How Surety Underwriters Really Think: Cash Flow, Risk & Smart Growth in Construction

Rishi Srivastava (00:41)
Today our guest is Jacob Studer from Travelers. Jacob, welcome.

Jacob Studer (00:47)
Thank you, Rishi.

Rishi Srivastava (00:49)
First section here is on your field experience to underwriting insight. You started your career actually in the field, framing, electrical work, even running your own small contracting businesses. How does that hands-on construction background influence the way you underwrite today?

Jacob Studer (01:11)
so I’ve always thought it just affects maybe my perspective. I, know you, I think you’ve talked to a couple of surety people already, you know, most people in this industry have like a finance or an accounting background, which is very valuable in its own right. but I’ve just always felt like my perspective is a little different. I, I appreciate the financial statement. It’s extremely important, you know, to evaluate the health of the company. Right. But.

I felt like I can have a little bit more of a holistic view and actually a stronger understanding of the other aspects of the business beyond just the financial statement.

Rishi Srivastava (01:45)
Yeah, actually understanding your end customers real business matters

Jacob Studer (01:50)
Yeah, I’ve always been glad because when we get bond requests, they’ll send over the contract, sometimes the plan sheets, and I’ve always thought, man, if I didn’t have the background I had, at least for me, the way I learned, I would feel lost trying to look through even just high level and understand a project. it’s always helped in that regard.

Rishi Srivastava (02:10)
For contractors listening, what is the single most important thing your surety underwriter wants to see and why does it matter so much?

Jacob Studer (02:20)
So.

I thought this was a good question that you put together. And when I thought about it, there’s three things that came to my mind. And the first one is just character. If you’re a terrible person, I’m sorry, I don’t wanna bond you. And that’s its own discussion, right? So just be a good person, be a moral person. That’s the number one, like just non-negotiable. And then the other two I thought of are operating margin and cashflow.

Cause you know, we’ll talk about this a little more later, but not every contractor has a perfect balance sheet. But there’s ways to work around that and to support and bond a contractor like that. And the key is positive cashflow and operating margin. those, those, know, if you have a contractor that has strong operating cashflow and a strong operating margin, then that can make them fairly bulletproof. So those are really important to me. And if those aren’t there, even if you do have a strong

profit center and you’re a profitable contractor. If you don’t have cash flow though, it’s going to be a problem. And as maybe some people have already talked about, we have contractors out there right now that are starving and struggling and it’s not because they’re not profitable. It’s just because the cash flow isn’t there.

Rishi Srivastava (03:27)
is a tough industry, know, it takes like 60 to 90 days get paid if you are a, contractor,

Jacob Studer (03:33)
Yeah, especially further down the chain you get. mean, I really feel bad for the guys that are a third or a fourth tier. I mean, you get that far down and the general’s gotta get paid by the owner, the first tier from the general. I mean, you get that far down and some of those guys are waiting so long to get paid that that’s tough. That’s really tough.

Rishi Srivastava (03:54)
Yeah. The next section is on surety underwriting fundamentals. When you look at a contractor for the first time, what tells you this is a company we can grow with?

Jacob Studer (04:07)
So I think there’s a few things to stick out. One is, know, I want them to be following a disciplined business plan and have like a strategic growth plan. And those sound like buzzwords when you hear like business plan, growth plan. ⁓ But you know, what I’ve seen and what we’ve seen is it actually really, it really does make a difference. The people that have written and defined, you know, here’s where we are, here’s where we want to be, here’s how we’re going to get there.

Rishi Srivastava (04:22)
Thank you.

Jacob Studer (04:35)
And I mean, that really makes a difference. And the most successful contractors I’ve worked with, that’s how they operate. Because that plays into, that helps you determine what you, not only what you are gonna do, but it helps you determine what you’re not going to do. And the contractors that I’ve seen that are the most profitable and successful, both of those are important. They know what they’re good at and they also know what they’re gonna say no to and turn down because they know that, you know.

For some people, the project you turn down is the best project you ever take, just by not taking it. So, just someone who’s following a well-thought-out strategic growth and business plan. Retention of earnings is a big one, because we’ve talked about construction is tough, especially on cash flow, and growth just eats cash. I mean, if you’re gonna grow, you have to have cash. There’s no way around it.

And so if someone comes to us and they say, hey, we want to grow. And then I look back at their last, let’s say three years of operations and I see all the earnings being stripped out every year, it’s harder. And it doesn’t mean we can’t do it, but it’s like, hey, let’s have a conversation. If this is really what you want to do, you’ve got to commit to reinvesting some of those earnings and having discipline in that way. And then just, think those other two things we talked about, just the cashflow and the margin.

that’s going to be really key. And if those few things are there and are in place for a contractor, then I think there’s a lot of potential.

Rishi Srivastava (06:00)
Yeah, not taking some of these bad projects is so important. You know, somebody asked Buddha what enlightenment is and Buddha responded in negative. It’s called via negativa. It’s so important not to do things.

Jacob Studer (06:14)
Yeah.

Well, you know, so one thing that’s interesting is so we’re I work for travelers. We’re the biggest surety in the country. So we have we have a lot of contractor clients. And one of the cool things about that is we have a lot of data. You know, the construction industry is highly privatized. There’s a small segment that are publicly traded. But other than that, it’s hard to get data right because they’re all just privately held.

But being as large as we are, that’s one of the interesting things is we can see a lot of information that most people don’t see. And so one of the things we’ve done with that is we’ve actually done studies, we’ve looked through historically at our losses. And what’s super interesting, Rishi, is over half of our contractors who ended up in claims on bonded projects, the ultimate problem was just one really, really bad project. And that’s part of why…

me and maybe other surety underwriters will say things like that is it might be like, it’s just one project, but we have a lot of data that shows that that one singular project can go bad enough that your company ends up out of business. And that’s why I say, hey, it’s just as important to turn down the wrong job as it is to take the right job.

Rishi Srivastava (07:30)
Can you break down the difference between surety underwriting, insurance underwriting and mortgage lending? What makes surety its own discipline?

Jacob Studer (07:42)
Yeah, so I always tell people, it’s a very niche industry, I work in insurity, so I usually don’t tell people I work in in surity, I just say, I’m an underwriter. And I kind of just leave it at that. And if they push any further, like, do you do mortgages? Do you do insurance? I’m like, no. And I personally, I could never, I would really struggle in those fields. And really the difference is, I mean, any of us that have bought a home,

Rishi Srivastava (07:52)
And

Jacob Studer (08:07)
like have experienced mortgage underwriting right, it’s very much a check the box approach. It’s hey, ask them this question, ask them this question. If it’s yes, checks the box. If it’s no, you don’t get to check the box and they don’t get the loan or they don’t get the one they want. And insurance is similar, right? So insurance rates are made by actuaries and those rates are set up so that they’re charging enough that they can pay for losses based on that assumed or estimated loss ratio.

and then they can pay their overhead and then the insurance company can make a little money afterward. And it’s again, it’s a very, here’s your insurance application, answer these questions, that’s gonna determine the rate, that’s gonna determine if we write you or not, and the underwriters don’t have a lot of autonomy. And that’s where I think we’re different and it’s a lot more fun for us is we have a lot of autonomy as surety underwriters to operate in the gray, where you’ve got a situation that’s not black and white.

and it could kind of go either way. We have the opportunity to look at it from all perspectives and there’s not necessarily a right or a wrong answer. And we just get to make a judgment call. And that’s what I think is fun for us as the underwriters. And that’s where I think as the contractor, it’s really important for you to be really thoughtful in your approach with your surety relationship because you really can get more out of it because not everything we do is based on a ratio.

or just a question that’s a yes or a no. There’s a lot of judgment and estimation that goes on that can’t be quantified.

Rishi Srivastava (09:41)
An AI cannot be a surety underwriter.

Jacob Studer (09:44)
Thankfully, no, least until that thing starts thinking for itself, which we’ll probably have other problems if that happens. But yeah, I would say we’re fairly safe because yeah, it’s not a job that can just be yes or no. So yeah, we have at least a little bit of protection for now.

Rishi Srivastava (09:48)
You

What trends are you seeing right now in the Shodi market? Capacity rates, claims activity or underwriting philosophy?

Jacob Studer (10:08)
So the surety industry, and you know this is similar to construction as a whole, it can be very up and down. And so we’ve had stretches of time over the last 50, 60 years where surety results have been amazing. And then there’s times it’s been an absolute bloodbath and companies are trying to leave the market. And just like the market in general, the last 10 years or so surety has been really, really good. Construction’s been doing amazing and so surety’s been doing amazing.

And so with that, we’ve had carriers who weren’t in the surety space who were just doing insurance and they’re like, Hey, that that looks pretty good. We want to get it on that. So you’ve got carriers entering the market who weren’t here before. And then all the existing carriers, say, Hey, we want more market share than we’ve historically had. so with that, there’s been just a lot of very aggressive, behavior. capacity is definitely at an all time high cause that’s just.

Rishi Srivastava (10:42)
Do do do.

Jacob Studer (11:01)
one way that some sureties are trying to compete is they’re saying, hey, if he’ll give you 30 million, I’ll give you 50 million. And sometimes that makes sense. And sometimes it’s, I would consider it very, very aggressive and almost, you know, speculative in nature. ⁓ then, you know, claims has been interesting because so with COVID, we had PPP and ERTC funds that went out to businesses. so, so that was super unique, right? Cause you had businesses that

Rishi Srivastava (11:14)
Mm-hmm.

Jacob Studer (11:27)
were operating, right, making their profits. There was some shutdown in construction for a time, but there really wasn’t a lot. So most contractors did well, even though COVID was going on. And then on top of that, you you had these funds coming in from the government, just free money. And so for like a one, two year period, we saw what I assume was the lowest losses in the history of the industry, because these companies got sometimes millions of dollars injected into them.

And so you had that period of time where the contractors that would have failed if they hadn’t gotten the free money but didn’t. But now, you know, we’re sitting here three years later and that money is mostly gone, right? It’s either been used or spent or distributed. And so we’re starting to see an adjustment. And what’s interesting is the number of claims is still fairly low, but the dollars is higher than ever.

And so we’re in this really unique environment where the frequency is very low, but the severity is extremely high. And so it is a little unique from an underwriting standpoint where you’re saying, okay, if I do have a contractor who ends up out of business and I have surety claims, you know, if I wrote him a $10 million bond, just for an example, there’s a really good chance that I end up paying out, you know, eight to $10 million.

whatever the penal sum is, there’s a really good chance he’d pay out the full thing, even if he gets some portion of the project done. So it’s unique. We’re seeing less right now that end up there, but when they do, it’s so much worse than it’s been in the past. And then with rate, I would say it’s kind of similar to capacity. You know, the people that listen to this that are experienced working with sureties will understand this. One nice thing about surety is your rate will virtually never go up, unlike insurance.

You’re not gonna, we don’t go through a renewal process. So we don’t come to our clients and say, hey, I know last year it was 10 bucks. This year it’s gonna be 11 or it’s gonna be 12. Then the other side of that though is usually the rate reductions are a little fewer and farther between. So we’re not gonna raise it on them ever really, but it’s gonna take a little more work to get it reduced. But there are some carriers especially who are lower down and don’t have a lot of market share.

That’s one of the tools they’re trying to use to compete is offering extremely low rates.

Rishi Srivastava (13:48)
Yeah, it’s tough. I have a friend who does some trading and he likes to naked calls. said like, I’m not going to lose too much money and I’m going to easily make some premium. It’s tough when you don’t understand the kind of position. Sometimes the severity can be extreme even if it’s a low probability event.

Jacob Studer (14:02)
Yeah.

Yeah.

Exactly. Which it’s, you know, it’s always been, it’s always been a low frequency, high severity, but it’s never been this exaggerated. It’s almost, you know, frequency severity. It’s always been like that, but it’s almost gone like this now where the frequency has dropped, but the severity is, I mean, so it’s really interesting when you’re underwriting, right? Cause it’s, you know, if it hits, it’s going to hit and it’s really going to hurt.

And so you know, that’s what you’re trying to work through is okay, you know, how do I feel about this contractor? if we get tagged, we’re really going to get tagged.

Rishi Srivastava (14:46)
Some companies don’t have a perfect balance sheet. What can a contractor do to earn surety support even when the financials aren’t ideal?

Jacob Studer (14:56)
So the nice thing about surety underwriting at a very high level is you can just remember the three C’s, which I think this is fairly similar to banking, except I think they have five C’s instead of three because they have collateral, we don’t. But you just got to remember character, capacity, and capital. Those are ultimately every discussion your surety underwriter has with you is going to fall into one of those three categories. And so really what we’re saying, you know, if your balance sheet is

impaired for some reason or just doesn’t look great for a time. One of the three C’s, it doesn’t look good. So then really what your underwriter is gonna do is they’re gonna lean really hard on the other two, your capacity to perform and your character. And so what I would say is what you really need to do is just show to the contractor, or excuse me, you as the contractor, show to the surety the ability you have to perform.

to show them that you have a well thought out business plan, you can achieve a solid operating margin, you can have positive cash flow, because if you’re doing that in time, the balance sheet will improve. Don’t go in and show a forecast that looks like it was made by a private equity firm as far as the aggressiveness, those are what we don’t like to see, because I look at that and I say, you’re probably not gonna do that, that’s extremely ambitious, but.

If I go into a meeting with a contractor and I can see like, Hey, I can see from your past experience, like this is very realistic. can see you achieving these results. And if you do, you know, Hey, two or three years. now your balance sheet is really going to look a lot better. Then I can rely on that for a time until the balance sheet does look better. So you’ve really just got to make sure to focus on those like, Hey, our capital doesn’t look great right now, but

Here’s how we’re gonna succeed now, here’s how we’re gonna succeed next year and moving into the future. And just really kind of show yourself off and show how those aspects of the business de-risk some of the capital issues that you’re seeing.

Rishi Srivastava (16:52)
Yeah,

Many contractors want to pursue stretch jobs beyond their current bonding limits. What does it take to get underwriters comfortable approving those bigger opportunities?

Jacob Studer (17:10)
So I think project selection is a big one here. And I’ll also say, you know, this is a relationship business, right? That’s a big, one of the big differences that I should have highlighted earlier between insurance and surety is, you know, insurance, everyone goes out to bid every year, right? Like you get quotes from every carrier out there. Who’s got the lowest price for the highest limits? Okay, you’re my carrier. You know, a lot of our clients, I should maybe say most of our clients have been our clients for over 10 years.

And we’ve got ones that are 40, 50, 60. I think we’ve even got a couple that are like 100 year clients. And that’s where that relationship really is a big deal. And why I would always encourage a contractor to put the time in to build their relationship. Because if you’re working with a surety that’s known you for 30 years or even five years, and not only that, but if you actually know your underwriter, like you’re on a first name basis with them and they know you and they trust you, that’s going to go a long way. But you know, when they come into the room,

What I’m gonna be listening for as you talk to me about this project is just why does it make sense? Why is this the project you wanna stretch for? And I think what’s hard is, and what we don’t wanna hear is just that it’s a big number. Like, hey, really like that, we think it’s cool that this is a $40 million project and we’ve only ever done a 15 or a 10. There’s gotta be a compelling reason beyond just the big dollar number.

It’s got to make business sense. And if it does, and I can see that you yourself have kind of pre-qualified the project and you’re interested in it for a reason and there’s business reasons behind why you’re going to be successful, then we can definitely get behind it and support it.

Rishi Srivastava (18:51)
From your seat, what are the habits or behaviors you consistently see in the strongest, most successful contractors?

Jacob Studer (19:01)
So some of this I’ve probably said already, I’ll go back to the buzzwords again, business plan. Having a strategic business plan, knowing what you’re good at and what you’re not good at. The other thing I’ll say is the contractors that have really honed in their skills on the business side of the operation and not just the operational construction side.

are the ones that I’ve really seen be extremely successful. There are some contractors I’ve worked with that either I can tell or they’ve just told me that the financial statement and the WIP is something that they produce for me and it’s not something that they necessarily regularly review themselves, which is in my experience not a great sign that they’re gonna be a strong performer. Whereas those ones that are the most successful contractors,

you know, they’ve got a timely balance sheet, financial statement and work in progress support that they’re reviewing for themselves and they’re checking in daily and weekly on it. And they know how accurate it is and they know exactly where the business is at. And that’s, that’s one of the things that I’ve seen is has made the biggest difference. Whereas there’s, you know, there’s a lot of people that have come up through the field, they’re excellent construction operators, but they don’t necessarily see the business side as their strength and

Instead of learning it and leaning into it, they kind of say, hey, I’ve got this person over here. They take care of the financials. And that, my experience, doesn’t always go as well as the people that have said, hey, I’m going to figure this out. I’m going to ask questions. I’m going to talk to my broker. I’m going to talk to my underwriter. And I’m going to really learn and better understand how the financials work, how the business side of the operation works. And those are the people I’ve seen that are the most profitable and most successful.

Rishi Srivastava (20:39)
The next section here, Jacob’s on risk, mistakes, and relationship management. Again, the continuation of the last question. On the other side, what are the biggest mistakes contractors make in how they manage their bonding relationship or present themselves to under-ID?

Jacob Studer (20:57)
I think a couple things come to mind. One is just not, this is not prioritizing the relationship. which ideally contractors are working with a broker that’s helping them prioritize the relationship. if you’re hearing this and you think you’re working with a broker who isn’t pick up the phone and give them a call and say, Hey, I want, I want to meet with my surety more regularly. I want to know them better. I want them to know me better.

And then also just, when you’re in those settings and interacting with contractors, and some of this is personality, right? But there are some contractors I meet with that are pretty closed off. And you ask a question or you bring up a topic and you get one or two word answers or yes or no, and it doesn’t really allow you to dive in and understand the situation. And then you’ve got some that…

You ask a question and they go for 10 minutes or there’s something I’m wondering about and they bring it up before I even do. And when you have a kind of a vibrant relationship like that, know, that’s where you really begin to trust and to know each other. And, you know, if you’re a really small contractor, like I’ll say maybe 10 million and below that surety underwriter you see that comes in, he might have the authority to handle everything on his own. Otherwise, if you’re any bigger than that.

You might only have one underwriter in the room, but I can almost guarantee you after he leaves your meeting, he or she, they’re gonna turn and they’re gonna write notes and they’re gonna send it to another underwriter and they’re gonna make a call. Cause there’s someone else they’re reporting to that’s helping them on that account. And when they turn around and talk to that other underwriter, just stop and think about it. Who are they gonna make the strongest recommendation for? Is it gonna be the contractor they don’t really know very well?

don’t necessarily have high trust for, or is it gonna be the contractor that they’re on a first name basis with, they’ve had strong conversations with, they really feel like they know and trust them. And from being in those conversations, it really does make a big difference, because that’s who I’m gonna go to bat for, is the people that I really know and I really trust. And so I would just say make the most of those opportunities, prioritize the time to get your underwriter in at a minimum once a year, maybe even twice a year.

and be willing to be open. The other thing I’ll add to that is there are certain clients I’ve met with that I almost think are afraid to present themselves as not knowing everything or not being a perfect contractor. But what I try to tell people is the secret’s out. I already know you’re not a perfect contractor. I already know you don’t know everything, because we work with a broad range of companies, right? And so.

Well, is it important? It’s not important that you’re perfect. It’s really just important that you know your strengths, you know your weaknesses, and that you’re working on improving the things that you want to be better. And frankly, we can be an opportunity just based on where we sit. We work with all kinds of sizes and types of contractors, and we’ve seen what works and what doesn’t. And so I would say, too, we’re a good audience. If you have something you want to improve, say, hey, this came up this year, or this didn’t go how I wanted it to go.

this is what we’re thinking, do you guys have any thoughts? And use that, use your time with your underwriter as an opportunity to gain some knowledge or some wisdom that you might not have thought before. And that’s not gonna lower you in our eyes. If anything for me, I think more highly of the people that do that, that are willing to ask those questions. For one reason, just because now I know, okay, he’s thinking about it or she’s thinking about it because we talked about it and I know they’re working on it. And so that.

I think some people, get afraid like, I don’t want to ask a question in front of my underwriter. I don’t want them to think, I don’t know about this or I don’t know about that. I don’t know what I’m doing, but we know you have questions. We know you have things that aren’t where you want them to be. So just be willing to invest in the relationship and have those conversations.

Rishi Srivastava (24:46)
Yeah, trust is so important. Construction, actually the entire ecosystem runs on trust.

Jacob Studer (24:51)
It does.

Rishi Srivastava (24:52)
You’ve worked your way up inside Travelers from the UPDP program to Associate Account Executive to now Account Executive. What has that progression taught you about how contractors should communicate with underwriters?

Jacob Studer (25:08)
So I would kind of just, probably a lot of what I honestly just said is relationship wise, you know, when you’re a new underwriter starting out, this is a unique business. we, we tell people it takes at least a year from the time someone starts before they’re like, really able to start meaningfully contributing that that first year is a lot of learning and training. And so for me sitting back that first year, I still remember seeing the more senior underwriters and my bosses.

and seeing their interactions with different contractors and getting to go to meetings and not necessarily participating. I was just the guy in the corner taking notes and just kind of watching and observing. And it goes back to what I said before. I saw those senior underwriters and my bosses, I saw them really go to bat and stretch themselves for certain clients. And I saw others where they were like, hey, I don’t know if this makes sense. And one of the big differences there with that Delta,

was the contractors who had invested into the relationship, who took it seriously, who made the time for it, who communicated well, who asked questions. I mean, those were the ones that they had the strongest ties with. Those are the ones now I have the strongest ties with. And those are the ones that it’s like, hey, I’m gonna find a way to get this done. I believe in this company. I believe in this group of people, this ownership group. I trust them and we’re gonna find a way to approve this.

whatever it is, an increased program, a stretch project, whatever’s going on, we’re gonna find a way to get it done, because we believe in them. But the people that haven’t, put in that work, and you don’t have a strong relationship with it, it’s a lot easier to just say like, hey, sorry, we don’t feel comfortable doing that, we don’t wanna do that.

Rishi Srivastava (26:46)
How important is the relationship between the contractor, the surety agent and the underwriter? What does good communication look like in practice?

Jacob Studer (26:57)
So, yeah, they all kind of have their own ecosystem, the contractor to the broker and the broker to the surety. And I mean, ideally, I hope that, you know, the contractor and the broker are communicating frequently and openly and the contractor is willing to share with the broker what’s going on, what their needs are gonna be, what they could use help with. I mean, we as the surety,

We love to be a part of those conversations as well, and if they are happening, hopefully the broker’s sharing it with us. But I would just say just make sure you keep open lines of communication, I mean, another thing with, guess, we’ll go back to stretches again. Sometimes those requests come in like the day before a bid or two days before a bid. That’s a lot harder, Rishi. You get an email like, hey, this bid’s in 24 hours.

Can we do this? It’s four times bigger than any project we’ve ever done and it’s like, hey, let’s look at this, but man, this takes some time. It’s really hard to, in 24 hours, get an answer to a question like that. And then there’s times, contractors I’ve worked with that they’re like, hey, there’s this project, we know it’s big, it doesn’t bid for two months, let’s talk about it. And I would say when you have that kind of a timeline, your odds of getting supported and getting approved are…

Rishi Srivastava (27:51)
Yes.

Thank

Jacob Studer (28:17)
are significantly higher. So I would just say maintain open lines of communication with your broker and with your underwriter and keep in touch with them because even just being a little more timely with your communication and your request can go a lot.

Rishi Srivastava (28:30)
So the contractors have to have the surety D bond before they actually bid on some projects.

Jacob Studer (28:35)
Most of the time, yeah. So if it’s a

public works project, it’s often hard bid. And so with that, they’re gonna have their bid documents and then they’re gonna have a bid bond attached and they’ve got to turn that in. And if they turn their bid in and then the agency goes through and they don’t see the bid bond, then the bid’s gonna be tossed out. There are some times that, particularly on private work where the bonding isn’t required, owner might.

do a request for proposals or they might do a hard bid request and then choose their contractor. And then after that fact say, we want performance and payment bonds even though we didn’t ask for a bid bond. But yeah, typically the bid bond is gonna be needed on the day of the bid.

Rishi Srivastava (29:18)
Make sense. The next section here is on financial discipline, WIP, and reporting. Many contractors underestimate the importance of accounting. From an underwriting perspective, how critical are WIP schedules and timely financial statements?

Jacob Studer (29:37)
Yeah, so I mean, they’re super critical, right? What I say for me is the work in progress, the balance sheet and the income statement, that’s the pulse of the company, right? Looking at those three together. And with that though, the timeliness aspect of it is super important, right? Because, know, let’s see, it’s December 10th today. If somebody sends me an April 30th statement right now,

It’s not necessarily worth a lot, right? Because I’m like, well, it looks good, but that was eight months ago. And things change quickly in this business. they’re super important. It’s critical that they’re timely. And just the other thing I always say to that is like, man, I hope those are as important to you as they are to me. Because like I mentioned earlier, the contractors that are the most successful, they’re looking at those things before I am.

Rishi Srivastava (30:05)
You

Jacob Studer (30:23)
and the ones that I’ve seen that aren’t always as successful, when I ask for a WIP or a financial statement, they have to scramble to pull it together because they don’t have a recent, accurate one that they’ve been using and reviewing. And so, I mean, that’s your pulse. That’s how you really know how your company is doing and making sure those are as accurate as you can and as timely as you can. That’s the only way you can really track yourself and try to make improvements. And that’s what I need to see like, hey, how is this?

this company really perform.

Rishi Srivastava (30:54)
Some of these contractors may only be looking at the bank statement. They’re like, OK, why do I care about any other thing? If my bank statement is going up and down, it’s telling me the pulse of the business. Is it?

Jacob Studer (31:00)
Yeah, exactly. Exactly,

which I always ask the question when that comes up, say, well, how much of that cash is actually yours? And some people can give a really good answer to that and they can say, well, there’s this much in the bank, this much is mine. And then there’s some that I think get more stuck on the dollar. Hey, there’s $3 million in the bank. Yeah, but you know.

In a month or in two months, how much is there gonna be after you’ve paid your subs, your suppliers, your employees, if you have a bank line to pay down, you gotta stop and really, and that’s again, that’s where the, you know, the financial statements come in, because with the financial statement, you see more of a full picture instead of just saying, oh, look, there’s a million dollars in the bank. You say, oh, there’s a million dollars in the bank, but I’ve only got $250,000 in working capital. And that’s a big, that’s a big difference.

Rishi Srivastava (31:53)
Yeah. What do you see contractors getting wrong about WIP reporting, over and under buildings and job cost tracking? And how does that affect bonding?

Jacob Studer (32:03)
So yeah, I mean, WIP reporting is super important, right? Because that’s, you know, in construction businesses, you know, they’re not retail businesses, right? They don’t manufacture and then sell an item. So that, I mean, that is the product. The WIP is showing the product and it’s showing us how profitable it is, right? And of course it’s estimates, it’s all estimates. The accuracy of the WIP all comes down to the estimated cost to complete, right?

And so that’s where I’d say that, you know, that number is super important. And of course there’s some fudging in there on every project. We don’t know exactly where it’s going to end at. But ultimately I want to work with contractors who have a reasonably good idea of like, Hey, this is about where the project’s going to finish. This is my estimated cost to complete. You know, the revenue amount is fixed. You generally, you sign a contract. you say, okay, we’re going to get paid this much.

So that estimated cost to complete the project, I mean, that’s critical. If you make a significant error with that number, then every other piece of information for that project on the WIP is gonna be wrong. And we’re just looking at bad data. And then over and under buildings, I mean, those are critical as well. The one thing I’ll say is the best operators I work with, especially in the trades and in heavy civil construction.

they’re very good at getting overbilled. And that just puts them, as long as it’s managed well, the one plug I’ll say with that is if you send me a financial statement and your overbillings are here and your cash is here, I might have some questions. High overbilling should equal high cash, right? Those should be correlated to each other. But when we do see that, when we see high overbillings, high cash, and when you have a track record I can look back on of years of work in progress supports, you know, we…

Rishi Srivastava (33:33)
Thank you.

Jacob Studer (33:46)
we kind of get to understand the behavior of a contractor. And like, okay, they get out, they get overbilled, that’s how the project goes. And those are the people that, you know, the key difference with the under and the overbilling, right, is what I always tell people is if you’re underbilled, you just gave an interest-free loan to the owner of the project or to the contractor above you if you’re a subcontractor. You’re giving the GC an interest-free loan. If you’re the GC, like, hey, you just gave an interest-free loan to the owner, which…

Don’t do that, right? This is their project, this is their product, they’re paying you, they’re financing it, you’re not financing it. So, you know, there are some contractors that operate in unique segments of the market, and the way they operate leads to underbillings, and they’re legitimate, and they collect, and it’s fine. But generally, I’m just not a fan of underbillings for that reason, and I say, hey, the best thing for you is get out, get in front of it, get overbilled.

And then as soon as you’re overbilled, make sure you manage that well, right? Don’t get overbilled and then distribute all the cash and go and do, you know, buy a boat or a mansion or whatever you might do with it. Make sure high overbillings equals high cash. And if you do that, then you you’ve put yourself in a position where your cashflow is strong, your company is protected, and the owner is actually financing the.

Rishi Srivastava (35:06)
Very good points. The next section and the last section is on technology, AI, and modern contractor development. Construction is adopting AI faster than ever. Where do you see practical ways contractors could apply automation or AI today to make their businesses more bondable

Jacob Studer (35:28)
So there’s a couple things I thought of with this. One of the big ones I would point out is contract review. Anyone who is on this call that is seeing construction contracts know they’re getting longer and longer and longer. Those mega project contracts have always been long, 1,000 pages, 1,500 pages. But what I’m seeing is we’re getting to where even the small projects are like that.

And you know in the past, that was very labor intensive if you think about it, to do like a thorough review of a 1,000 page contract. I mean it’s terrible and no one enjoys it frankly, right? It’s like watching paint dry. There’s nothing I would rather do less than just sit and read through a 1,000 page construction contract. And so with that, I think there’s people that…

you know, maybe there are certain sections they focus on, but I just think things have gotten missed historically. And I think most companies have not performed thorough reviews of their contracts. And that’s, I think that’s one of the coolest things with AI now is, know, there’s software out there where you can say, cause the other thing I’ll say is don’t take your contract and just drop it in chat GPT, like public database. That’s a terrible idea because.

You’re taking private data and you’re putting it in a public database, but there’s proprietary software out there where you can safely put your information in. There’s software I know that’s specifically trained for contract review and you can train it as well what to look out for. And as we know, AI isn’t perfect, so you still need to double check the work, but man, I just think there’s very significant labor, time, and cost savings with that.

and you can actually approach your contract negotiation on like, hey, I’ve actually vetted every page of this contract rather than what we did before, where maybe we kind of skimmed through it or, hey, go check that section and go check that section. Don’t worry about the rest. And that’s not a good route, especially anymore. There’s more and more hazardous terms being hidden in contracts. For subcontractors, flow down provisions are getting worse than ever.

And so that’s one big one I think of. And you know, another one, think is shameless plug for you guys. Rishi is just using AI just to cut down on time for tedious tasks. And my kind of personal experience with this is just I’ve got some family in construction. And one of my family members was one of the people that’s had to do some of the very manual, very tedious tasks.

you know, with payroll and payables and receivables. And so I’m aware of the amount of time drain that is. And I’d say anything you can do to save time and ultimately save money there. Because if you’re saving time, you know, you’re saving money. If you’ve got an employee that they used to spend eight hours doing something and now they spend 30 minutes doing it, then there’s a significant cost savings for you there. And hopefully that means there’s more cash in the company and you’re sure the underwriters happier.

Rishi Srivastava (38:24)
Yeah, I mean

some of the back office people are spending still a lot of time just entering data and validating you know tedious stuff.

Jacob Studer (38:32)
Yeah,

it really does take a ton of time. mean, as you know, there’s companies, there’s people, that’s all they do. I mean, that’s their entire role is data entry, verification. And when you stop and think about that, we think about how much a person’s being paid and their benefits. it’s like, that company, they’re paying a lot of money to get that done. And if there was a way they could automate that and significantly cut down the time and…

and let that person do something that’s more valuable to the company instead of just doing verification, it’s well worth it.

Rishi Srivastava (39:04)
Yeah, we are in the construction accounts payable automation business. Just a shameless plug. Yeah, check it out. The last question here for you, Jacob, is you’ve been part of the construction world from multiple angles, field labor, project management, consulting, and now a surety. Based on everything you’ve seen, what advice would you give a contractor?

Jacob Studer (39:09)
Yeah, check it out.

Rishi Srivastava (39:32)
who wants to grow safely over the next five years.

Jacob Studer (39:36)
I think the couple really high level things I’d say is one is remember to approach your business as a business. You know, when you think when you when you’re a construction company owner, I think it can be easy to just get focused on the projects and executing the projects. But you’ve got to make sure that you’re looking at through a lens of the projects or how we make profit.

and profit is how the company thrives. And so kind of in line with that, I always tell contractors there’s two things that I don’t care at all about, frankly, and that’s revenue and gross profit. I just don’t care about those. To me, the thing that matters is operating margin, operating profit. At the end of the day, it doesn’t matter how much work you did, it doesn’t matter how much gross profit you did, it just matters how much actually was left in the business at the end of the day. You know, I have…

worked with contractors that have done this much revenue and contractors that have done this much. And sometimes this guy down here makes three times as much money as this guy down that’s up here. And you know, those contractors that are doing way more revenue, it’s more stress, it’s more work. And at the end of the day, they’re making less profit. And that’s not me saying don’t be a big contractor. The point I make there is make sure you’re getting paid. Make sure you’re paying yourself and…

Don’t worry about revenue. Revenue doesn’t matter. Operating margin is what matters. So focus on your construction entity, not as just a group of people doing projects, but as a business that’s there to make money. Focus on operating margin. Build your business plan around that. Figure out what you’re good at, where you make money, where you excel, and stick to that. And don’t be afraid to turn opportunities down. And you know, if you wanna grow, if you operate that way,

You do excellent on your projects. You make a strong profit. Your business is gonna thrive and you’re gonna grow. The only thing that’ll stop you from growing is you saying, hey, we’re good. This is the size we wanna be. We don’t wanna grow anymore. We’re gonna stay here. But otherwise, if you operate your business like that, you focus on making a strong profit, retaining a portion of those earnings to help the company’s balance sheet grow, to help you have the cash to grow, you perform well on your projects. The growth is gonna come with time.

So don’t worry about rushing it. There are some contractors I’m around that have very, very ambitious goals surrounding growth and revenue increases. And I’m not saying that’s inherently wrong, but I’ll say the growth will come with time. And just make sure in the meantime that you’re getting paid and you’re making money. This is a very, very, very hard business. Very high risk, very stressful. You work a lot of hours. So make sure you get paid for it. Make sure you’re getting rewarded for that.

Rishi Srivastava (42:16)
That was a fantastic advice. Thank you so much, Jacob, for being on the show. had a great conversation with you.

Jacob Studer (42:22)
Thanks, see you as well, Rishi.

Rishi Srivastava (42:24)
Take care.