8 Ways to Reduce Overhead & Increase Bonding Capacity in Construction

8 Ways to Reduce Overhead & Increase Bonding Capacity in Construction

bond 0

Contractors are facing pressure from all sides – labor shortages, material costs, supply chain problems and all the other lingering effects of the pandemic. During my years at large bonding and insurance agencies, I learned many strategies for reducing overhead costs and improving bonding capacity. Here are some of my top tips:

#1 – Hire a construction CPA. It’s important to understand your numbers – especially when it comes to bonding. For example, rather than using cash basis accounting, consider using an accrual basis or percentage completion method. This type of accounting allows for more capacity because you can get credit from underwriters for working off your backlog.

You wouldn’t want a brain surgeon to fix a broken leg. The same goes for your accountant. Regular CPAs won’t fully understand why percentage of completion is important to contractors. Even if you don’t have a good construction CPA, construction accounting software is available that can centralize financial and operational data within one system to provide construction-specific reports and strong audit capabilities. I recommend the suite of Sage products, including their specialized construction accounting software.

#2 – Package insurance coverage. Some coverage lines have gone through the roof – particularly auto insurance. You can’t change that. But what you can do is talk with your broker about packaging your coverage – pairing the more stable lines with the less stable to get a better overall deal. For example, consider combining workers’ comp with difficult property coverage. You don’t want to go out and get a bunch of quotes. Rather, work with a broker you trust who can market your company as a whole. That gives the broker leverage and may give you a competitive advantage.

#3 – Beef up your change order process. If you don’t already have software to help you with this, check it out. A tightly controlled process helps you document and get approval for every change, so you don’t get caught holding the bag. Having a clear financial trail also helps with claims, reduces disputes with clients and subs and ultimately makes it easier to get paid.

#4 – Invest in technology. With a small investment, you can cut out entire categories of cost. Examples:

  • Eliminate the cost of creating blueprints and printouts with software that moves all of that work Instead, use a cloud storage system for blueprints and photos.
  • If you haven’t already, set yourself up for remote meetings. This saves time traveling and is far more normal now as a result of the pandemic.
  • Explore the power of cameras and drones to cut down on travel and in-person time at the job site.

All these ways to eliminate paper and time can mean big savings in the long run.

#5 – Reconsider your hiring strategy. We often see contractors hiring the cheapest labor available. But the reality is that you get what you pay for. You’d be smarter to hire workers that are more skilled and can perform multiple jobs onsite or in the office. Their flexibility will allow you to keep them on even when you have delays, which will make them more loyal to you, too. The most successful construction companies have employees and subs with deep, loyal relationships. It’s worth it to invest in your workers.

#6 – Specialize. Know what you’re good at and stick with it. Underwriters see red flags when you claim you’re an expert at too many things or in too many markets. Taking on projects outside the home territory is one of the top reasons contractors fail, right behind excessive backlog.

#7 – Pay more attention to safety. It’s the backbone of your company and a huge potential liability. Having a well-documented, communicated and managed safety program can make the difference in getting jobs. It can also save a lot of money in the long run by keeping your experience modifier down as a result of fewer claims.

#8 – Do your homework. Understand the market so you don’t get taken advantage of. For example, softwood lumber recently went up 154%, but now it has dropped back down 68% from its recent peak.

Make sure you’re in the know. Look at data from labor groups, trade groups and local and regional associations. Getting involved with associations can also help you stay on top of what’s going on in your specific industry.

Bonus tip: Be sure to use a professional bond agent who works with multiple sureties. Many insurance agents have one surety they go to and may not fully understand bonding. You can help your agent “sell” you by telling him what he needs to know to fully understand your company.

Remember that for bonding companies a poor presentation equals higher rates and lower capacity.

The pandemic and its effects are far from over, but you have options for strengthening your financial position despite them. An experienced broker who knows the construction industry and believes in creating long-term relationships can help you explore all these possibilities.

 

By Tanner McElroy, Vice President, Construction Risk, The Miller Group

See also:

How To Manage Your Broker Relationship
In Construction, It Pays To Be Prepared
Tips To Reduce Your MOD Rate

Leave a Reply

Your email address will not be published. Required fields are marked *