As any building contractor will attest, the past few years have been very, very, very good for most anyone capable of swinging a hammer.
A construction boom in the Denver metro area, underway for several years, has shown no sign of letting up, with as much as $4 billion in big projects either breaking ground this year or expected to get started soon.
In that light, it would stand to reason that the only contractors not getting business are those who are either not interested or, for some reason or another, unable to secure adequate bonding.
The good news is that one of the more common reasons we’ve seen is easily fixed:
It’s all about their financial statements, which, if not done properly, can quickly sink a contractor’s odds of securing a surety bond regardless of how much business is rolling in or how fat anyone’s bank accounts might be.
The problem isn’t in how well a contractor’s doing financially; it’s in who’s signing off on their financial statements.
A DIY approach is not what bond companies want to see. Rather, they’re much more likely to issue the big-dollar bonds to contractors who have hired a certified public accountant, or CPA, to bless the contractor’s financials.
The bond company will decide how big a bond it is willing to write based on whether those financial statements have been formatted, compiled, reviewed or audited by a CPA.
Formatting involves little more than preparing your financials according to accepted frameworks using records you provide with no verification regarding their accuracy. In other words, your financials might be laid out nicely, but the CPA isn’t providing their assurance that things are kosher.
The compilation approach brings the CPA directly into the picture, requiring that they confirm whether your financials are free from obvious material misstatements.
Moving up to the next level, a review can yield an independent CPA’s “limited assurance” that your financials were prepared in accordance with generally accepted accounting principles.
A review, however, isn’t as golden as an audit, the highest level of assurance that a CPA can issue.
Here’s how the American Institute of CPAs describes an audit:
“In an audit, your CPA is required to obtain an understanding of your business’s internal control and assess fraud risk. Your CPA is also required to corroborate the amounts and disclosures included in your financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures and other procedures.”
So, clearly, there’s significantly more work on the CPA’s part, right? Bond companies want to see that. They really like the assurance. What’s the upside to the contractor? Why bother going this route? Three reasons:
Money, money, money.
Contractors hoping to get approved for larger projects will need their financials audited. Doing this work at the kitchen table just won’t cut. What they’ll discover is that hiring a CPA to tackle the job is ultimately a negligible investment relative to the potential return.
Tom Patton is a Surety Advisor with CCIG specializing in construction bonds. Reach him at TomP@thinkccig.com or 720-330-7922.
CCIG is a Denver-area insurance and bond brokerage with the full-service capabilities of a national brokerage. We do more than make sure you have the right policy. We also help you manage your long-term cost of insurance with our risk and claims management expertise and a commitment to service excellence.
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