Volume 42, Issue 10 - October 2007

Sure Enough
The Surety Bonding Market Readies 
for Small Glazing Contractors 


by Megan Headley

For small- to mid-size glazing contractors looking to take the next step and take on the “big jobs” surety bonding is a necessity that can’t be ignored. 

While the experts say that for the last two to three years it’s been difficult for small glazing contractors to start taking bonded jobs, the market may be loosening up, making it a good time for contractors new to bonding to jump into the market.

“The surety industry had some terrible losses for a few years there up until about two, three years ago,” explains EJ Kelley, executive vice president and general counsel for Enclos Corp in Eagan, Minn. “They had a number of prominent contractors go down and … big corporations had some issues, so there were large losses in the surety industry. And so they significantly tightened their underwriting standards.”

Those losses increased the risk for the industry—closing off opportunities for some small companies. 

“It’s just like with the bank and finance industries—all of a sudden credit tightened up and it made it tougher for companies that didn’t have a long history in the business or had a somewhat weaker credit compared to others.”

Lynn Schubert, president of the Surety and Fidelity Association of America in Washington, D.C., agrees. 

“The industry has been … what the insurance industry would call a soft market for quite some time. A lot of people were getting bonds; just about everybody was getting bonds, and construction was good, everyone was making money. [Then] people started to lose money, and that always means the sureties end up paying once contractors default. And so the market tightened up and they really increased their underwriting standards again, went back to reviewing all the basics of ‘do you actually have the capital and the capacity to perform the work?’ So a lot of people who had had bonds were unable to get bonds for a while,” Schubert says.

Schubert says that the bonding industry has been profitable for the last two years, meaning that requirements are beginning to loosen again, to some degree.

“It’s probably, dollar-for-dollar, the most profitable group within the larger insurance or financial service group,” Kelly says of the current bonding industry. “I have heard that from a couple contacts at two different bonding companies that they’re doing better than the rest, even the rest of the organization right now.” 

“They’ve started to actually make money again,” agrees Jim Stathopoulos, chief executive officer of Ajay Glass & Mirror Co. in Rochester, N.Y. 

“With that comes typically a little bit of loosening in the ability to obtain bonds but, again, if you have a financially viable company, and you can show them you’ve been financially viable for an extended period of time, they’ll certainly consider you.”

After a tough couple of years, bonding agents are looking for more hard data. According to Schubert, requirements have been less strict in the past. “It’s actually an interesting phenomenon because it appears that people are not loosening up to the extent that they did in the past when they were writing bonds for unqualified people.”

“They won’t [consider a company] just based on … your own in-house numbers, they’re going to want an audited statement,” Stathopoulos says.

“It wasn’t very long ago that they had these huge losses. The surety industry is still fairly tough in their credit writing standards,” Kelley says. 

Now, instead, that “loosening market” is showing itself in bonding agents’ willingness to diversify in the group of contractors to which they offer bonds. 

“Not everyone is chasing the mid-size contractors anymore, there are actually people focused on mega-jumbo contractors as well as small and emerging contractors, and that’s really where I see it loosening up,” Schubert says. “They’re not saying that you don’t have to be qualified but they’re more interested in talking to a diverse group of contractors.” 

Meeting Bonding Requirements 
So with the market looking up, many of those smaller glazing contractors are looking to branch out. But what does it take to become bonded? For starters, surety agents need to know that a contractor has financial reach to take on the project. “They’re going to want a certified, audited financial statement,” Stathopoulos says. “You really have got to have a financial statement,” Schubert agrees. 

“You may not need audited financial statements, but you certainly need something close to an audited financial statement, because that’s what a surety is going to review.”

According to Rich Gianforti, Jr., vice president of Flower City Glass Co. in Rochester, N.Y., agents are looking for working capital and the equity of a company. The retained earnings are one item that Gianforti advises companies to keep an eye on. He says bonding agents are watching to see that a company doesn’t strip the retained earnings, taking the profits and not leaving earnings in the company upon which to build.

“[If] there’s no reserve or a sign that the company’s equity is being built out,” says Gianforti. “Retained earnings turn into shareholder equity.”

“They’re going to want to see that you’re making money in the projects, they don’t want to see that you’re losing money,” Stathopoulos says. Schubert adds, “If … as a new contractor it doesn’t appear that you’re willing to put money into your business, then they’re going to be concerned that you’re not going to be able to complete the work.”

Surety agents also need to know that a glazing contractor has the capability to complete the project. Agents are looking for experienced leadership and project management on each project. “They’re going to want to see that you have experience in the business,” Stathopoulos says.

“Make sure you have qualified project managers,” Schubert advises. “It’s a concern sometimes that new contractors don’t have the qualified personnel to actually run the larger jobs, and mostly bonded jobs are the larger jobs.”

“They want competent people being able to run the work,” Stathopoulos adds. “And stability in the management, the building management, the project management itself, the ownership of the company.”

Increasing Bond Capacity 
Even when starting off small, glazing companies that have bonded jobs for some time advise that there are ways to increase bond capacity. 

Ann Werner of Flower City Glass Co. in Rochester, N.Y., explains that the company is able to occasionally take jobs that are bonded slightly higher than the maximum amount the company is allowed. “We have an overall cap of $10 million on each job,” she says. “We’ve had some that are a little over and we split it into separate bonds.” 

Schubert explains that, in most instances, a surety bond is written based on 100-percent of the contract, and that’s what the bonding agent looks at to determine whether or not a contractor can complete a project. 

“Now you can’t take a contract and divide it into two surety bonds, but what you can do, and what we suggest everywhere we go discussing this issue, is that owners and general contractors divide up the contracts into smaller contracts,” Schubert says. “So if you can get $100,000 bond but your contract you want to bid for is $200,000, you need a $100,000 contract.”

Schubert explains that a glazing contractor could break a project contract into two separate contracts—perhaps one for supplying and one for installing products. “But the bond would only respond for each contract and you would have to be complete in that contract before you moved to the next one.” 

Forming a Relationship 
Gianforti says that Flower City’s history with its bonding agent has brought them past the point of concern for getting bonded. 

“We have a long history, [with] no issues, so for us it really isn’t a problem,” he says. 

A relationship with a surety agent can make a degree of difference in the ease of bonding jobs, according to some experts. 

“It is an important factor. It doesn’t override some of the other factors, but it’s just like banking … it can make a difference,” Kelley says. “It helps the surety become more comfortable with the right management team in place. It makes a marginal difference.” 

“Absolutely,” agrees Bonnie Canter, treasurer of Ridgeview Glass in Upper Marlboro, Md. “One hundred percent I do agree.” 

Ridgeview Glass has worked with the same bonding company for nearly 25 years. “They get to know your whole style of business, they know the personalities involved with the running business,” Canter says. 

Forming a relationship with the agent may help, but making sure a company has the right agent for the job is critical. 

“One more thing a new glazing contractor wants to do is make sure they get an agent who is not just their typical insurance agent,” Schubert says. “Frequently, their insurance agent who they’ve had for 20 years … doesn’t really know about surety bonds. Although they have a license to write surety, because it’s normally part of the property-casualty license, they don’t really know the market. They may not know exactly which surety companies to approach for a new small emerging contractor. It really helps to have an agent who has some expertise in the surety area.”

Advice for Contractors New to Bonding 
“It’s always tough for a company starting out,” Schubert says. “A brand new company takes some time to establish themselves, obviously, and their capital—all of the things that need to be looked at—but the market is pretty good right now. There are a number of surety companies who are now focusing on the small and emerging contractor market, so it’s a lot better than it was maybe two years ago for smaller, new contractors.” 

For companies just beginning to take bonded jobs, Gianforti has a word of advice. “I think having a strong financial statement [is critical].” 

The sureties want to see a strong balance sheet,” agrees Kelley, but, he adds, “that may or may not be doable if you are a new company. They want to see a strong management team in place. They want to see that you are not taking a job … that may be bigger than your capabilities—bigger or more demanding or more challenging. They’re conservative; they want to see that the company is being fairly cautious about the sort of projects they’re taking on.” 

Stathopoulos reminds glazing contractors that the requirements don’t stop once a bond is obtained. “Be sure that you’re prepared for the reporting requirements, because there are reporting requirements. [The bonding agents] are going to want to see statements annually, at least audited, and probably they’re going to want to see your reviewed statements every six months.” 

“Pay your bills,” Canter notes. She adds, “You just have to do a good job.”

Doing a good job is necessary—not just to start getting bonded jobs, but to keep them. 

“Just remember that your assets are going to be tied up on the line if you do this. And that’s what scares a lot of people off, they don’t want to be tied up—they guarantee their assets personally as well,” Stathopoulos says. 

But once those requirements are met, it’s likely only a matter of time before the ambitious glazing contractor starts looking to reach the next step. 

What is Surety? 
The Surety Information Office describes a surety bond as “a three-party agreement where the surety company assures the obligee (owner) that the principal (contractor) will perform a contract.” Since the bonding market fluctuates, meaning that there are some times when it’s easier than others to obtain this agreement, contractors should consider timing their leap into the big pool with the most favorable market conditions. 

Important Financial Measures
Percent of bond producers who indicated that the measure was important in the evaluation of contractors’ capacity

Amount of working capital 96%
Backlog levels 90%
History of consistent earnings 86%
Debt to equity ratio 80%Working capital ratio 77%
Quick ratio 65%Underbillings to equity 51%
G&A expense levels 46%
Days revenue in accounts receivable 36%
G&A expense to equity ratio  28%
Days revenue in cash 25%
Days costs in accounts payable 23%

Source: Grant Thornton LLP’s 2007 Surety Credit Survey for Construction Contractors: The Bond Producer’s Perspective

Steps to Secure Bonds
Percent of bond producers who “frequently” advise contractors to take each step.

2007 2005
Prepare proper financial presentation 93% 95%
Use CPAs familiar with the industry 89% 92%
Produce interim financial statements 87% 94%
Communicate potential problems early 77% 82%
Improve quality of job status reporting 67% 78%
Improve frequency of job status reporting 61% 63%
Develop a succession plan 59% 56%
Use bonded subcontractors 58% 66%
Develop a business plan 53% 53%
Establish a buy/sell agreement 46% 47%
Limit entry/expansion into new business areas 35% 44%
Reduce overhead expenses 30% 50%
Limit entry/expansion into new geographic areas 30% 41%
Seek joint venture partners on projects 11%
Seek co-surety 2%

Source: Grant Thornton LLP’s 2007 Surety Credit Survey for Construction Contractors: The Bond Producer’s Perspective

How Much Do Bonds Cost?
According to information from the Surety Information Office (SIO), the cost of a performance bond generally ranges from 0.5 to 2 percent. The price of a payment bond is included with the price of a performance bond. There is typically no charge for a bid bond. SIO says the premium may vary depending on the size and duration of the project, as well as the contractor’s bonding capacity. 

Important Criteria in Obtaining Surety Credit
Percent of bond producers citing each factor as important.

2007 2005 1996
Strength of balance sheet 96% 98% 90%
Financial statement presentation 93% 97% 91%
Equity 87% 92% 75%
History of successful projects 81% 81% 68%
Debt 79% 81% 71%
Experience in type of project 78% 75% 67%
Consistent profitability 77% 78% 63%
Use of CPAs with industry knowledge 74% 75% 68%
Expertise of company management team 72%
Reputation of firm and/or principals 67% 66% 65%
Claims history 60% 67%
Financial statement disclosure 60% 65% 70%
Accounting policies 56% 63% 59%
Experience in geographic area 55% 59% 43%
Size of over/under billing 54% 55% 36%
Overhead expenses 37% 47% 35%
Contract volume 28% 36% 33%
Succession planning 28% 30%
Safety record 14% 16% 20%
CFO having CCIFP designation 3%

Source: Grant Thornton LLP’s 2007 Surety Credit Survey for Construction Contractors: The Bond Producer’s Perspective 

For More Information 
For more information on the basics of obtaining a bond, visit the Surety Information Office website at www.sio.org. There contractors can learn the basics about bonding, how to build a surety relationship and how to obtain a bond. 


For a list of 10 steps to take when you can’t bond a job, turn to page 6.

Megan Headley is the editor of USGlass.


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