what is a contract surety bond? learn contract surety 101
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CONTRACT SURETY 101: BONDING AND INSURANCE
“What You Need To Know For Contract Surety Support”
Steven Swartz President
South Coast Surety
Information Provided By:South Coast Surety Ins. Svcs., Inc
National Association of Surety Bond ProducersThe Surety & Fidelity Association of America
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS
Welcome!
• Why are you here?• Why are we here?• Small Contractors and the Economy – Are
there opportunities?• How can you prepare to take advantage of
new opportunities?• How do you get started?
Let’s find out…
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS
Bonding vs. Insurance – What’s the Difference?
• Surety bonding is a three party contract – Insurance is two• Unlike Insurance which protects you, Bonding protects
another party – the Obligee• You cannot buy it like Insurance• You must qualify for it – it’s very similar to bank credit
– And the process does take some time, so it’s good to plan ahead• Unlike Insurance, no losses are expected
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS
A Bond is a Three-Party Contract
• Contractor – the “Principal”• Surety• Obligee/Owner
A bond guarantees a contract – without a contract there can be no bond.
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS
Types of Contract 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 required performance and payment bonds.
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS
The Performance Bond
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
The Payment Bond
The payment bond assures that the contractor will pay specified subcontractors, laborers, and materials suppliers associated with the project.
In public works contracts, the parties covered by the payment bond are specified in the Civil Code.
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS
The Warranty Bond
The warranty bond assures that the contractor will correct any deficiencies in material or workmanship for a specified period of time, usually one year from the date of completion.
Often this obligation is considered part of the performance bond and a separate bond may not be issued.
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS
Cost of Bonds
• Depends on a number of factors
• 1.0% - 3.5% of total contract price is common
• Cost of bond is acceptable project cost that may be passed on to the owner
• Bond premium is usually paid up front or out of first draw
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS
Information for Prequalification Process
• Contractor Questionnaire• Business and Personal Financial Statements• Work in Progress Schedule• Bank Line of Credit• Resumes of key personnel• Marketing material• Business plan• Continuity and contingency plan
SURETY 101: BONDING AND INSURANCE 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 – Historically, how has the contractor performed? What is the contractor’s reputation?
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS
Capacity: Ability to Perform
• Can contractor perform this type of work?• Analysis of past projects – size, profitability• Current work load – cost to complete• Does contractor have enough work crews?• Does contractor have necessary equipment?
SURETY 101: BONDING AND INSURANCE 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• Alternative solutions to lack of financial strength
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS
Character: References and Reputation
• Of the construction firm:• Business relations with
• Primes, subcontractors and vendors• Previous owners, Architects, Engineers• Banks
• Credit reports Business Dunn & Bradstreet
Personal credit reports of owners
SURETY 101: BONDING AND INSURANCE 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
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?
Why is it Difficult for Small Contractors to Obtain Bonding Capacity?• Capacity to perform• Financial Strength• Track Record & History of Company• Organizational Structure• Business Continuation Plans• Trade References• Analysis of all Projects in Progress• Credit History• Good Character• Working Capital• Quality CPA Prepared Financial
Statements• Broker Representation
Surety Prequalification/Underwriting
Track Record
Net WorthDemonstrable
Capacity
Access to Surety Credit
The Vicious Cycle
Gradually Grow your
Bond Business
Reinvest in Your
Company
Use a CPA That Knows Construction
Use Surety Agent
Expertise
The $uccess Cycle
How Do I Obtain or Increase My Bonding Capacity?
• Quality CPA Prepared Financial Statements
• Choose jobs wisely• Critical Analysis of all Projects
in Progress• Increase Personal Credit
Rating• Trade References• Increase Working Capital• Protect Company Credit
History• Good Character• Broker Representation
SURETY 101: BONDING AND INSURANCE 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 alternative insurance/guarantee products
DOES THIS HELP THE CONTRACTOR GETQUALIFIED FOR BONDING OR
GROW THEIR BOND CAPACITY???( ANSWER: NO. )
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS
The Surety Underwriter
• Primary goal is to prevent default
• Makes decisions on surety capacity
• Extends surety capacity to ensure success of contractor
SURETY 101: BONDING AND INSURANCE 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)
• Helps to establish and maintain your Surety Support
• Helps the contractor with business planning, especially discussions on risk management
• Helps the contractor grow his or her surety program
SURETY 101: BONDING AND INSURANCE 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
• Provides sound business advice• Referral resources for CPA’s, Attorneys, Bankers• NASBP – National Association of Surety Bond Producers
So if you are not a big contractor with FANCY Financial Statements…
What Can You Do?• Find a Professional Surety Agent that you can work with• Discuss the Easy Entry Surety Bond Programs that are now available
• What about these “Easy Application Bond Programs?• Programs start with only needing a simple application – No Financials• Can support single jobs up to $500k or more.• Can provide aggregate limits up to $1 million or more• Have programs for both General Contractors and Specialty Contractors including
Service, Supply and Install businesses• Need to show Adequate Experience in performing similar size and scope of work• Have a credit profile* that shows you take care of your responsibilities• Rates vary considerably subject to the financial information provided and your
credit profile
Bottom Line: “Most Contractors in Today’s Surety Market CAN get some level of surety support
SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS
Earning Trust: Maintaining the Surety Relationship
• Immediately notify surety of problems• Communicate openly, no surprises• Provide accurate, detailed & consistent information
How Do I get more Surety Capacity?
• Use your independent counseling team of your Accountant, Attorney and Professional Surety Agent
• Of the three, your Surety Agent provides free advice on how to grow your support
• All Surety Agents should be able to lay out a path on how to get larger work bonded
• Don’t hesitate in letting your Surety Agent and Accountant communicate with each other on how best to help you achieve your goal capacity
• Remember those 3 C’s for Surety, everything usually comes back to them
Any More Questions? Call us!
Steve Swartz, President/CEO
surety@southcoastsurety.com
SouthCoastSurety.com
1100 Via Callejon, Suite ASan Clement, CA 92673
(800) 361-1720
DOI Lic# 0B57612
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