Design professionals and contractors have very different temperaments. Generally, the contractor is willing to take on more business risk; the uncertainties of the construction process foist more risk on the constructor. Constructors generally have higher profit margins. Design firms on the other hand are service providers; generally there is lower risk as a service provider and lower profit margins. With owners increasingly relying on design-build as a procurement process, design firms (especially larger firms) are increasingly looking at assuming responsibility for construction as well as design. Taking responsibility for construction is not for the faint of heart. Owners want constructors to furnish performance and payment bonds in the event that the constructor is unable to complete the job. A surety will issue the bond; if the constructor fails then the surety will step in and complete the job. One of the key challenges that design firms have is their weak bonding capacity. Sureties look at the following indicators when evaluating firms who want to establish a surety line.
- Profitability – A firm that is losing money is a red flag to a surety. Controlling overhead costs and decreasing bonuses are two ways that a firm can improve profitability.
- Net worth and working capital – Sureties look closely at a firms net worth. If the firm fails to complete its obligations, the surety will try to recover its outlay from the firm’s assets as much as possible. Aged receivables and inventory are discounted as assets because it is unlikely that the surety can use these assets if the firm were to go under.
- Cash flow – Most constructors fail because of poor cash flow. A history of good cash flow management shows that you have an excellent handle on the finances of your business.
These are just some of the important metrics that a surety will look at to determine whether or not they are willing to issue a bond.