible to make sure that that project is on track for what they budgeted for.
AB: So why has the surety industry increased its scrutiny of contractor financials in recent years and what are the factors that are driving the need for larger bonding capacities?
JH: Yeah, so you know the surety companies they work in the construction industry right. And construction in itself is just its high risk. There’s a lot of things that happen. Heavy machinery, a lot of people out there, a lot of things going on, digging, unforeseen things they could come across. So when they're doing their underwriting and they want to see higher quality financials, you know, so they can really rely on what they're seeing to be able with confidence to say, hey, you know, we're good providing this company the bonds that they need and to support them. But also when they're looking at that, you know, we've had inflation over the last several years and the cost of everything has gone up, whether it's labor, materials, you name it, everything has gone up. So as we talked about when you’re looking at public work, the bid is the bid and the job is budgeted for what the job is budgeted for so if during that time you’re cost of whatever it is that you’re doing skyrockets that’s going to compress your profit margins. And as a company, certainly that’s concern to you but for the government body that has hired you on a budget, and an approved budget, that’s less of a concern to them. So it’s just really important for the underwriters to think about okay you know how have they done in the past? Do we have quality financials to rely upon now when they’re looking at these jobs and how confident do we feel like they’re going to get the jobs done as they’ve shown that they have done in the past?
AB: Alright, so how can better financial statements help contractors save money on bond premiums?
JH: Yea so you know, when people start doing bonded work, you know, they kind of get into, depending on the limits that they need, they may get into like kind of a credit check program where that's kind of a basic, you know, 3 % premium. And that's kind of where you start out for a lot of people. And then as they start to kind of graduate up and they do more projects, they kind of get them into what we call is the standard rate, which is the 25 slide. And that can be done, you know, typically with tax returns, comfort financials can sometimes get that too. But, you know, if you want to start being able to get a more competitive bid out there and, you know, when you are bidding on projects, your premium is kind of built into those bids and, you know, people have lost bids over a couple thousand bucks and it could be the difference in what they're paying for premium. So if you're paying the standard rate of 25 slide versus somebody who's paying a lower premium, that could cost you a job. And it could be because they're doing reviewed financials, whereas you're just providing tax returns.
So in the environment that we're in where the underwriters are looking at changing cost, inflation, and you're in a, you know, a sector where, you know, maybe you have concrete or steel that's, you know, susceptible to inflation. You know, the underwriters for the sureties think about these things when you're bidding on especially public work projects, right? Because they can't, you know, if inflation hits, they can't just say, hey, I need to change my cost of materials. It's, this is what the budget is. So if you start to step up towards reviewed financials, yes, there's a cost to do that, of course. But the payoff in the premium is easily accounted for, and you'll easily make that back in your bids. So it makes a lot of sense for the underwriters to look at reviewed financials. They can rely on the financials a little bit more so than they can with tax returns because it's looked at by a CPA. The review, their high quality. The whips are built into those things. So it gives the underwriters a lot more confidence when underwriting those things to say, hey, you know what, this looks like a solid account. And, you know, because of that, we're willing to adjust our premium downwards because we have more confidence in the financials we're provided.
AB: Yeah. So if you invest a little bit now to have someone review those financials and verify them, then you can save a lot more later on and possibly get more business.
JH: Absolutely. Yeah. I mean, the cost savings could be, I mean, if you're doing millions of dollars of work a year, it's several tens of thousands of dollars in premium that gets reduced. So like I said it does get baked into the bids but I think it is a completive advantage to spend those dollars on the reviewed statements to get a more competitive premium for bidding.
AB: Yeah. So Josh, if listeners have questions about their surety program, what’s the best way to get in touch with you?
JH: Yeah, so my email is one of the best ways to get in touch with me easily jhill@ranchomesa.com. I’d probably just start there. You know I have my phone on me 24/7. I answer emails at all times of the night so that would be the easiest way to get ahold of me or anyone at our surety team here.
AB: Alright, Josh, thank you for joining me in StudioOne™.
JH: Pleasure to be here.
AB: Thanks 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.