The issue of Surety bonds in a down economy.
With minimal lending from financing institutions, many contractors, small and large, are concerned about future backlog.
Already large multi-million dollar projects have been stopped in their tracks because some private owners have lost the financing on projects or have decided to wait until the economy improves to a point where the return on their investment is more promising. Unfortunately many private sector contractors have been left in situations where backlog has dried up without ever performing any work. Contractors whose livelihoods rely on privately financed projects are currently finding the pickings very slim.
The logical step in situations like this is to move to where available work is. This is normally public works.
The immediate issue that faces many knowledgeable and experienced private sector contractors is Surety bonds.
Most privately funded projects do not require bonding because many private owners do not want to pay the minimal cost of Surety protection.
However, when the private market dries up and public work becomes the only chance to build backlog, a shift in business approach becomes necessary. Acquiring Surety credit requires a more serious financial presentation on the contractor's part. Sureties need to qualify prospective contractors, financially and experience wise.
Surety credit is a normal part of business for contractors already involved in public work.
State and federally funded projects require under the Miller Act (Federal) and Little Miller Act (State), that Surety bonds be provided to protect the public funds designated to the project.
From a financial reporting standpoint these contractors are held to a higher standard of financial accounting by their sureties. Project success and failures are also tracked and adjustments in a contractor's Surety program are made depending upon project and financial results.
In effect, Public Work contractors have a silent business partner (the Surety Company) that they have embraced either willingly or out of necessity.
The economy has become ultra conservative and lending money to finance private enterprise has become an adventure. There has already been an increase in the amount of surety bonds being required by owners that have been successful in obtaining financing. The lending institutions are behind this as they see Surety Bonds as an added means of protecting their assets. Contractors who have worked in the private sector might be seeing more requests for surety bonds as we move forward as well.
In the future world of construction, staying competitive means exploring a relationship with a Surety Market.
All businesses are being faced with difficult decisions today. For contractors there is the question on how far you are willing to lower your price to get backlog.
Both private and public contractors that are serious about staying in business and riding out these difficult times realize it is all about maintaining backlog. Right now the more diversity you have the better your chances of adding backlog will be.
Contractors with a bond program can look for both public and private (whatever private work is available) projects.
What will also be more difficult for private contractors is that many people believe that when the private work finally does start coming out, the lending institutions will require owners to request Surety bonds from its General Contractors as an added means of protection. That would establish an even more difficult road to recovery for contractors without bonded programs.
It is not that hard to establish a solid Surety program. One benefit of this economy is that Surety companies will be suffering as well. They will be looking for new business opportunities. Many contractors who do private work would qualify for Surety credit if they make the commitment to improve their financial presentations.
However, there are excellent CPA firms out there that know contracting and work with contractors to walk that fine line between surety credit and tax planning.
Qualified Surety agents also know how to help address those areas where your firm might fall short as far as surety credit. They also know how to place you with the proper surety market that would best fit your specific needs.
Yes there is some expense in establishing your company with Surety credit, but if you are a serious contracting firm you should view it as an investment in your future growth.
There are some businesses that find success in adversity. It is difficult out there today but if you find a way to survive the current distress in this marketplace you will be that much stronger in the future.
BY ANTHONY PANNO
Atlynx Surety Brokers, LLC specializes in providing surety bonds for contractors. For questions or a free Surety Analysis contact Anthony Panno, Co Principal of Atlynx Surety Brokers LLC.
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|Comment:||The issue of Surety bonds in a down economy.|
|Publication:||Real Estate Weekly|
|Date:||Jun 24, 2009|
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