This is the one question that I have heard more than any other in the past three months while preparing year-end financial statements for my construction contractors. Consider this: the bond agent is a salesman; the product that he is selling is the contractor's ability to successfully complete a contract; the buyer is the surety underwriter. In order for the bond agent to be successful, he has to be comfortable with the product that he is selling. One component of that product is the financial statements. The bond agent requests supplemental schedules to accompany the basic financial statements not only for the obvious information, but also for the meaning and indicators behind the numbers.

Two key schedules that contractors are required to include are work-in-process schedules and completed contract schedules. When read together, these two schedules reconcile the gross profit on the income statement. It is the ultimate proof that the contractor's accounting system is working properly to recognize revenue, gather contract costs and apply burdens in proper ratios. The schedules also demonstrate the contractor's ability to manage production, management's accuracy in estimating costs to complete, and that billings are keeping pace with contract revenues and job costs.

Some other schedules that bond agents often request are accounts receivable aging and detail of the selling, general and administrative expenses. A strong receivables aging demonstrates that the contractor is managing its revenue and cash flows as tightly as it is managing its job costs. After gross profit, the biggest factor that determines whether a construction contractor is profitable or not is the company's overhead. The bond agents want to see that the components of overhead are of a magnitude appropriate to support the level of gross profit that the company is generating.

For several S-corporation contractors, bond agents have begun requesting a summary of the tax treatment of retained earnings. In recent years, surety underwriters have begun arbitrarily adjusting S-corporation net worth for imputed deferred tax liabilities that may become taxable in future periods, for which the owners may need to make draws from the company. This may limit the bonding program unnecessarily depending on the contractor's individual circumstances. This disclosure in the financial statements provides the information required for the surety to properly compute the theoretical deferred taxes.

If you have questions regarding your reporting requirements, or have the need to understand your "reasonable" bonding capacity, please speak to a Rea & Associates construction niche specialist. We have experience working with bonding agents and can help you fine tune your accounting system and reporting capabilities to provide the information that allows your bond agent to be confident about your company and maximize your bonding capacity.

Save article

Email Firm

Email to a Friend