9.6.19

By Chris Benko, CPA | Principal, Audit & Assurance | Leader, Construction and Real Estate Niche

Chris Benko
Chris Benko, CPA

Wrapping up year-end financial statements is critical for all business owners, including construction contractors. Preparing year-end financials can help owners navigate bonding capacity for the following year.

Reviewing Bonding Year-End Statements

When it comes to providing year-end financial statements to a surety, some may say, “cash is king.” A contractor that needs surety bonds must provide their surety with year-end financial statements. These statements, while only a single day in time, have a significant impact on the amount of bonding capacity available to a contractor in the subsequent year.

Most contractors need to maximize every dollar of bonding capacity they can get and should plan to have a balance sheet at year-end to support their position. Bonding capacity is based on working capital and liquidity on the contractor’s year-end financial statements. The more working capital and liquidity a contractor has, the more bonding capacity will be provided by their surety the following year. Working capital is defined by most sureties as current assets minus current liabilities after adjustments are made to certain asset items.

In most cases, some of the adjustments needed are:

  • Cash – no adjustment (cash is king)
  • Marketable securities/ investments – 25% excluded
  • Accounts receivable – Only includes receivables less than 90 days outstanding
  • Under billings – All that relate to unapproved change orders and profit fade are excluded
  • Inventory – 50% excluded
  • Prepaid expenses – 100% excluded
  • Related party receivables – 100% excluded

Understanding how the surety reviews a company’s balance sheet will help with required year-end planning. Here are a few things business owners should consider at year-end to help manage the balance sheet for bonding capacity:

  • Collect related party receivables before year-end.
  • Consider buying inventory in January, instead of December.
  • For inventory purchased for a specific job, bill for it or classify as unbilled receivables or under billings.
  • If the company has prepaid expenses that are paid annually, consider adjusting those payment terms to monthly.

Construction owners should work with an experienced accounting team before the end of the year to help get the company’s balance sheet in good shape for bonding purposes. Accountants and auditors will weigh decisions made for bonding capacity against any unintended tax increases that could arise. Contact me today to discuss your construction company’s year-end bonding capacity.