Ep. 599 Underbillings and How They are Viewed by the Surety

Surety Group Leader Andy Roberts sits down with Marc Henry, Region Vice President for Sompo International and Damian Pintor, underwriter in the Western Region for Sompo International. They discuss underbillings and how surety companies view and handle them.

Show Notes: ⁠⁠Subscribe to Rancho Mesa's Newsletter⁠⁠, Sompo International

Host: Andy Roberts⁠⁠

Guest: Marc Henry, Damian Pintor⁠⁠

Producer/Editor: Megan Lockhart

Music: "Home" by JHS Pedals, “Breaking News Intro” by nem0production

© Copyright 2026. Rancho Mesa Insurance Services, Inc. All rights reserved.

Transcript

Andy Roberts: You’re listening to Rancho Mesa’s StudioOne™ podcast, where each week we break down complex insurance and safety topics to help your business thrive.  I’m your host, Andy Roberts, and I’m joined by Marc Henry, Regional Vice President for Sompo International and Damian Pintor, who’s an underwriter in the Western Region for Sompo International.  Welcome to the show, guys.

Mark Henry: Thank you.

Damian Pintor: Thank you. Thanks for having us. Yeah, glad to be here.

AR: Yeah, thanks for making the trip down. This is going to be a lot of fun. We're going to be diving into an important topic here kind of regarding underbillings and how they're viewed by you guys on the underwriting side. But before we get into that, why don't you guys give me a little background on what you guys do, how you got into the industry?

MH: So my name is Mark Henry, and I am the Western Regional Vice President of the Sampo Contract Surety in the western part of the United States. So I oversee all of the operations west of the Mississippi, and that includes seven regional offices. And one of the best things about my role is I get to work with a really talented and exceptional group of people that are committed to working with our producer partners and the success of our contractor clients.

AR: Yeah, that's great.

DP: Yeah, my name is Damian Pintor. I've been with Sampo now for four years, straight out of college. And I kind of stumbled into the industry just as straight out of Cal State Fullerton, majored in risk management and insurance, looking to go into insurance underwriting, came across this thing called surety. And then from there, I kind of figured to fit my strengths a little more and kind of went down that rabbit hole of getting into surety and bonding itself and no looking back for me.

AR: Yeah, I feel like that's one thing whenever you know I hear about your background is I’m a little jealous of that you found it right out of college it took me eight years of working in insurance to realize the surety opportunity is going to be way better and such a much more fun industry that I feel suits myself as well too. So yeah that's great so let's jump into kind of what we're going to discuss here and so you know from a basic standpoint, like what are underbillings? That's what we're going to kind of dive into here. If one of you guys want to just give us a basic rundown of what that looks like or what those are.

MH: Sure, I'll jump in there. So basically what underbillings are is it's the difference between the work that a contractor has completed and what they have billed for. So essentially it's like a contractor saying, I have completed so much work, but I've yet to bill for that work. So that underbilling then sits on the balance sheet as an asset representing money that the contractor is going to receive in the future.

DP: Hopefully.

MH: Hopefully. It's a great point. That's what we're here to talk about. I didn't want to get too far into it, but that's a great point. Absolutely.

AR: That's the thing I think they look at it too is like most people that don't really understand it look at it as just like it's on their current asset. It helps their working capital. But like within relation to working capital, like what do you guys, how do you guys dive into it more deeply?

DP: Yeah. And I think when it comes to in relation to working capital, I mean, first of all, it's going to be shown, it's not going to say underbilling, right? It's going to show as cost in excess of billings. And that's going to be classified under the current asset section on your balance sheet, but also on your work in progress report as well. So I think that's important to know. And so when it comes to looking at it that way, I mean, the way we analyze it, you know, we'll typically take note of those larger underbillings that may be present on their WIP reports and at the beginning stages of those project.

I think it's important to at least make note of you know what large ones outstanding and then track those as you know you get future statements and WIP reports too really analyze you know how that billing process is going and I think for us where we really start to analyze and make adjustments is going to be for those late stage underbillings. And when I say late stage that's going to be projects that are in your back half of completion. So that'll be 80 to 85 percent complete or more. When we start to see those underbillings still on there that's typically when we'll start to ask the questions we'll request updates or what's going on there because for us looking at it when you have those underbillings at the beginning stages I think that's completely normal.

But then once you start to get on to the later stages, eventually you start to see that even out and catch up. So when you get into that back part, usually there's a story there, and I think for us, that's important to understand. But when you get to those points, that's when we'll typically make those adjustments depending on the notes we get. Or just looking at the numbers because we're only looking at the numbers, we understand there's a whole story to what's going out there actually in the field.

AR: Yeah. So at that point too, so you guys are kind of looking at it and as you're tracking those and you're seeing those late stage ones, that's when they kind of become a concern in your guys' eyes.

DP: Right.

AR: But so when you're having that conversation and getting that story with the contractor, like what would their reply be that would be to distinguish between a healthy underbilling versus like something that's problematic in your eyes with regard to those late stage underbillings?

MH: So it's all about context, right? Because at the core, an underbilling is an asset like we just talked about, but it's not a celebrated one, right? It's not one that we would love to see the makeup of your working capital, but it's how quickly can that underbilling be converted to billings and then be collected and then be converted to cash? And cash flow is really the name of the game.

So when you're saying when is an underbilling sort of healthy or manageable and when is it not? Kind of what Damian said, when you're seeing underbilling sort of pile up and grow as the job progresses, that's where, you know, as a surety, we should be working with you guys and having that communication, that dialogue as to what's going on. What's the context behind this? And not just jump to conclusions because it could be sometimes there's certain contractors or certain trades. They have large, upfront costs that they incur that they're not able to bill for sometimes until they're actually on the job or for however their contract is structured so when that happens they do show up as an under billing but if you understand that that underbilling is good and it's going to be converted over very quickly you're able to kind of say okay I can I see that I understand that we don't have to discount or analyze that. But it's when you get into the late stage of the job, like what Damian said, when a job is almost completed, the job should be almost billed.

AR: Absolutely.

MH: The billing should match the work. And so when you don't have that, then it's like, okay, what do we have here? Is this a billing process issue? Is this a lack of communication internally? Is this a problem between the contractor and their client?

And again, it just all comes down to communication and asking those questions and understanding what's going on behind that.

AR: Do you guys have something you hear most frequently from contractors like what they're reasoning behind or is it just kind of run the table based on different circumstances?

Like when you come to them they might go, “Well we're just behind on billing,” or, “The owner--we're on like the back side of a billing cycle from the owner we missed like a cut-off date,” or something?

MH: I feel like a lot of times most of the time, I feel like what we see is change orders. It's waiting for change orders to be approved, and they're following up on the approval process, but they expect them to be approved. Those kinds of updates of keeping us into the loop, I think, are very valuable to us because it gives us some insight onto why that may be. I mean, there's some added work in there that is expected to be approved, and it's not going to affect their profit margin.

Or there's even approved change orders that we're getting an update on after the fact because I think it's also important to remember that when we get these WIP reports and um and financial statements there's already two to three months that have gone by and you know there's most likely already updates that that are available for us to get. So if there's approved change orders that's I mean that's great I mean then we can mark it as like all right well it's addressed it'll be billed and they should be able to collect down the line.

AR: That all that all makes a lot of sense um what happens in a situation say you get with a contractor and they're like. “Oh well this is an internal issue we're way behind on our billings.”

You know, it's like, does that affect in your guys’ mind, like bonding capacity? Because there's like now there's like some sort of management issue maybe or processes issue?

MH: So, yeah, sometimes it is a personnel issue. I mean, you know, at the end of the day, these companies are run by people and, you know, life happens. Right. And so we've had situations where the person that's responsible for billing is out, you know, medical leaves, things like that. So. There's legitimate reasons as to why they fall behind.

But I think the contractors who make it a priority, make the billing a priority, and really take a proactive approach in staying on top of that help to avoid running into those issues. Sometimes it's converting software. They're changing from different softwares, and there's issues that way. And again, I'm trying to provide you where these are legitimate reasons where it's, you know, from a surety standpoint we can hear that we can understand that and we know that there's not an issue out in the field, there's not an issue bigger than, you know, what's going on internally because again one thing to just to kind of come back to on the underbilling is because that contractor has performed work and they have yet to bill for it essentially who's funding that job now, right? It's the contractor's money funding that job and when you have that, back to what you were saying earlier, Andy, it starts to squeeze their working capital. And I think that creates, from a surety standpoint, greater risk exposure.

AR: Yeah, well, now we're looking at more of a liquidity issue.

MH: Exactly.

DP: And I think going back to Mark's point, like underbillings themselves, they're not generally like a bad thing. At the end of the day, they're an asset. They’re a current asset looked at that way on the balance sheet. But the other side of that is when you as a contractor are heavily reliant upon those underbillings for the makeup of your working capital and your net worth then on the surety and bonding capacity side then we're heavily reliant upon the updates we're getting regarding any late stage underbillings and, you know, the quicker you can turn that into you know being able to bill and collect I mean we can't ask questions on cash right cash is cash.

AR: Get a bank statement.

DP: Yeah, exactly. Yeah. So we're not going to ask questions there. So I think that's just an important thing to know. And, you know, it could affect your liquidity overall. So, yeah, I mean, I think I think it's important to take that in consideration that, you know, they're not a bad thing, but if not addressed appropriately, you know, it could lead to a problem.

AR: Yeah. Well, I think you said it's not a bad thing, but, you know, it's a marker or something to pay attention to that. Could be a sign of how things are trending or what's going on. Like if it's a consistent thing, that's going to affect their, you know, liquidity down the road and then ultimately their bonding capacity.

MH: Exactly.

AR: How deep of a dive do you guys do, you know, your initial underwriting when you're looking at, you know, a new submission and, you know, you're tracking all these stuff. Like, does that go into your mind right away of like what kind of capacity you guys could maybe offer? Or is it, you know, are you guys looking to go to the agent with a lot of questions about underbuildings right away, to kind of figure out what the issue is up front?

DP: Yeah, and I think there's a difference too when we're talking about new submission versus long-time existing account. With the new submission, we're getting a few periods, a few years’ worth of financial data you know job schedules so we're able to properly trend um those jobs individually and the underbillings individually so we can look at the earliest statement that we have and some of those jobs and what those underbillings look like and then how they progressed.

So, I think when it comes to that um you know that plays a that plays a factor into how we look at it because if you if you see that the project margin has hold that has held across you know like two three four years of data depending on how long the project is then you know that goes to show you that historically this contractor does a good job of managing their billings, being able to bill and collect so I think I think that certainly helps and I think that's the deep dive that we typically take.

It’s different when you're jumping into a new relationship but at the same time you have you know a strong relationship with your agent that you can trust so I think you know that's the deep dive that we take. And there's a whole other side of you know if it's an existing relationship then you have a long-term understanding of that contractor's history.

MH: Exactly I was, and that's what I was going to add to that is that when it's an existing relationship there's a trend, there's a historical pattern, there's questions that we've asked in meetings so if that contractor is historically showing underbillings but those underbillings do get billed out. We have a track record we can look at and we can hang our hat on our decisions, knowing that they don't typically have issues with their underbillings not being billed and collected.

AR: Right. Absolutely.

MH: Whereas with a new submission, you're getting to know that account. So it's, you know, yes, you can look at the financial information, but it definitely it all comes down to communication. And it's the communication that we have with good producer partners like yourself. But it's also the open communication that we have with the contractors too. And just being able to ask those questions is, “Okay, tell me about this underbilling. You know, why are you essentially funding this job based on what we're seeing? And you've been carrying this for a while and it's starting to grow. Walk me through this and when you're going to get collected,” because, you know, it's important to us, but let me tell you, it's important that contractors too, because it's immediately hitting their cash flow.

AR: Yeah, absolutely. Just something kind of off the top of my head. In a situation where it's like, you know, there's maybe a dispute on the job near the end and the contractor comes to you and says, “Well, I think I'm in the right here. I think I'm going to collect this. I'm going to get this back from the city or the entity.”

Like, do you take them on their word? Do you look for any documentation from them or anything along those lines that help ease it? Or do we take that out until we know it's going to get realized for sure?

MH: That's a good question. I think what we try to do is obviously we want to hear a contractor story and we do want to take them for their word. But, you know, usually disputes and things like that, there's a there's a time frame that's going to have to play out. So even if they're right, that money is not going to be something that's coming in the door tomorrow.

So we have to apply some type of something to our analysis as to, okay, how are we going to treat this? Because this is not something that's going to be converted to cash tomorrow. So we may apply some kind of discount. But what the best tools that we have as a surety is kind of what Damian mentioned is the job schedules, the WIP report, being able to produce that timely. And quickly and accurately helps us kind of gives us an indication of that, you know, the contractor's health, being able to see those underbillings and what's going on there.

But also documentation. Hey, this was a change order that was approved, but now there's some kind of dispute on it. Like any kind of documentation like that helps. And I think the more documentation that we can get helps us make a much more informed decision. And it's better for the contractor because then we can choose, we’re making an adjustment to our analysis that is a little more accurate than based on just an amount we see on the web. And we just, if we have no communication, then we're left to just say, okay, we just got to discount this whole thing. We don't know when they're going to collect this.

AR: Yeah. No, I guess that probably leads into the next question too, of like what separates. It's a good contractor who manages their underbillings well versus those who might struggle, like documentation, financials. Is there anything else you guys can think of off the top of your head?

DP: Yeah. So, I mean, going back to the change orders thing, I think documentation of approved change orders, you know, that certainly helps. And then documenting whether or not that long-standing relationship, you know, because when it's when it's long-standing relationship it certainly helps and we know that the contractor is good for their word. When it's a new submission and we're getting to know them then that's completely different I think that documentation of things you mentioned along with the change orders I mean those things definitely help us to get to understand them and their billing process their internal systems which is another key part for us and just overall, you know, get the full picture.

MH: Yeah. I'll add to that, too. I think, like Damian said, it's understanding the systems. And that's why when we, you know, typically most sureties will ask what type of accounting systems and cost tracking and, you know, project management software do you use? Because if you, you know, if you have good systems and good policies and good people in place and you make it a priority to stay on top of your billings. Companies I feel that do that, they usually tend to manage the underbilling process much better.

And again, I don't want to leave here today with the thought process of underbillings are bad because they're not. To the question you just asked, there are times where they're healthy, they're manageable, and there's a lot of sense behind why or good reasoning as to why this underbilling is here. But it is an asset where you've got to be on top of it and making sure that this thing is eventually going to convert and convert as quickly as possible to boostering cash and working capital.

AR: Yeah, it's kind of like you said earlier, too. Like, you know, different trades have, you know, some trades might have more underbillings upfront.

MH: Exactly.

AR: And there's just understanding, like, kind of what's going on there. And that's going to be the case going forward, but they're going to convert it. You know that's going to happen. Any final advice you guys could give to contractors? I know we kind of talked about some of the management stuff, about what they can do to prevent underbillings from becoming an issue with regards to their bonding?

DP: Yeah. I mean, I think from a contractor standpoint, I think it's easy to see or easy to get lost in exactly what the surety is asking of you, especially financially or what they're looking at or their analysis or, you know, whether they set goals to reach a certain financial milestone or, you know, get to a certain point.

But overall, just working back and utilizing, you know, your agent. I mean, Rancho Mesa, you guys do a great job of just, you know, being able to provide that context to not only your surety, but translate exactly what the surety is looking forward to your contractor clients. So I'd say utilizing your agent because they have a plethora of resources that you guys can utilize as a contractor of just being able to be in the loop and what surety exactly is going to look for when analyzing your balance sheet and get you to the program and get the bonding credit that you want. So I think just getting an understanding of that and utilizing your resources is important.

AR: Fantastic.

MH: When I first told my daughter I was doing a podcast and when she found out it was about underbuilding, her excitement sort of left her face. But I think she would have been much more happier if this was about dating and relationships. But I'm going to kind of tie it back together a little bit here.

You know, surety is a relationship, right? And it's a lot more relationship-driven than, I would say, a lot of the other insurance product lines. So to really help in this process, it's really about communication because communication is kind of the foundation of any relationship. So it's having that open and transparent communication, being proactive.

And for contractors, you know, we don't have direct relationships with our accounts, but it's when you have a good surety professional like Rancho Mesa, you guys are very good at being proactive asking those questions you say see the WIP reports before we do and I like how you look at those and you'll see those underbillings and you're asking those questions before we even get that and that's important because we're saving time and we're getting to the core of what's going on, like what's the root of that? Is it something that we all need to be concerned about? Or is it one of those situations where, “Hey you know what it's a part of their normal course of operations it's not something that we need to be very concerned about.”

So I think it's having that transparency, meeting with your clients, having a good surety professional as your intermediary that's working between the surety and the contractor. Those are things that really help to make the process and make working through underbillings really work well.

AR: Yeah, that all sounds great.

Mark, Damian, just want to say thank you both so very much for taking the time to join me today here in StudioOne.

DP: Well, thanks, Andy. Hopefully we didn't say underbillings too many times.

MH: Yeah, really appreciate you, you know, giving us this opportunity. Thanks a lot.

AH: Yeah, this was wonderful.

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