Other Bond Information:
Adequate Financial Strength
The Three C's
Analysis of Financial Position
Contractor's Check List
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ADEQUATE FINANCIAL STRENGTH
The contractors financial statements and financial position of the construction company becomes the focal point of the surety analysis.
Evaluating the financial position is perhaps the most complex portion of the contractor-surety relationship. It takes money to do everything and it takes some types of contractors more and some less to properly run the project and company administration.
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Engineering Contractors
- Heavy & Highway
- Bridge Construction
- Utility Construction
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General Building Contractors
- General Building
- Commercial Buildings
- Residential Construction
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Speciality Contractors
- Painting Contractors
- Plumbing & Heating
- Electrical Contractors
- Roofing Contractors
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The amount of capital required can depend on the type of work being performed or the organization executing the work. There is no standard formula when appraising a company, however properly prepared financial statements can make the decision much easier for the underwriter.
FINANCIAL STATEMENT PRESENTATION
The contractors financial statements must accurately reflect the financial position and operating results of the company, including all necessary disclosures to make the financial statements meaningful to the financial statement reader, whomever he or she may be.
Sureties will look for the following “red flags” that are signals of doubtful financial statements:
- Late reporting - generally, the surety company wants to receive the year end statement 90 days after the close of the financial year end.
- Errors in the statement, inaccuracy in the notes or supporting schedules.
- Lack of required schedules or incorrectly prepared schedules.
- Changes in reporting entities or accounting policies.
- Funds that are being used outside the construction company.
PERSONAL AND CORPORATE INDEMNIFICATION
The surety will ask the contractor to provide personal indemnity of the principal stockholders and their spouses.
The indemnitors will be asked to provide personal financial statements to show what their indemnity is worth.
The willingness of the contractor to stand behind his or her company and support it with personal assets can be a deciding factor to a surety.
ABILITY TO PERFORM
To evaluate the contractors ability to perform, the surety needs the following information:
1. Resumes of the contractor and key employees in the company.
2. List of largest projects completed.
3. References from suppliers and subcontractors.
4. Organizational chart.
5. Continuity plan.
6. Plans for the future.
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Analysis of Financial Position - Contractor's Check List - Return to Top
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THE THREE C’s
The key items that contractors need to demonstrate is that their company is well managed, profitable and financially sound.
Underwriters evaluate the three C’s of a contractor:
Character of the key individuals. Does the contractors record indicate he can be trusted to complete the project?
Capacity refers to whether the contractor has the necessary skills, ability, experience and knowledge to perform.
Capital is the understanding as to whether the contractor has the financial position needed to justify the risk.
As the underwriter evaluates the “Three C’s,” consideration is given
to the following:
- Adequate Financial Strength
- Financial Statement Presentation
- Concerns in Financial Statement
- Indemnification- Personal and Corporate
- Ability to Perform
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Adequate Financial Strength - Contractor's Check List - Return to Top
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SURETY’S ANALYSIS OF FINANCIAL POSITION
The analysis of the contractor’s financial position takes into account all the information collected. The underwriter needs to develop an understanding and comfort level of the credit worthiness of the contractor in order to evaluate the financial risks. The underwriter must be comfortable with his decision that the project or work program will not pose a financial hazard to the contractor and ultimately the surety company.
Several methods are used for evaluating the company’s performance, among them: efficiency, leverage, liquidity and profitability.
The following ratios are a few of the more commonly used ratios used to evaluate the contractors financial position.
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RATIO & MEASURE
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CALCULATION
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COMFORT RANGE
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| Current Ratio-Measures the ability of the company to cover current liabilities with current assets |
Current Assets
Current Liabilities
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Greater than 1.0 times
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| Accounts Receivable Turnover-Measures the internal collection efficiency and potential bad debt exposure |
Acct. Rec. X 360
Annual Revenue
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60 days or less
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| Debt to Net Worth Ratio-Measures the equity the owners have in the business compared to interest of outsiders |
Total Debt
Net Worth
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3:1 or less
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| Fixed Assets to Net Worth-Indirectly measures liquidity showing what part of "permanent" assets are covered by "permanent" capital |
Fixed Assets
Net Worth
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10% to 40%
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| Sales to Working Capital-Measures to what extent the company's sales volume is supported by the working capital |
Annual Revenue
Working Capital
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10:1 or less
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| Return on Sales-Measures the success of the contractor in turning a profit. This depends on the type of contractor |
Net Profit
Annual Sales
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| Return on Net Worth-Measures the profit return on the investment , th ereward for the assumption of ownership risk |
Net Profit
Net Worth
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15% or greater
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Adequate Financial Strength - The Three C's - Return to Top
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CONTRACTORS SUBMISSION CHECK LIST
- Company’s Financial Statements - last three fiscal or calendar year-ends. If statements are more than 6 months old, we will need a current interim statement.
- Current Personal Financial Statement(s), on stockholders owning more than 10% of the company. These should be dated concurrently with the company’s year-end statement.
- Completed Contractor’s Questionnaire.
- Business Plan
- Bank Reference Letter
- Status of Contracts or Work in Progress Schedule.
- Information on project being bid. What percentage of the project is materials and what is labor. What is being subcontracted.
- Agents comments to assist in underwriting the account for underwriting considerations.
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