SURETY 101: BONDING AND INSURANCE SURETY 101: BONDING AND INSURANCE
“What You Need To Know
“What You Need To Know What You Need To Know What You Need To Know For Contract Surety Support”
For Contract Surety Support”
A Workshop Module of the
Model Contractor Development Program (MCDP) p g ( )
The Surety & Fidelity Association of America
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
Barriers to Emerging Contractors Entry and Growth
• Contracting Opportunities
• Information and Management Expertise T i d d R li bl W kf
• Trained and Reliable Workforce
• Capability and Capacity
• Performance Issues and Dispute Resolution
• Performance Issues and Dispute Resolution
• Bonding and Financing
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
How Contractors Have Addressed Barriers to Bonding
• Only bidding work where bonding is not required
• Bidding under prime contractor’s bond
• Advocating for bond waivers
• Advocating for bond waivers
• Advocating for alternative insurance/guarantee products
p
• Obtaining First Bond or Increasing Bonding Capacity
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
Bonding vs. Insurance
• Protects another party
• You cannot buy it like Insurance
• You must qualify for it similar to bank credit
• Unlike Insurance, no losses are expected
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
A Bond is a Three-Party Contract y
• Contractor
• Surety Surety
• Obligee/Owner
• Obligee/Owner
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
Types of Bonds:
The Bid Bond
The bid bond assures that the bid is submitted in good faith and that the contractor will enter into the contract at the price bid and provide the
the contract at the price bid and provide the
required performance and payment bonds.
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
The Performance Bond
The performance bond protects the owner
The performance bond protects the owner
from financial loss should the contractor fail
to perform the contract in accordance with its
terms and conditions.
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
The Payment Bond
The payment bond assures that the contractor
The payment bond assures that the contractor
will pay specified subcontractors, laborers, and
materials suppliers associated with the project.
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
Cost of Bonds
• 1.0% - 3.0% of total contract price .0% 3.0% o total co t act p ce
• Cost of bond is acceptable project cost that is passed on to the owner
Bond premi m paid o t of first dra
• Bond premium paid out of first draw
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
The Surety Bond Producer
• Primary surety industry contact
• Performs initial prequalification of contractor
• Matches contractor’s needs and strengths with appropriate surety company
• Communicates with underwriter & helps negotiate level of surety capacity
P id d b i d i
• Provides sound business advice
• Referral resources for CPA’s, Attorneys, Bankers
• NASBP – National Association of Surety Bond Producers
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
The Surety Underwriter
• Primary goal is to prevent default
• Makes decisions on surety capacity y p y
• Extends surety capacity to ensure success of
contractor
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
Information for Prequalification Process
• Contractor or Supply/Service Questionnaire
• Contractor or Supply/Service Questionnaire
• Business and Personal Financial Statements
• Work in Progress Schedule Bank Line of Credit
• Bank Line of Credit
• Resumes of key personnel in sales, operations and accounting
• Marketing material Business plan
• Business plan
• Continuity and contingency plan
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
Prequalification Criteria – The 3 “C’s”
• Capacity – Can the contractor perform the obligations of the contract?
• Capital – Does the contractor have the financial strength to fulfill the terms of the contract?
Character Historicall ho has the contractor
• Character – Historically, how has the contractor
performed? What is the contractor’s reputation?
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
Capacity: Ability to Perform
• Can contractor perform this type of work?
• Analysis of past projects – size, profitability
C k l d l
• Current work load – cost to complete
• Does contractor have enough work crews?
• Does contractor have necessary equipment?
• Does contractor have necessary equipment?
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
Capital: Financial Strength
• In-depth, detailed evaluation of contractor’s financial strength:
– Business financial statements as of fiscal year end and current interim on the % of completion basis
– Personal financial statements – Bank line of credit Bank line of credit
– Working capital and net worth requirements
– Alternative solutions to lack of financial strength
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
Character: References and Reputation
• Of the construction firm – Business relations with
• Primes, subcontractors and vendors Previous owners
• Previous owners
• Banks
• Of the construction firm owner Of the construction firm owner
– Personal financial statement
– Credit reports p
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
Quality of Financial Statements
• Audit – Highest level of service performed by a CPA.
Objective is to obtain reasonable assurance financials are accurate according to GAAP.
• Review – Middle level of service. CPA expresses limited assurance there are no material modifications to
conform to GAAP.
• Compilation – CPA takes information from management of company without undertaking to express any
assurance.
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
Project Monitoring
• Are there large costs and earnings in excess of billings? Why? Is it due to unapproved change orders?
• Are billings in excess of costs? Are there large cash balances? If not, why?
• Is the profit margin holding? If not, why?
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
Earning Trust: Maintaining the Surety Relationship
• Immediately notify surety of problems
C i t l i
• Communicate openly, no surprises
• Provide accurate, detailed & consistent information
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS FOR NEW AND EMERGING CONTRACTORS
Value of a Surety Insurance Agent
• Acts as a consultant in the selection process of other team members (e.g., banker, lawyer,
accountant) accountant)
• Helps to establish and maintain your Surety Support
• Helps the contractor with business planning, p p g, especially discussions on risk management
• Helps the contractor grow his or her surety program
PUBLIC AGENCIES BOND ASSISTANCE PROGRAMS
¾ City and County of San Francisco
¾ Alameda County
Bernida Reagan, Director of Community and Client Relationsg , y Merriwether & Williams Insurance Services, Inc.
Bond Assistance Programs Bond Assistance Programs
Program Mission
To reduce the barrier of bonding, financing, and enable greater participation of small
and enable greater participation of small, local, emerging contractors in public
contracting
contracting.
Bond Assistance Programs
Bond guarantees
Accounting cost subsidy for financial statements (one time only)
Funds Administration payment of fees – 1% of contract price
¾ Eligibility ~ Small Local Contractors
Bond Assistance Programs
Program Core Components
9Contractor Bonding Assessment/Technical Assistance
M i h
• Meet with contractor
• Obtain and review financial information/work history
• Determine contractors bonding capacity
• Establish bonding relationship
• Establish bonding relationship – Broker
– Surety
