Properly-stated financial statements go a long way toward securing a bond. The two methods allowed by Generally Accepted Accounting Principles (GAAP) for preparing financial statements for contractors are: completed contract and percentage of completion. With the completed contract method, revenue and costs incurred on a contract are not recognized until the contract has been completed and accepted.

However, sureties prefer (and usually require) the percentage of completion method, which recognizes revenue on the percentage of the contract that is completed. It calculates what revenue has been earned from work completed to date and how much revenue will be received in the future.

“The important things are presenting financial statements in a format that is accepted by the surety industry and making appropriate presentation disclosures,” said William J. Ferlita, CPA with Cherry, Bekaert & Holland, L.L.P. “Some of these disclosures may not be required by GAAP, but this additional information assists the surety assess the financial stability of a contractor.”

Sureties extract and analyze data and from financial statements to produce ratio and historical information. They are looking at working capital, cash in the bank, equity, overhead and overall profitability trends. They’re also interested per-job profitability: how did the completed job end up compared to where it started?

Bonding companies pay special attention to projects in progress. Profit to date for a job in progress is determined based on the ratio cost incurred to date versus to total estimated job completion cost. This determines the percent the job is completed, the percentage of revenue earned, and the percentage of profit earned to date. Completed jobs are what they are, but estimates change constantly on on-going projects. As change orders occur and job conditions change, contractors need to revise cost estimates in the work-in-progress schedule of the financials.

Red flags to sureties include:

• Unusually high gross profits that don’t match the firm’s history

• Large under billings

• Overstatements – has the contractor built in more profit than can be realized?

• Contract profit fades

“Sureties see contract profit fade and become concerned that the contractor is having problems either estimating or managing the jobs,” Ferlita said.

Before submitting financials for a bond, go through the fade exercise with your CPA.

• Were the estimates too low from the start?

• Were there unforeseen problems?

• Were change orders not captured and new estimates created?

• Is the job being properly managed?

Once the CPA is finished with the financials, The ProSure Group analyzes them to determine the next step. We may need more detail to better understand the contractor’s reports and operations or we may need to consult with the contractor on the best strategies for moving forward with their bond needs.

Thus, by the time financial reports are submitted to the sureties, there are no holes. Work-in-progress schedules have realistic estimated profits, any profit fades are explained and excessive overbillings and underbillings are explained.

Subject Matter Expert: William (Bill) Ferlita, CPA is a partner in the Tampa Bay practice of Cherry, Bekaert & Holland, LLP and can be reached at 813-470-4531 or bferlita@cbh.com.