Surety Bonds Explained: Capital, Capacity & Character with Zurich’s Zach Comfort

Rishi Srivastava (00:41)
Today, our guest is Zach Comfort. Zach, welcome.

Zach Comfort (00:46)
Thanks Rishi, thanks for having me.

Rishi Srivastava (00:47)
Zach from Zurich, North America. The theme of the podcast is understanding surety, risk, and how contractors build financial strength. The first section is, Zach, on your career and foundations. You’ve spent 15 years in surety underwriting, working with contractors across the country. For listeners who might not know what is surety,

in plain English and why is it so critical to public construction.

Zach Comfort (01:19)
So surety bonds are a credit instrument that provide financial and performance guarantees on a contract such as like the job will be completed and all subcontractors and suppliers will be paid. Surety bonds protect taxpayer dollars through those guarantees on public projects by shifting the risk of contractor failure from the public to the surety.

Rishi Srivastava (01:41)
Thank you. How did you first get into the world of surety and what’s kept you passionate about it after all these years?

Zach Comfort (01:50)
Yeah, this is a good question I get from a lot of people. I feel like most in the surety industry, I kind of stumbled into it, not really knowing what it was. But what’s kept me passionate is really the impact that the industry has, know, helping contractors succeed and being part of the infrastructures that shapes communities is very rewarding.

Rishi Srivastava (02:08)
Yeah, You know, it’s a very complicated instrument, surety in some ways. I was not working in construction before 2021, and I had no clue what it was and why it was even required.

Zach Comfort (02:22)
Yeah, I was actually an insurance major in college and I think there was one paragraph on surety in one of our textbooks. So it’s not very well known until you’re in the industry.

Rishi Srivastava (02:30)
Yeah.

Right, right. And it’s only required for public projects, or is it also required for private projects?

Zach Comfort (02:39)
So it’s required for public projects through the Miller Act at the federal level and then the Little Miller Act at the state level. And it can be required for private projects as well if the owner or the lending institution deems that a surety bond is necessary, which I would argue that it should be for every project, right? It’s just an extra layer of pre-qualification and protection for the owner.

Rishi Srivastava (03:04)
Yeah. It comes with the cost of private projects. mean, if I’m running a project, I want to save money as an order too, right? You mentioned during our chat that surety isn’t about quoting a rate. It’s about extending credit. How should contractors rethink surety as a relationship rather than a transaction?

Zach Comfort (03:13)
That’s right.

Yeah, so as mentioned earlier, surety is really a credit instrument. So you should think of your surety like a credit partner similar to your bank and not like a commodity such as maybe your insurance that you quote every year. In surety, we’re not just selling a product, right? We’re trying to build a relationship. And the more that you bring us in and we understand your business and goals, the more of a successful relationship we can have.

Rishi Srivastava (03:53)
Yeah, it’s very relationship driven industry. Risk, credit, and the three Cs. You referenced the three Cs of surety, capital, capacity, and character. Can you walk us through what each one means in practice and how you use them to evaluate a contractor’s strength?

Zach Comfort (04:18)
So the capital is obviously the contractor’s financial strength. You we’re looking at liquidity, working capital, equity, all of the key performance indicators and ratios that you would typically analyze a contractor. You know, there’s really a proportional relationship between the size of maybe a large project or the total backlog that a contractor wants to undertake and the required strength of their balance sheet from the surety perspective.

capacity is really their ability to successfully complete the project and finish their backlog. And that really considers things like their prior experience on certain scopes of work, the expertise they have within their company, right, the management and the manpower, and then all of the resources necessary.

for possibly a road builder like the equipment to complete the project that they’re wanting to undertake. And then character is a contractor’s integrity, their reputation, and their commitment to fulfilling their obligations.

Rishi Srivastava (05:14)
Yeah, if you had to rate them from top to bottom, which one is the most important out of three?

Zach Comfort (05:22)
I think they’re all three equal.

They all three play an equal role in the underwriting process. A lot of people focus on the capital. That’s kind of the low-hanging fruit, right? Just looking at the financial statements. But the capacity, you’ve got to know your contractor. You’ve got to know their business. You’ve got to know what they’re capable of doing. And then, as we mentioned earlier, surety is a relationship business. And character is obviously the most subjective of the three. But you’ve got to get to know your contractor. You’ve got to know their character. And you want them to know your character as well.

Rishi Srivastava (05:51)
All right. When you analyze a contractor’s financials, what are the early warning signs that make you pause before extending bond credit?

Zach Comfort (06:02)
Yeah, great question. You know, the first thing I’ll look at is just kind of their liquidity, working capital and equity position. But it really requires a deeper dive into the composition of those positions, right? A contractor may have a decent working capital position. But if you dive in and that working capital is being driven by accounts receivables over 90s, large under billings or related party receivables that have been on the balance sheet for years,

You know, what’s the collectability of those items? How strong is the working capital ready? Really and then you conversely a high amount of pure job borrow and over billings, which is where

the estimated cost to complete the project exceed the remaining contract funds left to bill, especially with an increase in short-term debt such as pulling on your bank line of credit can really create a fragile cashflow structure and really present as artificial liquidity. So you really need to do a deep dive on the composition of the balance sheet to see how strong the working capital and equity really is. And then another obvious early warning sign

that would make me pause is just looking through the WIP schedule and seeing multiple gross profit fades on multiple projects and the margin shrinking overall. That’s usually a sign that something’s not going right.

Rishi Srivastava (07:19)
Yeah, actually, I was talking to a CPA, he was telling me the ratios that a surety looks at versus the ratios that a bank looks at. Even though they may be the same, but the calculation methodology can be quite different.

Zach Comfort (07:36)
Yeah, I mean again, it’s similar to a bank and it’s more of credit instrument than a commodity product, but we certainly have things that I think that we may take a deeper dive into than the bank does and the bank may put more scrutiny on some of the ratios than we necessarily do at times. So it’s certainly similar, but it can be different.

Rishi Srivastava (07:58)
Character is the most subjective of the three. What are some real world cues that tell you a contractor has the right mindset for sustainable growth?

Zach Comfort (08:10)
Yeah, I think first, a contractor has to know their costs and they understand their financials. They need to be able to tell the story behind the financials, right? Not just present the financials to us and let us make our…

or let us do our analysis and require the CPA to come in to have to explain their financials to us. Another important one is when contractors show the willingness to answer hard questions versus getting defensive or being vague. And especially if we’re looking at a new contractor that has had some challenges in the past, they’re transparent about those challenges, about their past mistakes, and explain what changed afterwards.

And I think for the mindset for sustainable growth, they have to have a disciplined approach to project selection, a rigorous go, no-go process. And then I think they have to have a strong leadership.

bench strength available and delegate authority appropriately right. As you’re going to grow sustainably one man can’t make all of the decisions anymore right you’ve you’ve got to delegate that authority so that way that you know if something happens to you the company continues to run.

Rishi Srivastava (09:15)
Yeah, actually I was talking to a construction recruiter and he was talking about one of the big risks that a construction company has is key person risk.

Zach Comfort (09:27)
Yes.

Rishi Srivastava (09:27)
The next section in Zach here is on building better surety relationships. Many CFOs view bonding as compliance, not strategy. What’s your advice for turning surety capacity into a financial growth advantage?

Zach Comfort (09:45)
Yeah, so I would say, know, build a surety-ready financial package, right? I mean, we’ve previously mentioned the bank and sureties require possibly a deeper dive on some items than the bank does. So, you know, things like accurately quarterly or maybe monthly financials, you know…

Accurate work-in-progress schedules that all tie back into the fiscal year and audit and the fiscal year and review Go a long way for for the surety as well as you know cash flow projections that can certainly help runoff projections as well anything that can help us Understand your business and where it’s been and where it’s headed is going to be Favorable for for building surety credit You know like I said earlier, you know I would encourage CFOs to think of their surety as an additional capital partner similar to their bank

Use the surety as a sounding board. Share your business plans and goals.

Contractors can increase their surety capacity by building trust, right? So and I think when know surety capacity increases the market take takes notice, right? Your competitors are going to know that you’re going to see an owner that’s going to see you on a job that they didn’t think that maybe you were capable of doing and then that can help more opportunities present themselves

Rishi Srivastava (10:47)
Yeah, yeah.

Project managers often don’t interact directly with surety. But you said their actions affect underwriting confidence. What can project managers do better day to day to support their finance teams and strengthen the surety relationship?

Zach Comfort (11:15)
Yeah, one of the cornerstones of surety underwriting is the work in progress schedule and the project manager is responsible for the jobs on that schedule. you know, I think to help support their finance teams, things like maintaining accurate job costing and forecasts. So there are no surprises. Bill on time and push change orders promptly to manage cash flow at the project level.

manage your subcontractors with discipline and then I would say communicate early to finance about any issues so that they aren’t blindsided when the issue hits the financial statements and they have to go track you down and ask you a question.

Rishi Srivastava (11:49)
Yeah, one thing to say, project managers at our times, they don’t have as deep an understanding of finance, even though they understand the schedule and other stuff. You know, the WIP involves both schedule and the finance.

Zach Comfort (12:01)
Right.

Rishi Srivastava (12:01)
You’ve seen contractors grow from small to mid-market and beyond. What separates the ones who scale successfully from those who stall out financially?

Zach Comfort (12:14)
Yeah, I I think those who scale successfully develop a business plan with clear, measurable goals. They grow at a pace that their balance sheet can support. They do that by bidding for profit, not volume. I think they measure success by cash conversion, cash flow, and earned margin, not just growing the top line.

Across the organization, they have job cost discipline, they prioritize efficient internal controls, and they’re able to scale without adding operational friction and significantly increasing overhead. And they also build a leadership bench that can run the company, not just take orders from the top down.

Rishi Srivastava (12:54)
I these contractors, they’re working like 100 hours. They don’t have anybody else who can do their job.

Zach Comfort (13:02)
Yeah, it’s a demanding business.

Rishi Srivastava (13:04)
Yeah. When projects go sideways, you explained that when a contractor defaults, the surety might step in to finance or complete the job. What does that process look like behind the scenes and what separates companies that recover from those that don’t?

Zach Comfort (13:26)
Yeah, so full disclosure, I am not a surety claims expert or a surety attorney here. So this is just strictly my opinion.

But first you really have to determine where the job is, right, that’s in default. And that includes amongst several things, but some of the main points are the amount of work remaining, the time left to complete the project, the complexity of the work, as well as the amount of the…

balance remaining that could be available to the surety. So typically the surety has four options and you mentioned one the finance this is when we step in and finance our contractor the existing bond principle. This is typically you know the favorite option I think when you know the contractor is still solvent it’s just kind of one issue on one job the owner is willing to cooperate and they still have the resources available to complete the project.

I would say this is probably the preferred method out there, but again, have to have those kind of certain things in place in order to do this. The next option is the surety contender, a completion contractor to the owner to complete the work. And this is different from the next option, which is a surety takeover.

which is where the surety steps into the contractor’s shoes, assuming all liabilities and obligations to manage the completion of the work.

So in a surety tender, the surety collaborates with the owner and says, you know, hey, we’re going to tender this new completion contract to you. And a surety takeover, we just step in and take over the work. And typically, you know, we’ll hire a construction manager to manage the subcontractors and everyone else. I would say that the step in and finance and tender are the two preferred options. We’re a surety company, not a contractor. You know, I don’t think we prefer to take over work unless we absolutely have to.

Rishi Srivastava (15:10)
Yeah.

Zach Comfort (15:11)
And then the final option is just pay the bond amount. You know, if the project is too far gone and the options previously mentioned are going to far exceed the penal sum, we can always just cut a check and be done with it.

Rishi Srivastava (15:28)
So most of the time are sureties holding the owner or contractor personally liable on these funds.

Zach Comfort (15:36)
It can depend. We’ll have a general agreement of indemnity in place and sometimes there is a personal guarantee, sometimes there’s not. So that just really depends on a case by case basis.

Rishi Srivastava (15:46)
Before a claim ever happens, what are the subtle financial or operational mistakes that often set the stage for trouble months later?

Zach Comfort (15:57)
Yeah, that’s a great question. I think financially, in construction, cash is king, right? So when you start to see strange cash flow due to profit fades, an increase in underbillings, and slower AR turnover, all of those things can typically lead to increased debt. And that’s where contractors can find themselves in trouble financially. Operational, I think things like their

revenue, the growth, outpacing the balance sheet can certainly impact something down the road later. Taking on larger projects than they’re maybe capable of doing, expanding into new geographic territories or taking on new scopes of work, those are all operational mistakes that can set the stage for trouble months later.

Rishi Srivastava (16:39)
Yeah, like most contractors, want to grow, right? So they have to put on some risks to grow, be able to grow.

Zach Comfort (16:46)
Yeah, yeah, and we would always like to see, you know, a contractor have a calculated approach to growth, right, with a solid growth plan rather than just say, you know, I want to bid this larger job because I’m going to make money on it.

Rishi Srivastava (17:01)
How can contractors work with their surety partners early rather than waiting for problems to navigate cash flow strain or project overruns?

Zach Comfort (17:10)
Yeah, I I think, you know, it’s always preferable to hear from a contractor before there’s a crisis, right? You never want to get that call on Friday afternoon at 430 saying we’re in trouble. If you think you may be headed for trouble, it’s good to bring the surety in as early as possible. You know, someone at the surety company, whether it’s the underwriter or our claims team or our

solutions group at Zurich, you know, is likely seeing the scenario that the contractors in and can help create a path forward to help mitigate any issues. you know, bring us in as early as possible.

Rishi Srivastava (17:42)
A of when you’re in this tough situation, you think your situation is very unique, nobody else understands it.

Zach Comfort (17:48)
That’s right, and one of the cool things about being a surety company, right, is we’ve got a book of business in all 50 states. So it is very likely that someone within your surety company has seen the situation that you’re in before.

Rishi Srivastava (18:02)
The next section here is on bridging finance, field, and technology. You mentioned that improving construction starts with awareness, especially helping PMs and field leaders understand what surety underwriters look for. How can companies close that knowledge gap internally?

Zach Comfort (18:23)
Yeah, I I think, certainly from a surety perspective, we’re usually talking to the CEOs and CFOs. We’re looking at the financial piece. But everything that everyone does in the company from estimating the project management, right, drives the results that the surety analyzes. So I think finance can help, you know, PMs and estimators understand that their decisions day to day can have an impact on the company’s ability to obtain surety credit.

know, estimating and project management can, you know, sometimes collaborate a little bit better with the takeoff and procurement of a project to make sure the project starts off on the right foot. know, oftentimes when we’re looking at a profit fade and we’re having conversations with our contractor, it’s, oh, there’s a little disconnect between estimating and project management, but it’s still profitable. And that’s great. It’s good that it’s still profitable, but, you know, if you’re starting your margin at 5%, you don’t want to finish with 3%. You want to finish with 5 or better.

I just think having that alignment across the teams within your organization is very important. And then, as we mentioned earlier, at the project management level, the accurate job costing and forecasting, discipline billing and cash flow management at the project level, that shows up in the financials and then the work in process that the sureties look at. And the more accurate they are, the more confidence the surety has, which can allow for increased bond credit.

Rishi Srivastava (19:44)
Yeah. From your perspective, how can technology, ERP integrations, data dashboards, or AI-driven automation help build transparency and trust in contractor financials?

Zach Comfort (19:59)
Yeah, so you know, as a surety company, we’re typically lagging behind with financial information, right? We may get an internal statement, you know, from some contractors, maybe quarterly or, you know, maybe a biannual interim statement. But for the most part, you know, we’re getting a 1231 fiscal year-end audit or review in April, May, or sometimes June now.

So I think that the ERP systems and dashboards are great because they can give real-time visibility into job performance and cash flow. They can filter up to the financials and help present internal interim financials faster to the surety so we’re not so far behind. And I think that’s very important, right, when you’re looking at a larger project or looking at taking on a larger backlog.

it’s going to give us a lot more confidence to know that, here’s where you are as of March, not here’s where you were as of December.

You know, and AI is something that is, I think, transforming just about every industry right now. But I think in construction, what I’ve seen is that some of the AI tools out there can flag anomalies before they become issues. And when contractors share all of this data proactively, again, it just builds the confidence in them and it can speed up underwriting decisions.

Rishi Srivastava (21:11)
Yeah, our company, we do AI construction, AP automation. So we do help with bringing contractors into AI age.

Zach Comfort (21:22)
Yeah, and that’s part of that, know, prioritizing internal, efficient internal controls I mentioned earlier, right? Instruction companies typically have so much knowledge held in their employees’ heads, if they can automate what they can and get that knowledge, you know, out into the field or in estimating, why not?

Rishi Srivastava (21:41)
Yeah. The last section here is on leadership and the future of construction. The construction industry is known for being slow to change. From a financial and surety standpoint, what gives you optimism that modernization is finally happening?

Zach Comfort (22:01)
Yeah, this is a really, really good question. I think owners are demanding more transparency, especially in the private market. You’re seeing more and more owners that aren’t just taking the lowest bid, right? They want predictability and reliability. And I think the younger leaders in the construction industry and across all organizations are embracing tech. I think things like cloud-based accounting and integrated project management, ERPs, and predictive analytics

are kind of becoming the standard across the board. And I think what benefits the contractor and the surety from this is that embracing this technology, it reduces surprises. Owners and sureties don’t like surprises. So I think it’s a good thing that we’re moving towards a lot of this new technology that can allow us real-time insights on the data and…

where companies are. And I think it’s going to help explain the underwriting process, in my opinion, for certain contractors.

Rishi Srivastava (22:55)
What about positive surprises? So let’s say an owner estimates 5 % margin and he ends up contractor and they end up at 10%.

Zach Comfort (23:06)
You say they estimated 5 % and wind up with 10 %? That’s a good surprise.

Rishi Srivastava (23:11)
So do you like

that as shorty or you don’t like that even that?

Zach Comfort (23:14)
No, good surprises are good. It’s the bad surprises that we’re typically not a fan of.

Rishi Srivastava (23:20)
The last question is, you built a career balancing numbers and people. What advice would you give young professionals entering construction finance or surety who want to lead with both analytical skill and human judgment?

Zach Comfort (23:36)
I would advise them to remember first and foremost this is a relationship business. Master the numbers, but don’t forget the people or the story behind the numbers, right? Listen first and then analyze second.

Rishi Srivastava (23:51)
Yeah, that was a great answer. Zach, thank you so much for your time. I had a great conversation here.

Zach Comfort (23:54)
Thank you.

Thanks for having me, Rishi. Really appreciate it.