Business Owner Tips – Good Performance Saves Money
Companies with a good track record for completing jobs with quality work, on time, and within budget receive financial benefits as well as customer satisfaction.
From its first headquarters in a spare bedroom in 1984, Rowland Companies in Scottsdale, Arizona, has grown to annual revenues of $60 million and 73 employees. The general contractor and construction and development management company has a track record of excellence for constructing churches, medical facilities, and commercial buildings in 13 states from California to Texas to Wisconsin. Rowland Companies’ motto—A Matter of Excellence—depends on doing a thousand things a little better than the rest.
That track record of completing work with excellence pays benefits beyond customers’ praise. The construction industry relies on surety bonds. A third-party company ensures the customer that the contractor will fulfill all promises in the construction contract. Such bonding isn’t free. On big projects it can cost tens of thousands of dollars, and the contractor builds that cost into its bid to do the work.
“You have to have some level of financial stability with a surety company to get someone to underwrite the bond,” explains Brian Rowland, chief financial officer for Rowland Companies. “Most people would be shy to award very large construction contracts without bonds.”
With two decades of performance history, Rowland Companies can easily demonstrate its ability to get bonding as well as an ability to do quality work on time and within budget.
“When you have a long track record of completing projects and when you’re financially stable, customers see if they can waive the surety bonds,” Brian says.
In such cases, the customer, who pays for the bond, weighs how much its risk increases versus the cost of the bond. If the risk is minimal, based on the contractor’s history, the savings is substantial. And the contractor gets an edge in winning the contract by being able to knock thousands or tens of thousands of dollars off the bid.
A strong performance history can shave costs for many types of companies. It can result in lower interest rates on loans and credit cards, higher borrowing limits, better lease terms, return of security deposits on leased property, and discounts on purchases. The more companies save by demonstrating their quality and reliability, the less capital they need to raise and the more likely they are to secure capital when they need it.
In construction, the project owner doesn’t waive the requirement for a surety bond lightly. Surety companies require a contractor to provide a list of good references and prove its experience in fulfilling the requirements of contracts in the past. The surety company also looks at the owner’s personal assets outside the company, banking relationships, and lines of credit, which contractors use for short-term financing. All those factors and more must be in place for a customer to waive the bond.
The better a contractor’s performance over the years, the less personal guarantee a surety company will require, Brian says. However, surety companies have gone bankrupt themselves by doing bonds without guarantees, and construction lenders often demand bonds on projects as a condition for obtaining a loan.
Even if Rowland Companies often works without surety bonds, it still maintains good relationships with bonding companies and bond underwriters, Brian stresses.
“We work with a bond broker who is very knowledgeable about the industry and the requirements of different surety companies,” he says. “His commission is paid by the bond underwriter, so it’s a free service to us. The underwriter comes out once a year to make sure we still meet its subjective measures. A company that can no longer meet the requirements will close its doors eventually because it won’t be able to get bonding in the future. So it’s important for Rowland Companies to maintain its high performance standards and track record.”