In economic boom times credit conditions tend to ease. It’s easier to get financing and bonding for most projects under the assumption that there’s a high likelihood of success. Conversely, as economic growth decelerates, obtaining financing and bonding becomes more difficult. But several other factors are compounding this natural ebb and flow of the surety market.

The dramatic slowing of the economy that began in earnest during the third quarter of 2000 has the potential to cause an increase in defaults on surety bonds. In response, the surety industry is tightening underwriting criteria and looking to be more conservative going forward, particularly as compared to just a few quarters ago. Furthermore, bankruptcies of several large public companies — driven in part by rising exposure to asbestos-claim liabilities — have had a ripple effect throughout the market. Some surety players have exited the market, while others are adjusting their risk assessments. Reinsurers, in turn, are requiring higher premiums, and ultimately those costs are passed on to contractors.

Clearly, the pendulum is swinging in the other direction and sureties are becoming more cautious. Contractors need to be aware of the trend and take steps to remain attractive in this more competitive environment, including the following:

• Bolster the balance sheet in times of tightening underwriting criteria. Reduce debt and explore strategies such as sale-leaseback of equipment or changing depreciation assumptions.
  
  
• Show more consistency in income statements. Take steps to eliminate wide swings in monthly performance. Be mindful of monthly cutoffs for recording transactions and perform regular reconciliations. If quarterly statements were once used to measure credit-worthiness, monthly statements may be requested by underwriters in a tighter credit market.
  
  
• Monitor receivables closely to help maintain a healthy level of working capital. Receivables older than 45 days are likely to be discounted heavily by underwriters.
  

It’s also critical to conduct thorough due diligence on customers. Sometimes it pays to walk away from a potential job, even in slowing economic times. The days of contractors being pursued aggressively by the surety industry are gone — at least for now. But a solid track record and clean financial statements will help ensure that a contractor has continued access to bonding regardless of the greater economic outlook.