This experience I had with one of my clients shows how valuable it is to have a business plan in this challenging construction environment.

Recently, I met with a NYC contractor, whose surety line was pulled due to his terrible balance sheet… let’s call it Construction Company A.  The company was under bidding jobs just to keep their employees and crew busy, hoping the market would turn around in the meantime.  Bid openings where there used to be 5 other contractors, now had 40!  The 6 month interim statement showed a loss, and the year-end statement was not better.  As credit is extremely tight, the surety company felt it was too big a risk to support.  We needed to find a new surety, or else Company A would have to close their doors.

Working closely with the contractor, we developed the following strategy:

Step 1: Our first step to formulate a forward thinking business plan, that would show the surety that Company A was aware of the environment, and taking steps to mitigate their current losses while emphasizing the strengths of the company, which there happened to be many.  We came up with new potential avenues of revenue, which Company A had not thought of before, and eliminated the work opportunities that they were getting, but taking at a loss.  We came up with a forward thinking business plan that answered all the questions a surety company would ask, and setting milestones every 6 months going forward to gauge our progress and review what was going right versus what was going wrong.   We were ready to tell the story.

Step 2: The next step was finding an underwriter that would listen to what we had to say.  This is often difficult in these times, as underwriters have piles of “clean” cases to be looked at, so the ones with a little “hair” on it often get ignored.  I’ve worked with several underwriters who love the business plan presentation and use it as a primary tool in making their bonding decisions.  We ended up getting Company A a bigger surety line than what they had before, as they had a clearly articulated plan with realistic milestones that proved to the underwriter this was a risk worth taking.

Did it make underwriting sense from a strictly numbers perspective?  Probably not.  Surety underwriters usually look back at what you did in your previous years to determine what you are going to do going forward.  Since many contractors have experienced a downturn in recent years due to the economic slowdown, looking back will not help.  We need to convince underwriter to look forward.  A carefully crafted business plan could do just that.

Surety underwriting is a combination of art and science, and you must take into consideration that a human being with emotions is ultimately making the decision on whether your company is a good risk or not.  The presentation to the underwriter must tap into that emotion that your company will not be one of the casualties of this economic marketplace.  While most contractors have a plan in their head of how they want to move forward, they don’t have it on paper.   Taking the time to formulate a forward thinking business plan with a professional who understands the mind of an underwriter is a key tool that shows the underwriters you are serious about your company and its future, which can be the difference between you getting the bond line/financing you need, or not.

Hope this example illustrates the importance of planning.  If someone has another situation they would like to share, would love to hear the story.