By Merchants Bonding Company
A construction company’s work-in-progress (WIP) report speaks volumes about an organization’s competence and financial stability. What should a WIP say, especially to the surety using it to extend surety credit?
WHY WIP?
For top construction companies, WIP reports are a best practice. Used correctly, they can be a powerful risk management tool to identify and address existing issues, avoid potential problems, and inform profitable growth.
For sureties evaluating larger accounts, WIP reports are a requirement. Before extending surety credit, underwriters must assess a company’s operational performance and financial health. WIP reports, both past and present, are important tools to accomplish that. Surety underwriters analyze data in past WIP reports ranging from type of work and size of jobs, to completion rates and profitability. By comparing and contrasting the data across time and identifying trends and patterns, underwriters paint the picture of a company’s historical operational performance.
Delving into a company’s present WIP is just as revealing. Underwriters use data to assess backlog of work and costs to complete, projected revenue, and the number and size of existing projects. They’re looking for red flags; is the contractor taking on too much work? Are they changing the type of work they’re doing, or the size of their jobs? All of which speaks to capacity. And for sureties, a contractor’s capacity is crucial because of its direct correlation to the surety’s risk exposure if they were to extend surety credit.
WHAT WIP SAYS TO A SURETY
A company’s WIP reports instantly tell an underwriter whether the company’s committed to the process, or not. A high-quality WIP report’s comprehensive scope and accurate reporting provides the detailed information sureties rely on for their evaluations. A less robust WIP report often uses ‘guesses’ and ‘rounding’, giving the appearance of just-in-time reporting, just to fulfill a requirement. Companies hoping to obtain surety credit should always consider what message their WIP reports are sending.
LEVERAGE UNDERWRITING EXPERTISE
As companies grow, projects become more complex, with higher financial stakes and greater risk exposure, making WIP reports even more important. Surety underwriters’ deep understanding of the construction business, along with their ability to analyze and interpret the data in WIP reports, make them an excellent resource and consultant for contractors who want to utilize WIP to its full potential. Leveraging their surety as a partner, keeping them informed of their ongoing plans, can be very beneficial for a contractor’s profitable growth.
A SCORECARD FOR SUCCESS
For construction companies committed to the process, WIP reports act as a scorecard, giving company leadership an enterprise-wide view of operations. By maintaining detailed, accurate WIP reports and integrating them into your risk management strategies, construction leaders can improve operational efficiency and financial stability. Your message to surety underwriters will be loud and clear, that you are ready and able to take on a larger program to continue your profitable growth.
5 Areas Sureties Evaluate with WIP
1. Financial Stability – Accurate WIP reports demonstrate a company’s financial health, including profitability and cash flow management, which shows sureties a company can meet its financial obligations.
2. Consistency – Sureties look at the regularity of reviews and whether a company uses the information to influence decisions and make course corrections, so when it comes to WIP, consistency counts.
3. Estimating & Project Management Capabilities – Detailed WIP reports reflect a company’s competence in estimating and managing projects effectively. Companies that demonstrate they can complete projects on time and within budget are seen as a better risk.
4. Transparency and Accuracy – Accurate and transparent WIP reports build trust with surety providers. Discrepancies or frequent adjustments in WIP reports can raise red flags, suggesting potential mismanagement or financial instability.
5. Overall Trends – Surety underwriters analyze trends in WIP reports to identify consistent patterns of success or trouble. Positive trends can lead to increased bonding capacity, while negative trends may result in stricter underwriting criteria or reduced bonding limits.
Construction companies can use WIP to:
- – track the financial health of each project
- – manage and control costs
- – comply with contracts and pay application requirements
- – forecast cash flow and profitability
- – utilize past cost data for future bids
By focusing on these aspects and maintaining high-quality WIP reports, a construction company can strengthen its position when seeking surety credit and demonstrate its commitment to operational excellence and financial stability.
About Merchants Bonding Company
For nearly a century, Merchants Bonding Company has honed its expertise in providing contract and commercial surety bonds, offering first class service and a common sense underwriting approach. Merchants’ unique underwriting philosophy evaluates all accounts on their own merit, and places a high value on business and personal net worth. A national leader in surety, Merchants Bonding Company is among the top surety writers in the United States and has had an “A” (Excellent) rating or better from AM Best since 1958.
Side Bar:
5 Operational Practices of Contractors that Contribute to Claims Loss Severity
The surety industry tracks not only the frequency of claims, but the severity of claims. To proactively mitigate risk, it's important to have an understanding of contractors' operational practices that can contribute to loss severity.
Common Contributors to Loss Severity
Underbidding in relation to actual expenses is a reflection of contractors failing to control or properly account for – be it contractually, financially, or otherwise – price increases in overhead, labor, and materials over the course of a project. From a loss perspective, it places the surety at a disadvantage because the contract amount is low relative to the cost to complete remaining work.
Overbilling can be the result of underbidding a project in the first place, because billings are too low to generate sufficient cash flow to cover job costs. Overbilling in relation to actual work in place – for example, billing 75 percent of the contract amount when 50 percent of the work is complete – serves to increase the loss further because the contract balance is not enough to cover the cost of the remaining scope of work (even at original contract pricing).
Defective work increases the loss in a number of ways:
1) defective work can necessitate investigation and testing
2) repair work increases the completion scope of work
3) the scope of repair can be difficult to ascertain with certainty, which results in contingencies and higher pricing
4) repair work extends the time necessary to complete the remaining work, which increases general conditions and the likelihood of delay damages.
While past-due payables often result in payment bond claims that can serve as an early indicator of a contractor’s financial strain, that is not always the case. Sureties are encountering high 90+ day old balances, often without any prior notice or claim, which leads to strained or ruined vendor relationships, charges and penalties, and additional losses.
Delays in projects. This can result in supplementation costs and delay damages, including liquidated damages, which reduce the contract balance and ultimately increases the loss.
Partnering With a Proactive Surety
Contractors should be mindful of these issues in assessing their own operations as well as those of subcontractors and suppliers. They should also partner with a surety that demonstrates a proactive approach to claims. The right surety partner will seek to bring value to the relationship by working with contractors to avoid claims, and if the situation is unavoidable, to mitigate the severity of it.
