“Your word is your bond.”
In no other line of work does this age-old phrase ring as true as in the surety business.
We often talk about “the three c’s of credit” — character, capital and capacity — character is arguably the most important in deciding whether to issue a surety bond. And there’s no better way to gauge a contractor’s character than to meet with that contractor in person.
Underwriting depends on the careful analysis of reports and financial statements received from the client and the bank. These are vital to making a sound decision about a bond. But that’s only part of the process. Nothing can substitute for a face-to-face visit with the contractor. Without those meetings, it may be difficult to judge whether the contractor is a good risk.
Face-to-face meetings also strengthen client relationships, give us a better understanding of the contractor’s needs, and help answer any lingering questions we may have about a project.
When you bond a contractor, you are entering into a partnership. Wouldn’t you want to know more about a potential partner than what is in a written report?
The Basics of a Contractor Visit
It’s a good idea to visit contractors at least an annually – and more frequently with new clients or those who have made changes in their operation. The best time to visit is after you’ve received the annual financial statements. In addition to the CEO or owner, you may want the head of operations and the CPA to be in your meeting.
|"During the course of our meeting, I was persuaded that he would be able to handle both jobs and that the first and second jobs were complementary. I decided that we could support the second job. I’m not sure I would have come to that conclusion without the benefit of that meeting". -
John Estes, Bond Manager - Charlotte, NC Contract Branch
What are you trying to assess in an in-person visit? For one thing, you want to get beyond the numbers and find out what makes the owner tick. Contractors naturally want to show off their companies. Touring facilities and meeting the employees is a good way to see for yourself what the business are all about. It gives you a more complete picture of the operations. More importantly, it provides contractors a chance to share their vision.
Here are some questions you will want to address:
- Who are the key personnel? What project management skills do they have?
- What accounting and cost systems do they have in place? What about under and over billing?
- What does the work program look like? How does one project fit in with the next?
- Do they have large or out-of-the-ordinary projects coming up?
- What are the plans for the coming year?
- Inquire about succession planning (regardless of the owner's age), meet those involved.
- What are they looking for in their surety?
Open and forthright communications
The goal is to create open communications with the client, to be honest and forthright so that everything is placed on the table. It’s often at a client meeting that you can discuss items that may not show up in a report. These meetings may also be the only time you’re able to speak to the contractor directly since the agent is generally the one providing information.
Some visits may be more of a fact-finding nature. How are profits holding on this project? Was it estimated properly? It’s better to tackle these issues directly with the contractor. It is difficult to get a full explanation in an email.
I remember a client who needed a fairly large bond, and I was concerned that he might not have the capacity to take on a second project before completing the first one. During the course of our meeting, I was persuaded that he would be able to handle both jobs and that the first and second jobs were complementary. I decided that we could support the second job. I’m not sure I would have come to that conclusion without the benefit of that meeting.
Face-to-face meetings are also the place to have tough conversations. Maybe the job isn't going well. Perhaps some key personnel changes have been made. Or maybe the client wants to branch into a new line of work that you are not sure they can handle. I’ve had my share of difficult meetings, but it’s best that these kinds of conversations occur in person.
The importance of personal visits can’t be overstated. You can crunch all the numbers you want, but you need to connect those numbers to a face, philosophy vision, and character — and that means visiting your contractor.
Surety is all about relationships, so take the time to bring all parties together to strengthen that relationship. Your contractor will be more successful for having done so.
John Estes is the contract bond manager for the Carolinas and Southern Virginia based in Charlotte, North Carolina. He has worked in the industry since 1984, primarily in the Southeast. He has a B.S. degree in accounting and finance from the University of North Carolina – Chapel Hill.