The construction marketplace is, once again, evolving. New construction in Residential, Warehouse, Manufacturing, and Office are down. Public Works, Medical/Pharmacom, Power/Utilities, and Data Centers are each up and trending higher. This evolution, combined with still problematic labor shortages and volatile pricing in the supply chain is creating some unique economic times.
Many of these challenges aren’t new but having them combine is creating some instability.
In unpredictable economic times, maintaining and increasing bonding capacity becomes crucial for contractors. Now is a good time to revisit some effective strategies to enhance bonding capacity, including methods for prequalifying subcontractors and vendors, optimizing job selection, and managing cash flow. Let's dive into these best practices.
Increasing Bonding Capacity
To bolster bonding capacity, contractors can consider the following methods:
Strengthen financial health by reducing debt, improving cash flow management, and maintaining healthy financial ratios.
Build strong relationships with your surety partners through regular communication and providing accurate financial information.
Showcase professionalism and reliability by implementing efficient project management systems and completing projects within budget and on time.
Maintain a solid safety record through comprehensive safety programs, regular employee training, and strict adherence to regulations.
Prequalifying Top-rated Subcontractors and Vendors
It’s critical to work with reliable subcontractors and vendors. Consider these prequalification methods:
Conduct thorough background checks, including assessing their financial stability, past performance, and reputation.
Seek references and testimonials from previous clients to gauge their reliability and quality of work.
Evaluate their experience and expertise in handling projects similar to your requirements.
Verify their insurance coverage and ensure compliance with industry standards and regulations.
Optimizing Job Selection
Choosing the right projects is vital during an economic downturn. Here are effective methods for job selection:
Focus on projects aligned with your expertise and financial capabilities, considering factors such as size, complexity, and available resources.
Evaluate the project's potential for profitability, cash flow stability, and long-term benefits.
Consider public sector projects governed by bonding requirements, as they offer opportunities to expand your bonding capacity and don’t rely on bank-supported project financing.
Assess the project's timeline and potential risks to ensure a realistic and achievable completion.
Cash Flow Management
Maintaining a healthy cash position is paramount during an economic downturn. Follow these strategies:
Develop accurate cash flow projections, taking into account potential delays and payment cycles.
Negotiate favorable terms with clients to accelerate payments or request partial upfront payments.
Implement tight financial controls, including regular monitoring of expenses and rigorous invoice management.
Collaborate with suppliers and subcontractors to negotiate extended payment terms or explore alternative financing options.
By implementing these strategies, contractors can proactively navigate economic instability, strengthen your bottom line, and substantially impact your overall bonding capacity. Focus on financial health, build strong relationships, prequalify top-rated subcontractors and vendors, optimize job selection, and manage cash flow effectively.
Remember, these best practices require consistent effort and adaptability to succeed even in challenging times. Stay resilient, and your bonding capacity will be well-positioned for future growth.
Money still doesn’t buy happiness but it does buy you the ability to seize on new opportunities when they come your way.
Ken Fontana, Surety Manager
Cottingham & Butler’s Risk Management Division
563.587.6341 | kfontana@cottinghambutler.com
Ken began his career in the insurance industry in 1996 at the corporate offices of Horace Mann Insurance. After relocating to Wyoming, he spent several years managing corporate safety programs, insurance, and claims as the RMO for a nationally exposed company engaged in numerous state and federal contracts including operations at three military bases, the Denver Federal Center, and HUD program management. He has been a licensed insurance agent for 20 years with the last 10 focused strictly on contract and commercial surety. Ken’s relationships with the nation’s top sureties and his experience give him a uniquely well-rounded approach to your overall surety, bonding, and subcontractor default insurance needs.