Published April 16, 2024 . 4 mins read

Measuring project performance is crucial when a surety extends bond credit to a contractor. Open/Closed job work on hand becomes the “report card” not only for the contractor but also for anyone extending credit to them. The surety meticulously analyzes the contractor’s schedule of completed and uncompleted work to gain a better understanding of the contractor’s financial status and their ability to make accurate estimates on jobs.

The surety examines the amount of profit the contractor earned on completed and ongoing jobs. The profit on open jobs heavily depends on the contractor’s estimate of the final outcome. Profits on jobs nearing completion are more accurate than those in the early stages. Closed information provides a more reliable indication of cash assets than expected or estimated profit from unfinished work.

Surety underwriters assess past profit margins on jobs similar in size, type, and duration to the current work. If margins on previous jobs are lower than the original estimates for the current work in progress, the contractor needs to explain the optimistic forecast.

Regarding overbillings, the practice of front-loading is quite common. A red flag to underwriters is when a contractor who has experienced losses on overbilled jobs bids low on new work to create new overbillings to cover cash flow deficits in later stages of losing jobs. While sureties accept overbilling as long as the contractor keeps funds liquid and does not withdraw them to cover cash flow deficits.

Underbillings may be intended to offset earlier overbilling amounts or may indicate difficulties on the job. If a job is expected to lose money but the contractor hasn’t recognized it yet, the losses may first appear as underbillings. Causes of underbillings include a bust cost estimate or unapproved/disputed Change Orders, which would show up as underbillings.

Consistency and accuracy of work on hand from the start to finish of a job help determine how far a surety will consider extending or stretching bond programs for a contractor. The surety places significant emphasis on the fade analysis over the life of a project and overall differences from year to year. The fade analysis may identify meaningful patterns and/or material differences. More variability in gross profit per contract over time is viewed negatively in the surety industry since predicting future profitability becomes less likely.

Breaking down profit fade/loss analysis by project manager, estimator, and category of work often accounts for the fade. An inexperienced accounting department or fraud can also contribute to these issues.