Surety Bond Underwriters Apply More Scrutiny to Contractors' Financial Health

Like many industries in our economy, theU.S.construction market has taken a hit as a result of the recent credit crisis.  Many constructions projects throughout the country have either stopped or been slowed down, and subsequently, the construction bond portion of the surety bond market has seen changes as well.  Specifically, perhaps the greatest change to the construction bond market is the level with which underwriters of surety bonds apply scrutinize the cash flow, or financial health, of contractors seeking surety bonds for their businesses.

It’s important to understand why this additional scrutiny is being placed on the contractors’ cash flow by underwriters, because this is happening despite expectations by brokers that rates will be stable for the near future.  However, theU.S.construction market’s recent decline forced related insurance rates (premiums) to fall during the second quarter of this year, which was the first quarterly drop in insurance premiums in the past few years.  Additionally, the current market situation has caused a major increase in competition for construction jobs/projects nationwide.  Construction companies are forced to lower their prices to get much needed jobs, and therefore their profits (profit margins) are naturally going to take a hit.  This makes accurate, efficient management of companies’ financial statements essential to their financial well-being, and possibly to the survival of the business.  In particular, proper management of the balance sheet, and the statement of cash flows (SCF) is crucial to a construction companies’ success, because often times they can work for up to a couple of months on a project before they begin receiving cash from customers.  Constructions expenses and payroll can add up quickly in this environment, and therefore cash flow is vital.  Underwriters of surety bonds understand this, which is why they are taking a close look at contractors’ cash flow.