Key Ratio's Underwriters and Sureties Track

Cash greater than 5% of annual revenue (non-borrowed):Contractors should maintain an available bank line of credit of at 'east 5% of annual revenues, in addition, cash as reported on the contractor's annual financial statements must exceed overbillings, with any differences maintained or tracked through accounts receivable.

Tangibility equity greater than 15%  of annual revenue-Stated equity as reported on a  contractor's financial statements is adjusted to remove goodwill,  related-party receivables, prepaid expenses, and off-balance sheet tax  liabilities, including subsequent distributions to the owners for taxes and  deferred tax liabilities which represents tangible equity

Tangible working capital of at  least 10% of annual revenues (5% minimum)-Stated working capital as reported  on the contractor's financial statements is adjusted to remove prepaid expenses,  underbillings, current pass-through tax distributions, non-turning  inventories and old receivables (over 90 days outstanding) which represents  tangible working capital. tangible working capital excludes a" 13 month"  line of credit that is secured b short term assets, which is a planning tool  often used by contractors to manage working capital presentation

Low debt ratios:Low debt ratios include maintaining an interest-bearing debt to tangible equity of less than 50%. This is a baseline that varies within certain trades of a contractors; for example,    heavy highway or equipment-intensive contractors usually carry a higher    interest-bearing debt ratio around 80%. Additionally, total liabilities to    equity ratios are recommended to less than a 3 to 1 ratio.

No significant underbillings (Costs in excess of earnings):Underbillings is the highest    indication of risk on a contractor's balance sheet Underbillings usually    indicates poor billing practices and often represents a loss or fade that    is realized in subsequent periods. Contracts should analyze correlation    between underbilled jobs and subsequent profit fades.

Overbillings(billings in excess of  costs) should exceed 2% of annual revenue or uncompleted backlog (if less):Best of class healthy contractors  know their costs and how to properly estimate a job, including how much of  the total estimated costs represent strict budgets for each trade, general  conditions, potential cost savings and contingencies. These contractors  usually have a higher gross margin recognized on completed contracts than  estimated gross margins on uncompleted contracts, under- promising and over-delivering  on contract estimates. A contract should analyze 5-year gross profit trend by  type and geography to identify trends that may require additional focus and  review.

Profit fade or gain less than 10%  of original gross profit percentage:Best of class healthy contractors  know their costs and how to properly estimate a job, including how much of  the total estimated costs represent strict budgets for each trade, general  conditions, potential cost savings and contingencies. These contractors  usually have a higher gross margin recognized on completed contracts than  estimated gross margins on uncompleted contracts, under- promising and  over-delivering on contract estimates. A contract should analyze 5-year gross  profit trend by type and geography to identify trends that may require  additional focus and review.

Use of profit estimates less than  historical profit until job is 50% complete:Some contractors take conservative  approaches, using zero profit estimates for new jobs until 10% complete, a  common planning tool to manage tax and GAAP financial statement reporting.  Increased profits over historical profit estimates based on completed contracts  is rare in the construction industry. A contractor should maintain a contract  schedule sorted by type of work, customer, location, project manager as each  could impact the estimated gross profit estimates.

Good cash flow:Contractor manages cash flow on  projects by front end loading cash (permanent job borrow) which is a common  practice of overbilling to the owner on contracts. In addition, managing the  receivable collection period of less than 30 days (45-day max) and collection  of retainages on completed projects within 90 days are other common practices  that best of class healthy contractors use in maximizing cashflows.

Low fixed general and  administrative costs:Depending on the industry or trade  in which the contractor operated, G&A percentage of revenue should be  2-5%. Subcontractors usually use higher percentage than general contractors.  It is important that contractors properly identify indirect contract costs  and use full absorption job costing through labor burden rates to minimize  general and administrative costs and properly eliminate job costs.

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