Understanding the type of paperwork required to apply for a construction surety bond is a critical step towards becoming bonded. But the documentation will only mean little if you, as the contractor, do not have the right financial qualities to qualify. First, contractors need to demonstrate adequate financial strength - with low to zero debt levels - to show proper management of funds.
Based on the size of the project, contractors may provide the surety underwriter three types of financial reports:
- Compilation for projects below $1 million
- Reviewed statements for projects over $1 million
- Full audit for massive projects
But all these financial statements and reports won't make sense because there lacks an understanding of the complex requirements of construction accounting.
This is where a Professional Construction CPA will come in handy.
Why is getting a Professional Construction CPA important?
In the construction business, you need someone who can thoroughly understand what will be the financial impact on your project or business. That someone is a knowledgeable and experienced Construction CPA who not only can understand your project functions by preparing financial statements, but also can become your valued business consultant.
There are several reasons why you need to search and hire a Construction CPA if you are looking to qualify for surety bonding. Surety underwriters look for financial statements that are well-planned, well-documented, and well-presented.
A Construction CPA:
- Can correctly estimate the income based on the percentage of completion method using accounting principles.
- Will accurately compile financial statements that contain the mandated contract schedules as auxiliary information.
- Can evaluate multiple accounting software applications on top of internal business processes for proper handling of construction bidding, cost control, order changes or appropriate allocations.
- Can provide contract schedules relevant to the income statement and balance sheet. A contractor’s financial statements must exhibit completed work and work-in-progress revenues that tie to the total estimated contract costs.
- Can use the correct terminology throughout the financial statements (which is pretty much unique to the construction industry). Terms include a financial accounting of overbilling (billings more than costs and estimated earnings) and underbilling (reverse of overbilling where contractors are sometimes underbilled on construction projects due to the failure of completing the progress billings on time).
- Can recognize losses on non-completed contracts by using accepted accounting principles. This is beneficial so that the contractor cannot suffer any more financial pain, and that the losses are not spread over the duration of the contract. Therefore, a professional CPA involvement can prolong further losses to financial ratios (overall financial condition of the company) in the future.
- Can select the appropriate accounting method for tax purposes to match the cash flow of the contracting company. Multiple tax accounting methods are available to a contractor.
- Provides know-how on particular contractor disclosures contained in the financial statements. These may include, but not limited to contract billing status, backlog, contract claims, retentions receivable, and so on.
- Can help contractors ensure their bids meet all the construction job requirements, all the way to performance and payment to do public work projects.
- Can identify the type of business structure for a company and can help deal with the proper entity not only at present but also for long-term goals. There are sole proprietorships, C and S corporations, Limited Liability Companies (LLCs), and other legal structures allowed by state statutes available to construction firms.
How do you select the right Construction CPA?
Not all CPAs work in the same industry. A lack of industry-specific know-how can do more harm than good to a construction company, which can result in lost job opportunities and higher credit costs.
In the construction business, a Construction CPA focuses on accounting principles that benefit the contractor in the long run. From understanding your working capital to increasing your bonding capacity, a CPA can present your financial statements in a whole new light.
Construction-focused CPAs may manifest as a team or a solo accounting consultant based on your liking and what you are comfortable working with.
For Construction CPA firms, make sure you choose a company with a dedicated team that specializes in the construction industry. They may be led by a shareholder or partner with specific credentials.
For independent CPA consultants, make sure they are members of recognized industry trade organizations.
These credentials and organizations may include, but not limited to:
- Certified Construction Industry Financial Professionals (CCIFP)
- Associated Builders & Contractors (ABC)
- Associated General Contractors (AGC)
- Construction Financial Management Association (CFMA)
- Construction Industry CPAs/Consultants Association (CICPAC)
For Construction CPA firms, they should retain a massive construction industry client base and deliver value-added services. These services include tax and assurance, where they perform financial ratio evaluation, benchmarking, and succession planning.
Why do well-planned financial statements can quickly initiate a Surety decision?
Getting a Construction CPA makes a surety underwriter’s decision-making quick and easy. Submitting well-prepared financial documentation helps a Surety Company to view you as a thorough and credible contractor that can demonstrate proficiency in construction accounting, thanks to the aid of your Construction CPA. You understand the financial nuts and bolts to be issued a bond – because you know that financial capacity is one of them. It also means you have done your research and planning, and a Surety can see in you the three C’s of underwriting: Capital, Capacity, and Character.
How do Construction CPAs improve your company’s bottom line?
Working with a CPA that has established a solid relationship in the construction sector will likely help you grasp the best practices of a wide range of surety companies. Seasoned CPAs aid former clients that have faced a variety of financial issues and circumstances and help overcome them.
In the field of construction, CPAs have more robust and extensive relationships with insurance, legal, and banking institutions. All of these industries are important in today’s surety bonding processes. They also have a deeper understanding of the legal perspectives that impact the construction sector because this can be critical when disputes or other challenges arise.
Knowing the type of documentation and what procedures to follow helps protect your rights as a contractor. A contractor with good, financial record keeping and timely set-up of accounting methods is often in the best situation to prevail in any legal disputes.
In brief, obtaining a Construction CPA and understanding construction accounting principles ahead of time create steps in the right direction for your company's bottom line. It also helps you get the surety bonds you need at the best available rates.
Throughout the process, work with a Construction CPA who can explain the financial requirements to you and help put your best foot forward in the surety bond application process.