Today’s global economy contains increasing levels of uncertainty, where even best-in-class construction companies can be impacted by changes in the surety marketplace unrelated to their own financial and operational performance.
John Alberici, chairman of Alberici Construction Company, once said, “The price of gasoline has nothing to do with whether you’re a good driver or not.” That sentiment argues for construction CEOs, CFOs, COOs and owners to prioritize and invest some of their valuable time in their surety relationships.
The following list outlines some things to do (and not do) that can assist in maintaining stable, adequate surety capacity to support a business plan.
DO:
- Communicate. Anticipate the questions a surety may ask.
- Seek the surety’s input when finalizing a business plan, particularly if it involves pursuits in new markets or sectors.
- Outline the core elements of the company’s culture that will attract and retain the highest quality talent. Regularly review and update the firm’s continuity plan.
- Utilize the surety’s claim department staff as a second set of eyes on contract terms or pending disputes.
- Ensure the broker has communicated an active backup plan in case changes outside of the firm’s control affect its current surety program.
- Maintain a general knowledge of the factors that are driving conditions in the surety marketplace.
- Ask the surety about its business plan, financial results and changes in risk appetite. Develop relationships with both local decision-makers and those in the home office.
- Understand how the broker is communicating with the surety.
- Work with the surety broker to develop an analysis of the WIP schedules provided to the underwriter.
- Understand the credit model components the surety uses to determine the pricing and level of surety support extended to the firm.
- Have an objective method for determining the value the surety broker is delivering to the team. Employ it on a regular cycle.
DON’T:
- Sit on bad news. Experienced surety underwriters can deal with bad news, but a surprise can put support on hold.
- Forego the broader perspective underwriters may have for what has worked and what has not worked in other comparable construction company business plans.
- Presume that the surety only underwrites financial results and projections. Underwriters look at the whole picture of how a contractor’s management team plans for and executes on its objectives.
- Bypass the surety’s claim team as a resource. Their time and expertise are part of what surety premiums pay for.
- Allow a disruption to the surety program from events beyond the firm’s control that may impact the surety’s ability to be responsive to the company’s needs.
- Ignore that macro conditions in the surety industry factor into strategic decision-making for the surety, just as construction industry conditions do for contractors.
- Disregard that surety relationships are a two-way street. The business plan and objectives depend on stable, responsive support and the relationships that underpin it.
- Assume the company is being presented to underwriters in the manner it would like, or be reticent in asking to review one of the broker’s submissions on the company.
- Forget that the WIP schedule is the only forward view financial information provided to the surety. It can be used to maximize the support the underwriter offers.
- Pass up an opportunity to improve the reporting of projections and results to emphasize the factors critical to the surety’s analysis of the firm.
- Be satisfied with transactional and service excellence. If the broker is not assisting both the top and bottom lines, then he or she is costing the company money.
Surety credit is the most efficient source of contingent capital a contractor can use in its business. The word credit has its roots in the Latin words “credo” and “creditus,” which mean to believe and to trust. Creditus is earned through proactive communication and delivering on promises (by all parties).
Surety support is an outcome of a contractor’s good business performance, but it is achieved by treating the surety as a partner with a vested interest in the company’s success along the way. The time involved to do this can be managed efficiently. With the backing of a stable surety, willing to provide and expand its support based on credo (and not just numbers), a contractor will wield a competitive advantage.
