Episode 3: The 411 on Bonds & Surety
with Drew Addison
INTRO: This is Karalynn Cromeens, and welcome to the Quit Getting Screwed podcast, where we talk about everything related to contractors, construction, and information to help you run better businesses. The transcript of Episode 3, “The 411 on Bonds & Surety,” follows.
Karalynn: Hey guys, and welcome to the Quit Getting Screwed podcast. Today, I have Drew Addison of IBTX, and we’re going to talk about everything bonds. As in surety bonds for your projects that are required on public works and the like. How are you doing today, Drew?
Drew: I’m doing well. Thank you for having me.
Karalynn: Thank you for being here. Drew is a place where you can get a bond, and all his information will be in the info on the show notes. So, if you have any questions or anything like that, just make sure to look down there and find his contact information. So, before we get into all things bond and legal-related, Drew, tell me about yourself. Where are you originally from?
Drew: So, I grew up in Corpus Christi, actually, and you can actually see some guitars behind me. I grew up in a small part of Corpus Christi called Flower Bluff. After graduating high school, I started into college pretty immediately at Delmar College and then dropped out not too long after that to become a Rockstar. So, I did that for about ten years. I got to tour around the country to do some really cool things, and then kind of bounced around, lived in Houston, lived in Austin. I kind of did that thing and then got engaged and moved to San Antonio. And she got me on the right track, so I went back and finished my degree at UTSA. Funny enough, I ended up starting to work with IBTX when I first moved to San Antonio and my fiancé at the time said that there was a job board by UTSA. So, I checked it out to see if there were any jobs on there, and IBTX was on there. I shot my resume over to them, and this was in 2012, and they hired me just doing data entry and started there and had been with IBTX ever since.
Karalynn: And now you’re, what, the vice president of Surety?
Drew: Yeah. Vice-president of Surety. So, I bounced around within the organization a little bit. So, I started at data processing, a very basic entry-level job, and then moved over to a support account manager on the PNC side. I did some logistics on our risk management. We do safety and HR services as well, so I did a lot of logistics and scheduling there, and then a position came up in the surety department, and I jumped on it. And I fell in love with it. I mean, it’s such a small niche industry. Well, I feel pretty fortunate enough that, you know, jumping into an industry that’s so small. Not a whole lot of people know what it is. I mean, it’s not like something that, you know, wherever you’re sitting in your finance class, your professor says you should go into surety bonds. Anytime I tell somebody, “I work in surety bonds,” they’re like, “Oh, so when I get arrested, you can bail me out of jail!” It’s like, no, no, no, no, no. Don’t call me, call your lawyer.
Karalynn: I love UTSA. They have so many great programs, especially for entrepreneurs, and free resources that, I mean, it really is great. I’ve done a couple of talks there and workshops. So, did you ever have any background in construction?
Drew: So actually, when I lived in Houston, I worked as a roofing contractor. So, I worked throughout the city. I did the majority of my work in The Woodlands. After Hurricane Ike rolled through, I was one of those roofers going around, helping people with their insurance claims and getting their roofs bought and replaced. So, I was running around, doing door-to-door sales pretty much, and going through, lining up projects that way. I’ll never forget the experience of being on top of those roofs. It was probably about a, like a 6- or 7- 12 slope. It was pretty intense, probably three or four stories off the ground in the middle of July, and it’s 120-something degrees on the roof. I did that for a little while, but as far as any heavy construction, most of my stuff has been in residential. I guess kind of what you’d call a YouTube contractor, around my house anyway.
Karalynn: I think any good husband is, right? At least, in my experience.
Drew: Right, yeah! Exactly.
Karalynn: But, I mean, there’s a different perspective; I think people who have worked in construction—whether it’s roofing or whatever it is—as opposed to most lawyers that have never worked in construction, have a different perspective. And I’m sure it’s the same in the surety world. Like, they’re just selling insurance, whereas you know what it’s like for the guy on the roof. And so that being said, if somebody is required to get a bond and have no idea what it is, what would you explain to them? What is a bond, and how does it work?
Drew: Yeah. So, I mean, there’s a lot of information, and I’ve sat through countless surety bond 101 lunch and learns, enough to know that they all say the exact same thing. So, I mean, I can go into the three Cs spiel and all that good stuff, but the main point of this is that there are different points of surety. You know, what I work with day in day out is on the contract surety side. And that is with the construction contracts, right? We’re the broker, so we’re the middleman between the contractors and the surety company. And so I think it’s really important for people or contractors to realize. I try to clear this up as quickly as I can when I begin working with contractors, that anytime that you come to me looking for a bond or if a bond is required for you to do work, that, we’re not procreating a coverage for you. That bond is being required by the owner or the general contractor you’re doing work for, and they’re doing that to protect themselves, not you. My job is to pre-qualify the contractors that have that bond requirement from a financial capacity level, you know, by their ability to perform the work. And we can break it down into the different types of underwriting, but the main key is that it’s basically performance and finance security protection for the owner or the general contractor go ahead.
Karalynn: And the bond is not insurance.
Karalynn: So, if somebody tries to file a claim on your bond, it’s not going to just be paid, and you’ll never hear about it again. Right?
Drew: Yeah, the last thing that you want is a default. And, whenever you step into the surety bonding side of work, it is a big step. There are many risks that these contractors are taking on, and I think that, in our industry, we haven’t done a great job explaining what kind of contract they’re entering when it comes to the surety bonded work. In Texas, we are a homestead state, so typically, whenever I work with a contractor, we find a program to place them with whatever surety company they fit with. The next step is the general indemnification agreement, and it’s extremely important that contractors raid through their GIA, so they understand what risk they’re taking on. Because I believe, through the countless amount of contractors I’ve spoken to that have worked with other agencies and whatnot, it hasn’t really been explained to them what exactly it is that they’re signing. They don’t understand that the general indemnification is your contract with the surety company, basically stating if you default, here’s what’s going to happen. Right?
And it’s a reality check because let’s say worst-case scenario, there’s a default. And the only way to satisfy this default is for the surety company to step in and pay for the job to get completed. Well, if you, as the contractor, sign that personal identification agreement, the surety company is going to come back. It is not an “if.” They are going to come back and get that money back from you. Now, they’re going to start with your company financials first, but then you’ve also signed personally. So, if you do not have the assets within your company, they can actually go after you personally. Now, as I mentioned, Texas is a homestead state, so your house and 401k are protected because of the law. But everything else is on the table.
It is very much; there’s a lot of skin in the game. So, you know, I think it’s important for contractors to realize that whenever you jump into this side of the work, you fully understand what you’re taking on and know that no surety company wants to go after you personally. That’s the last thing any surety company wants to do, but you know, they must have that lever in place for the cases they don’t have a way to pay for it. So, the underwriting performed before you go into this work, they do it in a very in-depth financial underwriting.
Karalynn: Which that was my question. If I was going to come to you as a contractor who needed a bond, what would you need from me?
Drew: Yeah, so there are different levels of programs. So, assuming that, we prefer to have at least three years of job experience, or at least a company being alive for at least three years, so we have some financials to track. Right? And we can start with house financials, a balance sheet income statement, work on hands, ARs, and AP agings. All that is important, but before you do any of that, I would strongly suggest going ahead, do your due diligence, and look for a good construction CPA who understands how to help you do your internal financials and help explain it. I would say a lot of what I do day in and day out is helping contractors understand the percentage of completion accounting, because that is the accounting basis on which construction is done. And nine times out of 10, when I get the financials in, it is not percentage of completion accounting. So, find a good construction CPA if you don’t have time to do it, which is again about nine-tenths of my job, everything that was needed like yesterday. Submit your in-house financials. At IBTX, we do internal underwriting ourselves. So, we can show you exactly what your financials are saying, what you actually qualify for, and what a game plan is moving forward. Right? And then, if you need connections, if you need to find a good construction CPA or a suitable construction lender, or to set up your line of credit with the bank, we can facilitate all that as well. But it starts with at least three years of fiscal year-end financials and all the information you could submit on your company. Websites are great and all, but what really gets them on the capacity side is getting some references that the surety companies can tap into or can give a call on your largest projects, which is very important.
Next is going to be your personal financial statement, because again, you’re personally indemnifying, so they want to take a look at your personal financials. They will break everything out there. You know, there’s contractor questionnaires, uh, things like that. But what I would suggest is to get the last three fiscal years of financials and your personal financials in order so we can at least start there and help you build a file.
Karalynn: So, on a regular basis, probably most of your clients, it takes them a while to get all that ready. So, once they give it to you, how long does that approval process normally take?
Drew: Again, a lot of what I do when a new client comes over, it’s normally in a hurry, so bonds are needed, probably like yesterday. I would strongly suggest that to any contractors that are listening to try to give us at least a week, if not two, to work through it, especially in order to help you negotiate the right deal and get you placed with the right surety because I don’t want to do anything in haste. A lot of times, when our back is up against the walls, the options may be limited, and we want to give you the best shot possible. We want to be able to understand exactly what it is that we’re submitting. I would want at least a week or two to work on you, but I have gotten bonds executed on the same day. So, it could be turned around relatively quickly.
Karalynn: The rule is like, if you want to start public works or you’re thinking about getting into something that requires the bond, you know, let’s start early. Because, I mean, it’s better to have a relationship with you and not need it than not to have one at all. Right?
Drew: Right. Yeah. I mean, the relationship is key. And again, that goes back to the three Cs of surety, and one of the Cs is Character. And underwriting the financials is a black and white side. Still, unlike most other financial institutions, in underwriting on surety, there is a significant amount of a gray area underwritten. Right? So, you have your financials that are there, so that’s, that’s Capital. Then you have your Capacity, which is measuring whether you have done projects of this size before. Are you capable of handling a project that’s maybe a little bit larger than what you’ve done before? We want to take a look at all your internal processes and see how they jive. And then there’s the third C, which is Character. Character is You personally, like, what is your personality like? Do you fly off the handle, or are you kind of a loose cannon? Are you calm, cool, and collected? All of that is considered. So, whenever you’re firing off those emails with all the exclamation points in all caps, you need to make sure that all of that is being taken into consideration at all times. It’s really important.
Karalynn: It’s like an interview, and they’re the scope.
Drew: Exactly. Exactly. So, you know, I’d mentioned that we do the internal underwriting. So, over the last couple of years, I developed an internal underwriting system to mimic what most of the surety companies are looking at as far as it pertains to the underwriting process itself. And then, whenever I place you with a surety company, I can adjust how we’re underwriting to be a little bit tighter to what the actual underwriter is doing. And that mainly falls on the current assets listed there, and that’s a whole other discussion. But I feel like there’s been this huge disconnect of communication between the underwriters and the contractors where the contractor is coming in and saying, you know, I want to get this, I need to get this bond approved, or I’ve got this project. I need a bond.
And then chances are if it gets declined, it’s not explained well as to why it was declined. That said, when it comes to requesting your first bonds, it’s crucial that you get in touch with a good agent that can help you outline what size project you’d be approved for. Because if you come to me and the financials are not quite there yet, or your largest project was maybe a hundred thousand dollars, but you’re coming to me, asking for a $2 million project, it’s probably not going to happen the first go-round. Right. So, you must understand precisely what your financials are saying, so we can help you do that. But then, at the same time, I want to make sure that we place you with the right underwriter. I think personality is very important. Just like the underwriter takes your personality as a business owner, I take their personality as an underwriter when matching you with the right one. So that’s kind of our process in a nutshell.
Karalynn: So, how involved are you? Like, say you have a client that got a bond for the first time, and someone files a claim. What should they do? Can they call you? What’s the process?
Drew: Yeah, 100%. And that’s really, really important. I mean, typically, we can kind of see it come in. Assuming when we deal with the underwriting, the work on hands is also underwritten. So, we can kind of see potential issues before they kind of come to fruition. And then, at the same time, we’re doing those quarterly too, right? So, every three months, we want to get an update. We want to see where everything is at. We want to make sure that profit margins are sticking to where they’re at, that there’s no bleeding anywhere. And then, we want to talk through what the work on hand is and stay on top of the bonded projects. Now, if we do see a problem coming, the sooner you let me know, the sooner we can create a plan. And let’s say in this case, especially as it pertains to your book and what you suggest; Everything is on a timeline when it comes to, like, if I bought in a subcontractor and he’s not getting paid, we’ll see that on the financials. On the ARS, we’re going to be seeing them not being paid, and we want to be able to help them rectify that. So what we want to do is make sure that, number one, where are they at on the timeline for submitting a claim? And then we do have some resources when it comes to the actual notice itself. But suppose it looks like it’s going to be even a remote amount sticky. In that case, we want to get them in contact with a good construction attorney, which is one of the primary resources that every contractor should have is a skilled construction attorney.
Karalynn: Along with a good surety. And so, you’re doing all these checks like quarterly. So, you’re helping them run a better business. You’re just not giving them a bond.
Drew: Right? Yeah. So that’s kind of what the underwriting report that we generate for our clients does. Right? It’s a very sound, solid cash flow analysis. So, money in, money out. Is the contract or bleeding anywhere. Is there anything that we can help them from a process standpoint to help them retain as much money as they can because working capital is critical? For those that don’t know what working capital is, that’s your current assets minus current liabilities. But when it comes to surety, we take a look at your current assets, and we come to an agreement between myself and the underwriter as to what current assets are genuinely current. And then, at that point, once we come to that agreement, they do the calculation, current assets minus current liabilities. I like to call it a Current Asset Ratio Analysis. So basically, it gives you your analyzed working capital number.
We want to help the contractors more from a business development standpoint because, you know, if you need to get your bonds on time and everything else like that, for me, that’s just par for the course. I mean, every agent should be able to do that for you. And, you know, I have arguably the best team in Texas where every one of my team members has over 20 years experience in surety. So, when it comes to the service side of things, I would venture to say again, we’re probably one of the best in Texas. But from a business development standpoint, that’s kind of where we shine—that added value of coming in and showing the contractors we want to partner in this. Like, we want you to do better, and we want to create opportunities to help your business grow.
We want you to grow safe because, you know, a lot of times, and we see it quite a bit, we’ve heard the horror stories of companies growing too fast. And, you know, there are checks and balances for that too, in ensuring that everything is handled safely. And at the same time, when it comes to managing the projects themselves, you know, assuming that something does come down the line, when a claim does happen on a bond, and a surety company is notified, which they always will be. It’s important that we have a sit-down discussion with the surety company and say, here’s what the game plan is because they don’t want to pay the claim just like anybody else. Right. So, you know, we want to come up with a game plan together and open up that line of communication. And that’s really what our forte is, is creating a line of communication for becoming a business partner with our clients and helping them grow their business.
Karalynn: You know, I’ve dealt with bond companies and sureties of my clients, and obviously, by the time I’m there, it’s not a good situation, but I have never seen anything like that. Usually, I’ve gone to mediation with the bond company, and it’s my client and me in one room, the general contractor in the other room. The bond company over in another room, trying to figure out what he’s going to do and what liability my client ends up having, even if it’s right, wrong, or indifferent. So that’s something amazing that I’ve never heard of. Just a quick question I didn’t ask you before, do you do lien indemnity bonds, too, or just surety bonds? Or does your company do like if somebody needed to bond around a lien?
Drew: Yeah. Yeah. So, we do offer all those. So, even when it comes to your municipality bonds, you know, right of way bonds, over-axle bonds, things like that, we actually have an excellent online system for a lot of those smaller license department bonds. You go to our website and find the one that you’re looking for, general contractor bonds, things like that. You can get your bond automatically in a matter of five minutes. Now, when it comes to the lien bonds, we do have markets for that as well. And what is vital for lien bonds and establishing a relationship with the surety company is that you, let’s say there’s a lien that’s filed and the company’s owner saying, you, as the contractor, need to post a bond around this lien, and you don’t have a relationship with the surety company. We can still get you a lien bond, but more often than not, the surety company is going to ask for a hundred percent collateral on that deal.
Right. And when it comes to these bonds, it’s not just a hundred percent of the claim amount. It’s going to be for one and a half to two times the claim amount, right? So that can be a significant amount of money that you’re going to have to lock up for however long it takes to go through litigation. But you know, if you do have a contract surety relationship with a surety company, sometimes we can talk through working with them about removing the requirement for collateral, which kind of makes that process a whole lot easier. Lien bonds aren’t the easiest to write, but we do have markets for that.
Karalynn: And then another thing, you know. Having a relationship with you would be so beneficial because you can’t just show up and say, I need a lien bond. That’s not how it works unless you just want to post all the cash, which you might still have to do anyway, especially if you don’t have that relationship. I just see how much easier it is for my clients who have relationships with sureties. They say they need a bond, and like two days later, can get one because they already have that relationship established. It’s so much easier. Another thing I want to ask you, you are also the host of the Ahead of the Game podcast. And I want to kind of ask you, who’s your audience, and where does everybody find that?
Drew: Yeah. So, the Ahead of the Game Construction Podcast is done by myself and a colleague of mine, Warren Spiwak, out of our Houston office. So, Warren is a hired gun by the oil and gas global network in Houston, right? So, he had some experience in the podcast game and still does. He still works for OGGN, but he was like, you know, we should put together a podcast. And I was like, you know what, out of all the conversations that I’ve had with contractors, sometimes I wish that we could record those conversations and be able to like share them with the construction industry. There are so many great stories about how companies started and hit those roadblocks, and those hurdles, and how they were able to pivot and move around and navigate around those circumstances that I want to share.
And so, I told Warren, you know what, I’ve wanted to do this. And we started the Ahead of the Game Construction podcast to interview construction companies and go through their story and let them be heard. I mean, many times, these successful construction companies, a lot of people just see their big billboards on the side of the road next to their job sites. And you know, some of these smaller contractors are like, “man, you know, it must be nice to be able to have those big jobs like that.” Well, we want to tell the stories of those general contractors that are doing very well and have been extremely successful. Then we have them talk through their experience when they were a small contractor themselves when they were that guy who started their company in their kitchen and had two trucks and started their company.
And whenever we get to these conversations with the contractors, I like to kind of dive into the challenging circumstances that they run into. And, interestingly enough, you’ll find so many correlating stories of a lot of the same hurdles that these guys were hitting, which are going to be a lot of the same hurdles that our demographic of listeners are hitting right now. And so it’s a perspective for them to kind of sit back and listen to successful contractors that have been through it and lived to tell about it. They really provide their end of the story. You can find the podcast; we’re on LinkedIn. You can look up Ahead of the Game Construction Podcast; we’re on Facebook, we’re on Instagram. And then aheadofthegamepodcast.com is the website. You can get in there and check out some of the episodes that we have, including the last one we just published was with you, Karalynn, which is such a great episode. I love it. But yeah. We’re on all the socials, so hit us up.
Karalynn: Yeah, I agree. There’s just so much information that can lessen somebody’s pain points based on your own experience, and just getting that information out there or finding ways to help them, you know?
Drew: Hundred percent.
Karalynn: So, they don’t have to go through the same thing as you. Don’t lose time, lose money, and realize that all of those big companies did start someplace small. You know, they have a lot in common.
Drew: Yeah. So many great stories.
Karalynn: We’ll put your info in the bio, but what’s your website and your information if people need bonds, need to contact you, need help in the surety world? How can they get ahold of you?
Drew: Agency has IB as in boy, TX, IBTX. So www.ib-tx.com. Yeah. We have all the information on there. We’re a full-service agency. We do PNC, employee benefits, HR, and safety services. We do training, HR, and safety trainings. Obviously, we do surety. We’re working out some great new coverages. I’ve spent the last year expanding on the surety department to include project loss insurance, which is basically insurance for your backlog. The subcontractor default insurance, which used to be Subguard, was a Liberty Mutual tool but has been expanded since then. We are working on parametric insurance coverage, so weather delay coverage. We have a couple of markets that we’re working with to create the coverage, but we do have somebody internally. It’s a really cool service to do a weather forecast over X amount of time of a contract to see if you have enough adverse weather days in your contract, but we have a little bit of everything. So yeah, look us up on ib-tx.com. You can find me on LinkedIn, Andrew “Drew” Addison. Just search me and hit me up, and I’ll be happy to help answer any questions if you’re interested. Even at an underwriting report, just to kind of see where you’re at. I’m happy to do that for you at no cost. Just reach out, let me know what you’re interested in. I’ll be happy to help you.
Karalynn: Awesome. Well, I appreciate your time so much. Thank you so much for being here. And I know you’ve answered a lot of my questions, so I’m sure you’ve answered a lot of our listener’s questions too. I’m sure we’ll have you on again to talk about something just as exciting. Thank you, Drew.
Drew: Yeah, I appreciate it. And reach out to us! I’ll be happy to help. Thanks.
OUTRO: Thank you for listening to this episode of the Quit Getting Screwed podcast. I hope you found it helpful. If you like what you hear, please like us and follow our podcast. If you want further information about you can find us at subcontractorinstitute.com. We’re also on Facebook, LinkedIn, and Instagram, and the book is available on Amazon. Come back again two weeks from now for a new episode. Thank you.
Connect with Drew:
IBTX – Surety https://ib-tx.com/insurance-solutions/surety/