A quick glance at the surety credit industry shows what looks like mixed messages. On one hand, some surety underwriters at capacity are responding unfavorably to their existing clients’ balance sheets and suggesting they look to another surety credit provider. On the other hand, some surety companies with excess capacity are taking on struggling companies – why is this the case?
If there is one thing that separates the construction contractors receiving wide-open bonds from those getting their bond capacity tightened, it is the Work-In-Progress (WIP) report. By analyzing this report, surety underwriters are able to determine how likely a contractor is to satisfactorily complete the projects so far underway.
What Does the WIP Report Contain?
As a professional construction contractor, you’ve had to generate and distribute WIP reports to surety creditors. You’re already aware that the document includes the estimated gross profit of each project currently underway, as well as a systemically categorized list of expenditures and billings along with recognized revenue.
Your underwriter is not necessarily concerned about whether your actual figures are meeting estimates – they rarely do for even the biggest construction companies in the industry. However, the underwriter islooking at how complete your estimates are.
For instance, does your projected job cost include indirect labor costs? Indirect labor costs such as payroll taxes, safety supplies, equipment maintenance, and depreciation can quickly add up and skew your profit margins off-course. A carefully completed WIP report will include estimates for these costs, showing the underwriter that you’re serious about delivering a concise, realistic estimate.
Actual Costs vs. Estimated Costs
Another important part of your WIP report is the section dealing with actual costs. While estimates are useful for projecting cash flow needs, you, your client, and your bond agent are all primarily interested in actual costs. This element is important because it shows the difference between your expectation for the project and the reality of it on the way to completion.
This may lead the underwriter to determine trends such as profit gain or profit fade. Surety creditors want to determine which direction your original expectations for the project are skewing towards. Unless your project predictions are somehow always perfect, your expected profits will either grow or shrink during the course of the project.
Underwriters are aware of the fact that conditions may change during the course of a construction project. They want to see how you respond to those changing conditions and what you do to ensure a consistent, predictable result. Adhering diligently to your WIP schedule will give you the information you need to keep your projects costs and profit projections under control.