Getting ready for Bonding

WIDESPREAD REQUIREMENTS FOR BONDS

Project owners and owners more often than not require performance and other bonds from contractors. The reality is that this requirement will become standard in all construction contracts, although the bonding format will vary from the NZS3910 format to straight “on demand bonds”.

THE NEED TO COMMENCE APPLICATIONS WELL BEFORE CRITICAL DATES

Contractors need to get their bonding requirements in order early. There’s not much point in asking for one off bonds the day before the first progress payment is due. We recommend that contractors have Bonded NZ arrange a facility in advance so that when a bond is required it can be issued with a minimum of delay.

The facility should be for an amount which will cover all the contractors possible requirement over the following 12 months.

THE NEED FOR COMPLETE INFORMATION

Considerable information will be asked for, and the process will be time consuming. But consider that the bond provider is being asked to guarantee the contractors work – put yourself in the bond provider’s shoes and ask what you would want if you were asked to guarantee someone previously unknown to you.

In the process of preparing to be bonded, a contractor will assemble information about itself for submission to the surety bond market. Most of the information will already be held by the contractor.

The quality of that information and the manner in which it is presented will dramatically influence whether or not surety credit is granted and to what dollar extent. With proper preparation and guidance, contractors can do a great deal to maximize their surety bond credit. Bonded NZ provides that guidance.

Once full information has been submitted and the bond issued, all that is required is updating from time to time, and Bonded NZ can and will provide the best facilities and services available.

To start, the contractor should assemble information concerning:

1. Reputation and experience.
2. Completed and current contracts.
3. Finances.
4. Game plan and vision.

Reputation/Experience

Any documentation, including industry and credit referees, quality assurance and past projects, to establish reputation and/or experience will enhance the presentation. A picture is worth a thousand words, and photographs or brochures documenting where you have been and what you have done are a significant enhancement.

Finances

In the area of finances, the contractor’s most important means of preparation is to accumulate in the balance sheet and retain working capital sufficient to support the work program needs of the company.

The net worth and working capital requirements of the sureties will vary, depending on the work program sought.

For example, if you are looking at a $5,000,000 work program, the bond provider will be looking for at least $500,000 in working capital. (The bond provider will calculate working capital by taking cash and accounts receivable, other current assets will be scrutinized and often discounted, less all current liabilities.)

Established accounts of the contractor company may qualify for work programs and bonding significantly greater than 10 times working capital.

Not enough can be said about the importance of the financial reporting provided to the bond provider. It is critical and must be prepared in proper form by a chartered accountant with a solid reputation within the industry. A continuing flow of financial reports during the course of the year, ideally quarterly, is usually asked for and should be planned for in advance.

This information allows the bond provider to track the progress of the company and the progress of the work. Over time, this will further demonstrate the contractor’s capabilities in forecasting and in identifying problems early, avoiding disappointing surprises to the bond provider which can shake the bond provider’s confidence and level of bond provider support.

Good financial progress and reporting will also enhance the contractors ability to obtain additional bond limits.

Personal Financial Statements and Guarantees

In addition to providing financial statements on the business entity (ideally, the past three year-end financial statements), the bond provider will ask for personal financial statements of the individual owner(s). Additional assets outside the business entity (whether a corporation, partnership, or sole proprietorship) will be given consideration, since the personal guarantees of all owners and spouses will be asked for, at least initially, to guarantee the obligations of the contracting company. Personal net worth notwithstanding, the bond provider will seek to be sure its business applicant has a financial statement considered adequate to support the cash flow and funding needs of the business in pursuing its work program.

Game Plan and Vision

In addition to reputation, experience, and adequate capitalization, the contractor seeking surety must have a sound and realistic game plan. This angle may take the form of a special relationship with certain project owners and owners, proven abilities in value engineering, or expertise in certain construction methods.

The bond provider, in its subjective evaluation, will be trying to assess your point of view as a contractor, i.e., your attitude toward bidding and obtaining work. It will be looking for a sensible, conservative point of view toward taking risks and evidence of your contracting history.

The creation and submission of a formal business plan will most favorably assist the bond provider’s evaluation of the contractor’s point of view or vision. This plan should help the bond provider follow where the contractor wants to go and how he or she proposes to get there.

In evaluating the stability and capabilities of the company, the bond provider will want to see an organisation chart.

The Basics of a Contract Surety Bond Submission

The basic requirements for contract surety bond submission are:

A. Contractor’s questionnaire, including credit and performance references.
B. Financial accounts and reports for 3 years.
C. Up to date management accounts.
D. Bank reference letter (setting out current bank facilities including bonding).
E. Work-in-progress spreadsheet information.
F. Personal financial statements on owners and spouses.
G. Bond format.

Contact us if you would like advice, precedents or formats to assist you.