SURETY OUTLOOK FOR 2009

Riding Out the Downturn &

Preparing For New Opportunities 

We’ve all seen the news and heard about the economic conditions that have affected the  construction industry.  We have some insight that can assist in maintaining, and possibly even increasing, your bonding capacity during this downturn.  While not all inclusive, here are our suggestions: 

• Think about the market from a long-term perspective: Bid the job, not the competition.  There must always be adequate profit in your work to cover unexpected contingencies.  Chasing after work at a lower margin just to keep the firm busy will slowly eat away your financial base.  Do not spend precious time on jobs that do not provide enough of a return to your company. 

• Be selective when bidding projects.  Look for those which offer your company a competitive advantage such as geographical location, familiarity with the owner/architect, or experience on similar projects. 

• Prepare for executing less work by reducing variable and fixed overhead or reducing staff.  Sell non-essential equipment, trucks and real estate.  Consider outsourcing payroll and other services, and leasing equipment versus owning it. 

   

• Retain and reward your indispensable people:  The core operational team is critical and will be essential to being well positioned for the recovery. 

• Offset escalating costs of materials and services by engaging in early commitments.  While bidding a project, make commitments to key suppliers and subcontractors to purchase their equipment and services in exchange for their commitment to freeze quoted prices if your company wins the contract. 

 
• Consider the owners.  The stressed banking and financial sectors will make it difficult for them to finance work.  Offer good service by providing creativity and quality, improving plans when possible with value-adding ideas. 

• Maintain strong cash positions with minimal institutional debt.  Changes in bank ownership or management can cause unexpected changes in lending practices.  As interest rates increase, paying off debt obligations will become more difficult.

An experienced SURETY PROFESSIONAL is vital to the overall success of your business.  For more information on how to best handle these challenging times, contact the SURETY PROFESSIONALS 

Philip E.Vega, President
Contractors & Developers Bonding

Surety bonding not only confirms the contractor’s credibility and ability to complete jobs, it may also provide a competitive adge when it comes to acquiring new jobs. As the facilitator of your bonding capabilities, your broker can enable you to increase your bonding limits by providing assistance in a number of important areas.

Financial Performance
Surety underwriters closely compare the actual execution of a contractor’s business planto the projections on which it was based. Overhead levels and the adequacy of present and future cash flows are reviewed, including an analysis of individual project cash flow needs and performance. Project pricing and estimated margins will be benchmarked against sector performance for a given contracting firm. Your tangible equity, its operating liquidity and access to outside sources of liquidity are all carefully assessed. Understanding how your surety analyzes the information you provide can increase your chances of obtaining or expanding surety support.

Risk Management
Surety underwriters are also placing increased scrutiny on subcontractor selection controls and performance risk management. For firms that employ subcontractor default insurance as a risk transfer mechanism, some sureties are requiring endorsements granting them coverage, and in some instances, dedicated limits of coverage on bonded projects. For those using subcontractor surety bonds, the credit rating and perceived stability of the subcontractor’s surety may be evaluated.

Market Conditions
Your broker must be knowledgeable regarding current market conditions as well as those on the horizon. The surety industry has recovered from devastating losses and will continue to move toward traditional underwriting. Seeking knowledgeable counsel and input on prospective business planning will also reduce the chances of unforeseen events negatively impacting your surety facility. Your relationship with the right surety partner is key to consistent bonding capabilities and future growth.

For more information on how an experienced surety professional can help you best deal with the challenges of this industry, contact:
Philip E.Vega, President,
Contractors & Developers Bonding