Moving from nonstandard to standard surety
It’s been a challenging and uncertain year for the construction industry. According to Deloitte, construction was finally returning to pre-recession levels of employment and economic growth in February 2020. Then COVID-19 hit, and the industry lost more than $60 billion in gross domestic profits and nearly one million jobs. Although 2021 projections are looking up, this unprecedented economic situation put many contractors in a tough spot, with uncertain financials making them only eligible for more expensive nonsurety bonds.
While it’s not always a quick fix to move back into standard surety eligibility, there are concrete steps you can take. The ultimate goal of any underwriter is to help contractors move back to standard surety — whether you’re new to the industry or you’re an experienced business owner going through a period of financial difficulty. In this piece, we’ll share five best practices for a return to the standard market.
1. Clean up your financials.
In general, it’s a best practice for contractors to work with a trusted CPA to maintain clean books. As Brian O’Neal, director of Liberty Mutual Surety Vista, a specific program for nonstandard contract accounts, says, “Multiple irregularities or errors in a contractor’s financials are going to raise red flags.” To move out of nonstandard surety, underwriters need to see that contractors are doing their due diligence to improve accounting procedures and correct these irregularities.
Often, these errors and inconsistencies occur because of poor internal controls. Along with providing a CPA-reviewed Percentage of Completion statement, contractors should work with their CPA to improve their internal processes. Those processes will vary based on the size and scope of the business.
2. Maintain quality Work in Progress reports.
Work in Progress reports, or WIPs, are critical pieces of information to help underwriters determine the current state of a contractor’s business. WIPs include ongoing projects and income for the current period and help underwriters evaluate future profits, on-time payments, and cash flow. Contractors need to keep WIPs up to date and ensure the data they include accurately reflects the current state of their business. After all, a report is only as good as the data it contains.
