How to Maximize Your Bond Programs

September is one of my favorite months of the year—it signals the start of the NFL season. My dad first bought season tickets when I was 5 years old, and I’ve been obsessed with the game ever since.

Like the construction industry, the NFL is competitive. And every company is looking to grow and win work in the face of that tough competition. The following are a few lessons I’ve learned from the league and how contractors can apply them to maximize bond programs and ensure long-term success. 

1.  Remember: Bad Deals Equal Dead Money

The NFL has what is referred to as a “hard salary cap,” which means each team is given a limit every year on what they can spend on their players. However, every year, there are teams that think they are a couple of players away, and go out and chase big contracts in free agency. Usually, this is a bad strategy.

Many of these deals don’t work out, and the player ends up getting cut before the deal is finalized. In the league, the money remaining is referred to as “dead money” against the cap. According to online sports team and player contract resource Spotrac, in 2018, eight of the 10 teams with the most dead money finished in the bottom standings of the league. 

So, what does this have to do with construction bonding? Unfortunately, many contractors make similar mistakes. They do a great job of filling up their pipeline with profitable work, but their year is wasted by one or two bad projects. 

Even though work may be tough to come by, you should never settle for a project in which the margins are too tight, the schedule is too short, or the contract too restrictive. Your bond company is looking at your profit trends on each project. Even if your overall backlog is profitable, they will be concerned if you keep having “that one bad job.” In the NFL, there is always next year to get rid of dead money. But, in construction, dead money often results in dead companies.

2. Travel Smarter

According to Football Outsiders, a football statistics and analyses company, west coast teams face a large disadvantage when they must travel east for a game. Statistically, they are significantly less likely to win those games. Contractors also face challenges on the road. In fact, a good number of bond claims come about when contractors travel.

There are various reasons for this statistic. It may be a different labor climate. How do you know which subs to use? Perhaps they are unwilling to work overtime and weekends when you bid the job accordingly. Weather can also be an issue. I’ve had clients go into a different region and be surprised by the amount of rain the area received, resulting in delays and lost profits. 

A growing number of NFL teams have started to leave early when traveling for games to give players’ bodies time to become accustomed to the local time zone. Contractors would be wise to adopt this strategy.

Before leaping into a new market, spend some time there, get to know the local labor and the challenges that the area can bring. Start with a small project or familiar owner, and build up. Have a plan for the market and justify your plan to the bond company—they will be more likely to support you if you are not just chasing a job. 

3. Protect Yourself

The quarterback (QB) can’t do his job well if he is running for his life or if defenders are on his back all the time. Even worse, one bad QB hit could take away a team’s most valuable asset and end their season.

It’s no coincidence that in 2018, the teams that did the best job protecting their QB won the most often. In fact, sack percentages on teamrankings.com indicate that four of the top five teams made the playoffs, with Pittsburg being the only exception. 

Protection is important in construction, yet I still encounter many contractors who fail to bond back subcontractors or use their default insurance, reasoning that the additional cost will ultimately make them uncompetitive or less profitable. This is inaccurate for two reasons. First, your good competitors are doing it. Secondly, I have seen subcontractors erase entire years’ worth of profit and even take good contractors out of business. 

Remember: The No. 1 risk that general contractors face is subcontractor default. You can expect this to get even worse if the economy slows down and/or the labor shortage continues to be a challenge. Bond companies will expect you to protect yourself. Or, you may risk getting cut and finding yourself a free agent.

4. Stockpile Resources

Oct. 12, 1989, one of the most significant trades in NFL history occurred when the Dallas Cowboys sent Herschel Walker to the Minnesota Vikings. In return, the Cowboys received eight draft picks, and those picks led to the Cowboys’ dominance in the early 90s. Despite this success, many NFL teams still do not understand the value of stockpiling their most important resources (draft picks). 

According to “The Loser’s Curse: Decision Making and Market Efficiency in the National Football League Draft,” economic studies have shown that teams that trade back more often win more. But, in an effort to win, many teams still trade these picks away for stronger players or earlier draft pics. In my experience, NFL executives are not the only people who make this mistake. 

Despite doing well in construction, many owners feel like they need to use their most important resource (cash) on other investments. Instead of acquiring more, they purchase real estate, invest in other business ventures, become developers, purchase toys, etc.

Unfortunately, these things are not easily liquidated in times of need. Generally, contractors don’t run out of net worth; they run out of cash. 

Rainy days happen, even for the best contractors, and cash tends to be difficult to acquire when you really need it. If there is one lesson to learn from the last economic downturn, it’s that you need a lot of cash to cover the cost of overhead and equipment in times of lower business volume.

Unlike NFL general managers, bond underwriters are aware of these trends. Stockpile your most important resource and you’ll have the bonding capability to win in any circumstance. 

5. Finish Strong

One of the things that makes NFL games so exciting is that, in many cases, the game is decided during the last drive. Endings are important in surety and bonding as well. Unfortunately, it’s usually the bad endings that get the most attention. Fighting over unapproved changes orders, subcontractor disputes and poor accounting practices are usually the reasons jobs turn south at the end.

If these actions turn into habit, your bond company will lose confidence in your abilities. Fortunately, these actions can be corrected with good internal controls.

Do not perform any work without a written and signed change order. Keep a close eye on underbillings, as they often turn into losses. And keep in mind that disputes are expensive and disruptive. Even when you are in the right, legal battles drain cash, resources and time. Make sure you walk off the job a winner—that is, with profit. 

Although you can’t eliminate risk in the construction industry, good planning, policies and internal controls can minimize it and ensure you have the bond capacity you need to win work now and in days to come.