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Tips for Increasing Bonding & Prequalification Capacity
By: Dennis McGuire
Dennis McGuire
Partner
Audit
Construction & Real Estate, Construction & Real Estate, Inf, Comm & Entertainment
Bloomington
812.336.8550
In today’s competitive bidding environment, contractors continue to look for any advantage that will help them perform at optimal levels. To bid on public works or large private contracts, a contractor must be able to demonstrate the requisite construction experience along with adequate capital structure and overall financial strength.
Following are strategies for improving your bonding and prequalification capacity with your surety or state departments of transportation:
- Invest new capital – This is the easiest way to increase bonding capacity. Companies generally receive a tenfold bonding capacity increase by investing new capital into their equity structure.
- Collect accounts receivable – Sureties generally exclude all accounts receivable more than 90 days outstanding and all related party accounts. A structured collection program and a consistent collection history will increase the contractor’s free cash flow and overall bonding capacity.
- Equipment – Consider selling excess or idle equipment to generate additional cash. Finance equipment with long-term debt instead of short-term lines of credit. These techniques will help improve cash flow and the contractor’s working capital.
- Divest real estate holdings – Leveraged real estate holdings reduce a contractor’s cash flow and overall liquidity, and real estate holdings that are not leveraged also reduce a contractor’s overall liquidity. Both of these conditions result in lower bonding capacity. However, be sure to consider any potential tax consequences before divesting such holdings.
- Debt – Maintain a balanced debt-to-equity ratio. This ratio should generally be less than 5-to-1.
These items highlight certain financial ratios that affect a contractor’s ability to maximize bonding or prequalification limits. Your BKD advisor can provide further assistance and advice on related tax considerations.
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