Bond Agent Secrets: Make Surety Your Secret Weapon!

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ℹ ABOUT THIS EPISODE

Your bond agent and surety company are more than a bonding requirement. They're one of your most underutilized business advisors. 

In this episode, Wade Carpenter and Stephen Brown break down how your surety relationship can protect your cash flow, flag risky growth decisions, support crisis management, and even connect you with the right industry partners. 

If you're only calling your bond agent when you need a bond, you're leaving serious value on the table.

⌚️ Key moments in this episode:

• 00:00 Surety as Smoke Detector
• 00:19 Why Relationships Matter
• 01:55 Claims vs Losses
• 03:15 Financial Statement Reality Check
• 04:46 Agent First Big Decisions
• 07:07 Risk and Controlled Growth
• 10:36 Industry Intelligence and Underwriters
• 14:48 Networking and Joint Ventures
• 16:55 When Trouble Hits Call Early
• 18:06 Key Takeaways and Wrap Up

The Contractor Profit Blueprint is a complete guide that breaks down exactly how to identify where your money's going and start keeping more of it. This isn't theory. It's the same framework I use with contractors I work with every single day.

Head to profitfirstconstruction.com/blueprint to download your free copy. 

Stop working for free. Let's get you keeping what you've earned.

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Find all episodes and related links at ContractorSuccessForum.com.

Join the conversation on our LinkedIn page: https://www.linkedin.com/company/CarpenterCPAs
   
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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

Wade Carpenter: [00:00:00] Your surety relationship is a little like having a smoke detector. It's not there to put out the fire. It's there to warn you before the fire gets out of control.

Today, we're talking about why some contractors see their bond agents and their sureties as a paperwork requirement, while others see them as one of their most valuable advisors.

This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter Company CPAs, alongside Stephen Brown with McDaniel-Whitley Bonding & Insurance.

And Stephen, in my experience, the best contractors seem to have a great relationship with their bond agents and the surety companies. Not just call me when you need me type of relationship.

Stephen Brown: Yeah. that's so true, Wade. Just to explain to our listeners, a A surety company's making a financial decision whether to back the project you're gonna do.

Are you gonna finish that job? Are you gonna pay all your bills and liens? What about the workmanship? What about the warranty behind the workmanship?

You might think to yourself, "I know what I'm doing. I've got a good business model. I'm not gonna take on a risk that I don't need to take." So [00:01:00] surety to me is just a necessary evil.

I remember a very large asphalt paving contractor couldn't stand surety, or a relationship with them, or even having to spend any time with them. And I don't know why that was. I think it was just a certain amount of arrogance of I don't need you. Surety bonds are required.

So, I'd say to our listeners, don't think of it as just a necessary evil that you've got to deal with, but think about it as when you're getting surety bonds and you have a good relationship with a good surety agent and a good surety company then your business is gonna grow and prosper, because the two go hand-in-hand. 

Wade Carpenter: Yeah. And I see it all the time too. Like I said, always with your bond agent, they are a great source of information, but I've also seen it where they bring the underwriters out and introduce them and explain to them.

I know these insurance companies, the surety companies have a lot more resources that a lot of the contractors are not taking advantage of.

And I think they really want to help the contractors. Obviously the insurance company would figure like, we're gonna expect a loss, but the [00:02:00] surety companies hate losses, and they don't want you to have a loss.

Stephen Brown: You have a loss, then you lose a customer, and as a contractor you're out of business. And you can have claims. There's a difference between a claims and a loss.

Claims can occur, and a good surety company keeps claims from becoming a loss. But also so does a good contractor and a relationship with the bonding agent. That keeps it from even getting to the claims department in the beginning.

A lot of our listeners are gonna see payment claims pop up. They're gonna have some material vendor or supplier that they didn't even do what they're supposed to do, yet they've got a credit manager that they blame it on, and the credit manager files a payment claim.

So, you've got these necessary evils to deal with in bond claims.

But then again, when you have a job with a lot of materials on it, like pipe or something, and you show them that job is bonded and you provide them a copy of the bond, then that supplier knows that it's at least protected by a surety company. They're gonna get paid.

[00:03:00] So they can start producing and delivering that material faster and with more credit than they might otherwise. So there's that going on.

There's a whole lot more to it, Wade, than just saying, "I'm gonna get a bid bond or a performance and payment bond." 

Wade Carpenter: It's almost like they're basically a financial partner and, I guess I'd ask you, I know the answer to the question, but would it be fair to say your bond agent, your surety company probably understands your financial statements better than your average contractor?

Stephen Brown: Yeah, absolutely. And sometimes better than you do. How is that possible? You're saying, "I'm reading this and this is what I'm seeing." If I said that to you as a contractor and you said "that's wrong," okay, then you've posted something incorrectly or there's something going on. Explain it. Fix it. That's something that you need done anyway. Something wasn't right.

As contractors, you can't be an expert in everything. Surety, it's all about not only interpreting the financial data that they get from you and your CPA, but [00:04:00] also figuring out whether you're making money or losing money. It's important. Do you know?

Sometimes as the owner of a construction company, you get so mired down in a lot of moving parts that it's just really hard to see the forest from the trees.

And I know, Wade, a lot of times you have to give your clients some news they don't want to hear about something that you're seeing that they need to know about.

Surety companies aren't like that. They're just like, " we're just gonna quietly stay out of things unless you ask us." Like good grandparents. I'm not gonna tick you off or you're not gonna let me see the kids. So, I'm just gonna be quiet and watch behind the scenes.

However, if you ask and you engage them, and you consider the surety company as well as the surety agent, a key member of your team, it's a great resource.

From my standpoint, I would like you to bounce things off of me first. How do you think our current surety is gonna look at this? Fill in the blank. I want to look at this. I want to do this. We're thinking about this. We're talking about [00:05:00] this.

Talking it over with your agent first, and if your agent says "let's just send it to your surety company and see," that's not the right answer. You should have the kind of relationship to know about that.

I'll give you an example. There was a certain project down in Florida. It was a parking garage. And my client was adamant that they wanted to bid it, and the surety was adamant that it was a bad idea.

And rather than just say no, and as an agent, we moved him to another surety, that relationship was so important with the surety, and the surety to the contractor, that we spent half a day discussing why and arguing.

And nothing like a surety that's got good reasoning to back up. This is not emotional decision. This is a practical decision. It's not good for you to do this, and here's why.

But this is how we think, okay? If you don't feel the same way no, we understand you may go look at another surety to get this job approved. But at least in that relationship, you [00:06:00] start that discussion and you know where you're going.

The resources that a surety, Wade, can offer are just incredible. Say you wanted to get out of the company and you wanted to do some succession planning, buying and selling your company. How can they help you?

Bring them in early. We've said that about ESOPs and employee ownership trust and other things. Bring the relationship with your agent and your surety in early to discuss, how's this gonna look to you? How is this gonna affect... 'Cause if surety's important to your business it's important to keep that relationship 

going 

Wade Carpenter: Yeah. I think what a lot of contractors, their reality is more like, okay if I get more revenue, that's success, and why would you question that?

Your surety companies are thinking financial health. Your cash flow is survival. This financial health is going to help increase the value of your business if you're looking to pass it on, sell it, whatever it is.

So they are looking at your overall health, and that's one of the key things I wanted to point out here. I'm glad you're bringing that out.

Another thing that I think, you sort of touched on it [00:07:00] already, but not just financial health, but is it risky? A lot of times people go in with blinders on. They're just seeing that revenue.

But talk about risk management. That's obviously what they do.

Stephen Brown: Yeah. I'm glad you brought that up. That's just one of the key things that I think our listeners need to understand about surety and surety relationship.

You want to go after something big that's gonna absolutely be a game changer for you and your company, and it's gonna solve all your financial woes.

If there's gonna be enough profit in this one job that it's gonna solve a myriad of problems, let us do it. Bond us.

I know you've heard this expression: betting on the come bet on in a craps table. There's a pass line, there's a come line, and the come line is the sucker bets. And the pass line is the numbers you tend to roll the most, 7 or 11. That's the pass line.

So why would a surety want to roll the dice with you because the job was large? Oh we charge more for it. You get more premium. Oh, this'll be good for you, it'll be good [00:08:00] for us. But if you can't show that you're currently making money and you can manage money, why would a surety think that you can take on a big job and not manage money?

Now, there may be extenuating circumstances where that large job might actually be exactly what you need. If you can't explain that to the surety, and your accountant explain that to the surety and your agent explain that to the surety, then do you really have a good grip on it? 

Wade Carpenter: Yeah. I think there's so many things to be said about that. I think they also sort of almost serve as a growth consult.

Going back to the same theory, like, all we see is revenue. That's gonna solve all our woes and everything. Life's gonna be hunky-dory.

I rarely see them like, "Okay, you're growing too slow." It's more like, "Okay, you're growing too fast, and why do we need to slow it down?" They wouldn't really point that out if there wasn't a good reason for it.

I talk about it in my book. I've seen companies grow themselves right out of business. What do you think?

Stephen Brown: Yeah, they grow themselves out of business. But at the same time, the ideal situation for me [00:09:00] as an agent is to go to the surety and say, "We have a job, it's right up their alley. They're really excited about how this is gonna grow this certain division. They're excited about the location, the timing, the amount of profit they can make on it. They have a proven track record, and this is just another element of what we've already done, but on a larger scale.

And then the surety takes a chance and doubles, triples, quadruples the largest job you've ever done because they have that kind of confidence in you.

That's controlled growth. That's growth that makes sense. That's not somebody holding you back. So, I can't tell you having been a former underwriter as well as an agent, how many meetings with contractors I've been in, different contractors.

Over the last 40 years of being in this business, I've been in a gajillion meetings with contractors and most of them are enjoyable. And some of them are ridiculous.

It all has to do with like Forrest Gump says, 'Stupid is as stupid does.' It's someone who's digging in on a bad plan, and [00:10:00] absolutely gonna drive that bus right off the bridge whether you like it or not.

If that's not what actually happens, and nobody wants it to happen, that's what everybody feels, and that's what it's like.

So don't let that happen. Please. Don't be arrogant about a surety relationship. It can be easy to be a little bit arrogant about your surety relationship.

" Do you realize how much premium I give them?" They've already earned that, just like you earned your profit on the job you finished. 

Wade Carpenter: Yeah. 

Stephen Brown: That's history. They're not gonna take a crazier risk based on how much premium you've given them in the past. Does that make sense? 

Wade Carpenter: Yeah, absolutely. And I think, just not just growth, but, they're looking out for you and quite frankly, they've got more data say, like industry.

We had the conversation about that dashboard you were talking about. The industry intelligence that the surety companies have access to that you as a local contractor, whatever, you may not understand what's happening in labor trends or what's the margin, what's happening in, maybe you're moving a state or [00:11:00] two away, you're not familiar with what's happening in that different state or whatever.

I think the surety companies also bring a lot of that industry intelligence to it. What do you think? 

Stephen Brown: Yes, absolutely. If you're doing over $10 million of bonded work a year, you should know who your underwriter is. They should be meeting with you, and you should have a relationship with them. And you should be comfortable that you like them or you don't.

And if your surety agent introduces you to an underwriter that you don't like, then you have the right to say, "Hey I'd like for you to find somebody else for me. I don't think this is a good fit." Because remember, being a surety agent, too, is like being a matchmaker, trying to make sure all the pieces fit together and everything goes smoothly. 

Wade Carpenter: Yeah. They're really out there just trying to prevent claims from happening, as we said before, but it's almost like a check engine light on your car. If we're seeing some profit fades or whatever, you know, they're trying to protect both you and them.

A lot of times they see things coming, that, they may not be boots on the ground, but they see trends happening in the [00:12:00] industry or whatever, and I think A contractor would be stupid not to pay attention to what they're saying about

Stephen Brown: Yeah. That's right. And also remember, listener, contractor, that surety agents, underwriters, they don't know how to do what you're doing.

We may talk about a lot of things that we're familiar with because you do it all the time, but that doesn't mean we can do it. You're building it. So you got to spend some time letting your agent and your underwriter see the work you do and explain how you do it. That's worth its weight in gold.

Surety relationship, like you said, Wade, they don't want you to go under, and they don't want to write a risky project.

So if that's the case and you've got a good sound business and you're taking on very little risk, and you've got a track record of you know what you're doing, you don't need a surety company telling you what to do, that's a good place to be.

So why not use that relationship for a little more than saying I just use them for bonds? I don't appreciate that relationship.

Meet with them, talk to them, find out what's going out there that could possibly sink your ship, because you never [00:13:00] know what that could be.

Wade Carpenter: I think they love to educate contractors. One of the most underutilized things I would say out there that they're not really taking advantage of, some of the things that they want to give them information.

Stephen Brown: That's absolutely true. How many times, Wade, have you been on a phone call with an agent and/or an underwriter and the contractor were trying to interpret some data that we see, some financial data that we see?

Because as a construction CPA, you are posting things the way you need to post them, and the surety company's interpreting them the way they want to interpret them.

And that's why in the surety business, we're always pushing our contractors to do business with a construction-oriented CPA.

It just allows the conversation to go so smoothly, compared to a CPA that doesn't handle contractors, that doesn't understand percentage of completion postings the way they need to do. That can explain over and under billings, and also be able to help develop a work in progress a WIP report that shows [00:14:00] exactly how your jobs are performing. It's a snapshot as of the day that financial statement was done and assuming that everything's been posted properly.

So when all these elements come together, Wade, surety can be a wonderful experience. I love it. I've never had a midlife crisis where I wished I did something else. As I get older in the business it's more and more enjoyable to help work with contractors that wanna grow, and I love being a part of it.

So I beg you, if you haven't met with your underwriter or talked to your agent, make that a regular thing. Make your entire team understand how important that relationship is and include them.

The more the underwriters know about the team behind you, the more faith they have in not just you and your abilities, but everybody on the team to get the project finished. 

Wade Carpenter: You just said it, relationship. I think that also is another thing that people don't think about. We all know construction is all about relationships, and I think that's a networking partner. Your bond [00:15:00] agent, the surety company. They can introduce you to bankers and CPAs and maybe buyers and sellers, who knows?

But I see that networking is sort of a underutilized thing or they don't think about that part of it.

Stephen Brown: Yeah. The networking is everything. Also, wait till you put a joint venture together and you see what a small world surety is. You joint venture with someone across the country and your surety and your agent knows those people, their bonding people.

When that kind of comfort comes together and you can merge that together, joint ventures are a lot more seamless than you could possibly imagine.

But partnerships, you want to go after a big job, and a lot of that job depends on your sub and your sub relationship. And that sub happens to be bonded with the same surety, or those sureties know each other, and they know of that sub's reputation. That's the kind of stuff you can ask your surety.

Surety agent and surety underwriter are not gonna tell you details of the contractors they do business with. They're not gonna tell you the [00:16:00] financial details. They're not even gonna tell you whether they're good financially or they think they're going under, because that's arrogance, and that's not the way our business runs.

It's one way to guarantee that you go out of business, just like a lawyer. A lawyer keeps all your information private. But what a surety agent and underwriter can tell you is about particular project managers or engineers that they've heard some notorious horror stories about that you need to know about, or about certain regions of the country. Or you're thinking about doing subs have you heard anything, bad about them? What do you know? "I hear good things about them." Or, "yeah, they're currently in claims with our company right now." They can say that.

But the most important thing that a surety company can share with you is generalities. That's a good idea, that's a bad idea. You have to trust that relationship because they're telling you a lot, even though they may not be specific. 

Wade Carpenter: Yeah. You mentioned lawyers. You know, you think crisis management, whatever, whether [00:17:00] something's come up on a job and do you need to spend a bunch of money on a lawyer and not put it in front of the bonding company? Versus maybe that should be the first company call you make is to your surety companies.

Or maybe you're having some cash flow, you know, you're bouncing payroll or something's going wrong. I'll ask you, when should a contractor call their surety if they're having trouble?

Stephen Brown: I say they should call their agent first to get advice about it. And the agent's gonna say: "Have you notified your attorney?" And the answer should be yes, or we're getting the file together. We're sending it over. Send that to them. Send me a copy. I'll give the surety a heads-up.

Usually I get a call when someone's filed a claim on their bond. And that's the difference between a good surety agent and a bad surety agent, is how fast you move to keep it from getting worse. So how fast you move as a contractor to defending yourself is how fast the surety agent and the surety company moves. 

Wade Carpenter: My experience too, is the contractors who are getting the most out of their relationship are treating them more like, a partner or business [00:18:00] advisor than just some vendor that they pay.

Stephen Brown: Sure. If the shoe was on the other foot, wouldn't you want it to be that way?

Wade Carpenter: So what can we take away from this?

Stephen Brown: I think we talked about financial analysis and benchmarking, because surety companies can tell you how benchmarking ratio, we've had numerous podcasts on that. How things are trending, what they like to see. When a financial ratio is out of balance, what it tells a surety. And when you learn that, then it helps you. It helps you manage your company. So these are the kind of questions you ask.

Strategic business planning. This is what we're doing now. This is what way we want to go in the future. How to maximize your bonding capacity. At all times. Your surety agent should be thinking of that nonstop. How do I maximize the capacity? How do I push that? How do I prepare in case my client wants something that's gonna be size-wise, large or different, and we gotta do some discussions about it.

Identifying risk [00:19:00] and reviewing contracts. It's not their job to review your contract. But remember, the bonds are completely tied to whatever you sign.

So when you're in a situation and you can explain to your agent and your underwriter that you've got a good construction attorney, you've reviewed the contract, and you've made significant changes about everything from the hold harmless language, to the terms and conditions, to the timeframe, to liquidated damages, to also how often you get paid. Tying that in and letting the underwriter know "We're very serious about managing risk, and what do you think about it?"

claims prevention, the early warning signs, paying attention to things that could cause claims, and how the surety can help you with that. Also, surety has a lot of educational programs. They have a lot of papers. They've done a lot of marketing research. So if you wanna do something, you wanna consider an ESOP, these sureties have what they call white papers that are very seriously researched in order to help their underwriters understand the risk involved, so it's gonna help you as well.

And [00:20:00] also crisis management support. A good surety is not a fair weather friend. Someone that, "I've been with you. I've bonded you. We've done many successful projects together, and now you're having a crisis. We're not gonna bail on you." Okay? And when a crisis comes up that has to do with claims, the project's gonna lose a lot of money, the project is not performing, the timeframe to get the project done is escalating, you're getting lawsuits from subcontractors and other vendors. And it's all a snowball effect because of things that you couldn't control as a contractor. That's where a good surety and claims department and that relationship can come in and help you weather the storm.

I can't tell you how many case stories that we could talk about where someone was on the brink of bankruptcy from something where actually, the surety and their claims department came in and stood behind you and said, "We're gonna be your partner in this particular situation." And the folks that have gone through that know exactly what I'm talking [00:21:00] about.

Listeners, if you haven't gone through that, just know that's the kind of relationship you should expect to have with your surety company and your agent. 

Wade Carpenter: That's great. It is a really hidden relationship sometimes, and I think it's something that they should be using more. And a surety company has seen hundreds of healthy companies as well as hundreds of train wrecks out there. And the idea is let's learn from somebody else's dime.

You know, Basically, if they've had the failure, they're giving you some advice that you're not gonna get anywhere else. So I appreciate you bringing this to us today. 

Stephen Brown: Sure. That's exactly why we decided to do this podcast five years ago. Is it six years? 

Wade Carpenter: We're into our sixth year, yeah. 

Stephen Brown: Okay. Wow.

Wade Carpenter: Hopefully we made you think about some of these things. If you've never really explored the relationship and getting to know your agent as well as the underwriters, it can go a long way, and they've got a ton of information that you can use in your business that can help you build a better business.

So with that said, we appreciate you being with us. We do this every single week, [00:22:00] and, we'd appreciate it if you would like, share, subscribe. It always helps a ton, and we do appreciate it. Again we do this every single week, and we will see you on the next show.