Maintaining Your Surety Relationship — Share the Ugly, Celebrate the SuccessPosted by Jason C. Walton, AFSB
In order to maintain a good relationship with your surety, you must be as transparent as possible. We really don’t like surprises. If anything happens with your company — good or bad — you should share it with your surety company as soon as possible.
And maintaining the relationship goes both ways. You have to be able to trust what your surety says, and they have to mean it when they tell you they are willing to support you and what you need. A good relationship with your surety shows character, the most important “C” in the character, capital and capacity trifecta.
So how can company owners maintain that relationship?
Be open and honest with your financials. You should be timely with getting your financial statements to the surety. If something is stressing your balance sheet, it’s important that you are able to explain what is causing the stress. Some things that may stress a balance sheet include, but are not limited to, a difficult job, change in ownership, borrowings by companies and/or related parties, an increase in debt, large equipment purchases or a large distribution that exceeds net income for that particular year. It’s important that owners and their agents communicate any of these scenarios to their surety as soon as possible so that the surety is not surprised when they discover it.
One of the key pieces of information that a surety requires is the work in process (WIP) statement, and it is important to provide these on an ongoing basis. The WIP shows the surety how you are doing on all of your uncompleted jobs. You should be able to explain why a project may have experienced a significant profit fade. Maybe you had a bad estimate? Or the owner you are dealing with is difficult, resulting in declining margin. Or maybe one of your employees running the project is not performing well. Again, you should be as transparent as possible.
Another aspect of the surety’s analysis of the WIP is overbillings and underbillings. The surety wants to make sure that the cash flow on the project is in good standing. For example, if a project has a high underbilling and is close to completion, this could mean there is a dispute between you and the owner regarding an unapproved change order that, if the change order is not approved, could result in significant profit fade. It’s important to be as detailed and transparent as possible when discussing your WIP statement with your surety. The better you are able to explain things, the more trust your surety will have.
New CPA or bank? Tell your surety
You should also communicate any significant changes, including any changes in your banking relationship and if you’ve changed CPAs. Your surety will want to know why you have decided to make a change away from your current banking relationship. It could be because a new bank was willing to extend more credit or willing to change their covenants to be less strict than your current bank. Likewise, a CPA change will need to be explained to your surety. The surety relies on the CPA statement each year and will want to know why you made the change. Perhaps they are more experienced in construction or maybe you got a better deal with the new CPA. Regardless, your surety will want to know.
If you decide to enter a new territory or get into a new business venture, you should also communicate that to your surety. Your surety will want to know the reasons why and will want to understand your strategy.
Share your successes!
While it may seem like you just need to share the negative with your surety, you should also share your success. A surety wants to know how you were able to increase your profit margin on a job or how you were able to increase your bottom line on your income statement.
Another key element in maintaining your relationship with your surety is sharing your experience with any prior surety relationships. It’s important for the surety to know why you may be looking for a change or why you decided to make a change. Perhaps you did not get along with your prior surety, or maybe they were unwilling to extend the surety credit that you feel you need. Understanding what your needs are is important for a surety, so they can better serve you and build a solid relationship for the future.
For more advice on contract surety bonds, or anything regarding surety and growing your business, contact an appointed agent, or reach out to an Old Republic Surety branch nearest you.
Jason Walton is the Regional Vice President in the Southwest, where he oversees the underwriting and operations of our branch offices in Dallas, Denver, Kansas City, and Phoenix. Jason has nearly ten years of experience working in the surety industry. He holds a Bachelor's degree in Finance and Marketing from the University of Kansas, in Lawrence, Kansas. As well, Jason has earned his AFSB designation - Associate in Fidelity and Surety Bonding.