Financial Statements and Performance Bonds
There are many types of bonds used in the construction industry. From bid bonds to payment bonds to maintenance bonds and supply bonds, bonds are found wherever public projects sprout up, and they help ensure that all parties meet their obligations to complete projects according to plan. One of the most important construction bonds is the performance bond, which works as a guarantee that the contractor will provide the work outlined in the contract. This means completing the project in a way that satisfies the project scope and schedule while simultaneously avoiding defects.
That said, a contractor can’t simply acquire a performance bond without proving that they can be trusted to deliver on their word. In this brief article, an Asheville construction lawyer from Cotney Construction Law will discuss which financial statements a contractor must be prepared to provide in order to obtain performance bonds in the Tar Heel State. For all of your bond-related legal needs, consult an Asheville contractor lawyer with years of experience representing contractors in bond claims, furnishing preliminary and final notices, and more.
As a contractor, your best opportunity to receive performance bond approval is by providing comprehensive business financials. If you opt to forego providing this information, you will be relegated to smaller contracts. Your business financials should include the following:
- A Balance Sheet: your balance sheet should illustrate the quality of your relationship with financial institutions and surety companies by showcasing metrics such as current ratio, working capital turnover, equity turnover ratio, debt-to-equity ratio.
- An Income Statement: the income statement, also referred to as a profit and loss statement or statement of revenue and expense, displays your company’s revenues and expenses over a select period. It helps verify the profitability of your company.
- A Cash Flow Statement: this statement acts as a summary of your cash (and cash equivalents) flowing in and out of your company. Basically, it tells the story of your company’s cash position, or it’s ability to generate profits, pay debts, and fund ongoing projects.
- Complete Notes and Disclosures: using the relevant American Institute of Certified Public Accounts (AICPA) disclosure checklist, your CPA will provide this report which dives further into a contractor’s particular situation. This may require audits, reviews, and compilations to complete.
- Work Schedules: work schedules provide insight into your day-to-day operations. They help establish the feasibility of your project and showcase your ability to lead.
If you submit business financials to a surety and any of the above information is missing, it could affect your ability to obtain a performance bond. During the review process, your business financials should illustrate that your company has working capital, equity, and cash flow. While the desirable thresholds for these figures will vary based on the size and complexity of the proposed project, an Asheville contractor attorney can help ensure that you aren’t missing any information before your submit your financial statements.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.