In this week’s episode, Stephen, Wade, and Rob cover one of the three C’s of getting bonds: Character.
We talk about how it’s measured by bond underwriters, how your agent can help you put your best foot forward, and how to build a bond team of deeply trusted allies, rather than fair-weather friends.
Make sure you tune in next week for a very special guest!
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Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com
Rob Williams: [00:00:00]
Welcome to the Contractor Success Forum! Today, we’re discussing the second of the three C’s of bond underwriting, and that is character; the other two being cash and capacity. So at the Contractor Success Forum, we discuss financial strategies for running a more profitable, successful construction business. Check out our show notes below and our show page, ContractorSuccessForum.Com. Subscribe and learn how we can work with you. Share the show with your friends.
And now our three long-term construction industry professionals are Wade Carpenter with Carpenter and Company CPAs, helping contractors nationwide to become permanently profitable for over 30 years. And that is CarpenterCPAs.com. And Stephen Brown, a construction bond agent with McDaniel-Whitley Bonding and Insurance Agency with over 30 years of experience underwriting and placing bonds for contractors. That’s MCWins.Com. And I’m Rob Williams, your profit strategist with IronGate Entrepreneurial Support Systems, driving profit in contractors’ businesses with decades of experience as a contractor, as well as many other aspects of the construction industry.
So, today our discussion is Character. It has been amazing talking to you about that, Stephen, and I always knew there were the three Cs, but until we really started talking about this, I didn’t realize how important that was to my bonds and the other people. And what is that first big part of character that you look at?
Stephen Brown: [00:01:54] Well, the three C’s: cash; you’ve got the cash to finance the projects, character; you do what you say you’re going to do. And then capacity; you have the capacity to do the job you want to bid.
And so how does a bonding company measure your character and what does that mean? I can give you an example of character in a construction company. One of my customers bid a job putting a fiber optic cable across huge long stretch of the state of Arkansas. This was probably close to 30 years ago and they bid it at three and a half million dollars.
The job ended up costing $9 million complete. They ended up putting that cable through swamps and their machinery disappeared, and it rained- everything that could possibly go wrong, went wrong. But that family company, they dug deep and they used every one of their assets and they finished the job when people were telling them they should file bankruptcy. Well, that’s character. Character is doing what you say you’re going to do.
From a bonding standpoint, a surety company looks at the presentation that we make as bond agents. That’s the first impression. They say you only have one good chance to make the good first impression. This is the package that we put together to send on your behalf to get a surety company interested in doing your bonds. And that package is a contractor’s questionnaire: Tell us about your background, jobs you’ve done, and financial statements. Wade, why would a financial statement be used to determine someone’s character?
Wade Carpenter: [00:03:26] Well, I know there’s a lot of things that you can see off a financial statement that- from year to year, seeing job fades, things will go wrong on a job. It just happens. But if you consistently are showing a rosier picture and then it comes in later, then, one of the things we do is show the fade in our notes to a financial statement. And if you see that they are consistently not doing what they, you know, are coming into the profit, that can definitely affect the bond ability. And I think we’ve all seen negative things. I could tell you a story about, they had the cash and the capacity, but people refuse to work with them. So I’ve definitely seen it.
Stephen Brown: [00:04:10] What happened in that situation, Wade?
Wade Carpenter: [00:04:12] Basically I had an underground utility contractor about 15 years ago. Father had actually built a really good company. He had about $6 million aggregate line and, healthy balance sheet, and father got where he couldn’t work. Son came in and he took over the company and he was very competent. But you know, He had got a reputation for not paying his subs and material suppliers and ended up getting in lawsuits. I hate to go into a lot of detail, but the agent did his auto policy, the worker’s comp policy, he had trouble collecting on those things. The guy showed up with a couple of DUIs, they saw that on there.
So long story short, he had nothing set up on his bond line. He got a $1.5 million municipal contract and they refused to bond it. He still had the crew to do it, he had the healthy balance sheet to do it, but the bond agent walked away and after that, I don’t know if bond agents talk to each other, but…
Stephen Brown: [00:05:10] They sure do.
Wade Carpenter: [00:05:11] …he had trouble getting that bond. And he eventually got one, but he had to go to the, one of the lower end, very expensive agents to get it done. And so I hate to be negative about it, but, I’ve seen it.
Stephen Brown: [00:05:24] Well, when you don’t know someone and all you see is a paper presentation that paints the picture of you and your company, the financial statement shows a list of the jobs in progress and the jobs you’d completed in the last fiscal year, and shows whether you made money on it. That’s just something that verifies you do what you say you’re going to do. You complete jobs, that’s character.
Rob Williams: [00:05:47] I guess I did understand that you have to complete your jobs. So I knew that. I didn’t really think about how that fell under character. I didn’t really know what that meant when we talked about that, but we all knew if you don’t complete a job, that’s just like something that goes on your credit rating, I guess, like not paying a bill. But it’s interesting that is what the character means.
And then that second one, what you’re kind of saying there, Wade is reputation. I think that reputation is that second part that didn’t really sink in to me. I’m glad we paid our bills and did the thing, so that’s good for them to know.
And I think that third thing that you’re talking about is that relationship. I certainly didn’t realize that our lunches were part of our underwriting process, getting to know the people. Stephen, talk about that a little bit.
Wade Carpenter: [00:06:38] I mean, can I talk about it ?
Rob Williams: [00:06:39] Yeah. Go ahead, Wade, even better.
Wade Carpenter: [00:06:41] I’ve definitely experienced over the years when the contractor can sit down and talk with the guy and they get along. And as a CPA, you have a relationship with an underwriter. We can talk about and be proactive on the financial statements. What do we need to do? Do we need to pump up the cash before the end of the year? Those kinds of things.
Stephen Brown: [00:07:01] Sure. That lunch is just getting to know you, it’s like a first date, Rob, just getting to know you. It’s something that your agent does all the time and your underwriter does all the time, if they’re a good underwriter.
You are more than just your paperwork submitted. And I guess that was the point of this podcast is saying, okay, you may have character, you may have capacity to do the work or believe you have the capacity, but you may not have the cash. And that’s what everybody thinks, that sinks us getting the bond. Well, getting the cash and keeping the cash is all about what you teach at Profit First. It’s about why you have to put some carts before the horse before you get a bond. And bonding is just an extension of successfully run construction company.
So we’re all about finance. We’re all about those tips and tricks, and from a character standpoint, it’s important, not only bonding company, but it’s more importantly to you and your employees. People want to work for someone they like and trust. They want to have ownership of your vision. And so that’s pretty much all I have to say about that.
Rob Williams: [00:08:10] Yeah. I’m sitting here thinking about that first time that you and I 15, 20 years ago, Stephen, went out to lunch. I still remember that it was a Mexican restaurant and I probably should have ordered something that wasn’t quite so messy. If I’d realized that my character was…
Stephen Brown: [00:08:25] It wasn’t. I already knew you Rob. It was no problem, I can tell you a hundred horror stories of contractors you just couldn’t help being themselves. And it came through and it cost them bonds. Okay. Maybe not hundreds, but there’s a few.
Back in the old days, I was complaining about one of my customers to my uncle at the agency. And I said, I don’t know why he has to be such an asshole. And my uncle said, let me tell you something, son, if it wasn’t for assholes, we wouldn’t be able to open our doors in the morning. And I said, well, that’s where I disagree. I’m not spending the rest of my life working with assholes. And he said, well, enjoy being broke.
And I can just say 30 years later that he was wrong. I’ve got great customers and great friends I enjoy working with. And bonding underwriters like to be part of the team. We talked about that. Let us come visit your job sites. Tell us what’s going on. Let us know that we’re important and you’d be absolutely amazed at some of the good advice you’ll get.
Rob Williams: [00:09:25] You know it’s funny you say that. I guess that’s why you fit in with Wade and I in the Profit First thing. Because that’s Mike’s first rule and Ron, who’ve been on these episodes surrounding this, is No Assholes Allowed. That’s the first rule. So that’s the interview. It’s kind of, I guess like you guys. So no assholes are allowed.
So now we’re definitely going to get the E for explicit on this episode. So we’re on the cutting edge here. You know, tell us, I love your, your terminology. You told the story, but tell us, what is a Phoenix Contractor?
Stephen Brown: [00:09:56] Oh, Phoenix contractors are the best. They’re the ones like that story I told at the beginning of the podcast about the contractor digging deep to finish the job. It was such a high profile job that the whole family’s name was on the line. And they did what they had to do. So they’re a contractor that literally has risen from the ashes, like a Phoenix bird. Phoenix contractors are contractors who are absolutely the best. They’ve been through fire, and they have shown that they’ve had character, and they’ve done what needed to be done to move up.
And I can just tell you that there’s always some way to work around your financial nightmares. There’s always options beside bankruptcy; there, there just are. Wade could tell you lots of stories about it, but a bankruptcy is the kiss of death for a bond. It just is. I’m sorry. And I’m not in that situation. I don’t know what they’re up against and also there’s other circumstances we don’t know. I’m not necessarily saying bankruptcy is bad character. But when you’ve gone through fire and you’ve made it out of it and you’ve got that story to tell and people know it and your employees know it, they know what you’re made of.
Rob Williams: [00:11:10] Hm, that’s so interesting because I remember back in oh seven, oh eight, oh nine when things got really tough, I really thought that was a ding on my bonding. I mean, I guess as I was running out of cash, I’m sure the current, it was probably not a positive, but, I look back at that as a negative on mine, where maybe that was a positive. The fact that I did sink so low cash flow, not receiving, my receivables were one in two years, if I ever got them, and our cash got bad and things got slow. And I was just thinking about that as being a major hit on my bonding and we didn’t go under, I mean, we actually ended up deciding to close later, but we didn’t financially-
Stephen Brown: [00:11:54] Well, bonding companies have to have character, too. I can tell you stories about bonding companies that have stuck with contractors because they had character and they had a plan to work out of their problems. And so they kept the bonds coming when they needed that cash flow. We worked very hard to have our best relationships with our bonding companies that have character and there are a lot of them and they do the right thing. And they’re great allies to have. The bonding company’s an insurance company and an incredible amount of assets, a legal department. When things go south, you’d be amazed at the resources that you have.
Rob Williams: [00:12:32] Yeah, that’s great. That’s amazing. Wade think we’ve had a pretty good show here today.
Wade Carpenter: [00:12:38] Yeah. I mean, I think the lesson for today is be nice to Stephen. Um, Honestly.
Rob Williams: [00:12:45] Use a fork to lunch. If you go with your bonding partner don’t don’t
Stephen Brown: [00:12:47] I just try to put the lipstick on and and puff you up a little bit before we go meet the meet the
Rob Williams: [00:12:53] So you’re calling me the pig with lipstick. Yeah.
Wade Carpenter: [00:12:56] No, I mean, honestly though that if I’ve seen when the agent likes you and they will go to bat with the underwriters, I’ve seen it many times and I know Stephen does it for his clients all the time. And so be nice to Stephen there.
Rob Williams: [00:13:12] All right, Stephen, you want to go to lunch?
All right. Well, that’s enough for today. So this has been great show. And I’m really glad we talked about this because until we started talking about this, I wasn’t aware of really what character meant other than maybe your credit rating’s good, or I guess, finishing the job. So this has been really interesting to me and not just talking about the negative parts, I guess it was character is a lack of having those negatives, but the positive aspects is really interesting.
So that is us for today. We have Stephen Brown McDaniel-Whitley bonding and insurance agency. He is MCWins.com, and look at our show notes for all this stuff, too. It’s down there, I think- depends on where you’re looking at it. You’re probably listening to this. You don’t know where I’m pointing. So swipe up, you can see that those notes down below.
We have Wade Carpenter with CarpenterCPAs.com. And I am Rob Williams at IronGateESS.com. So get in touch with us and follow us. If you want to get notices on this, that’s the amazing thing you can actually go in there and we have this landing page thing. You can put your email in there, or your phone number and you’ll actually get texts and great messages so you won’t miss a word of all this valuable information. So you guys tune in and wait to see our amazing guests that we’ve got on some of these shows. And we’ll see you at the next episode. Thanks a lot.