Surety Bonds. Lori Kieswetter

Transcription

1 Surety Bonds Lori Kieswetter

2 Things we just don t understand Requiring insurers to issue certs instead of brokers Requiring certs at prequal stage Your own forms Not putting version numbers on your forms Those that partially fill in forms and demanding that form be used instead of making a generic electronic version available which allows us to insert the project specific information

3 Who are the Bonding Companies In the United States they base their decisions on acceptable bonding companies on the financial rating companies numbers such as A.M Best. In Canada - as you know; we are a bit different. The federal government controls on our financial institutions are much different and thus we have alway relied on Ottawa to do the research and we follow along. In order to get on that list a surety company must undergo a lengthy process. If it's good enough for the Federal Government it's good enough for the rest of us. Click to Access the Federal Government's current list of acceptable sureties Search on page for "Appendix L"

4 The chart shown here represents last year's surety numbers. Remember many of those shown are not contract (construction) bond writers but instead write license and permit bonds (commercial bonds). Anything under number 20, Jevco, ACE INA, Cooperators and Northbridge Financial are not to my knowledge contract surety writers.

5 Be warned that occasionally we see a fly-by-night surety company pop up offering contractors insane limits. They should be avoided at all cost. If you are concerned about a bond please contact the Surety Association of Canada and they will either explain that a company has recently changed it's name and the Federal List hasn't had time to adjust - or that this is a company you may be best advised not to accept a bond from.

6 The Bonding Brokers If a brokerage has dedicated qualified surety personnel they will be issued "power of attorney" for any number of different bonding companies. I am one of those brokers. In my opinion brokers are more customer service oriented and this power of attorney allows them to issue bonds for their clients as they are also provided with a seal for those surety companies. This will help you understand why, when you call a bonding company as ask for the name of the person that signed the bond, that you are told there is no such person working there. When municipality staff explained this to me I started including my address after my name when signing bonds and while this works well with me, if the broker signing is not a surety broker as much as a surety administrator; then that contact information would be useless to you. This is the reason I am providing this listing for you of the underwriters with different sureties but another route may be to phone the office of the bonding company and ask for the underwriter for "Contractor XYZ". If this doesn't work I am happy to help you find your way because as a member of the surety industry it is my job to help the end users of our product just as it is to help my clients. I takes me no time and I'm very happy to do that.

7 The Bonding Broker continued The power of attorney is issued to us under certain conditions - limits are a part of that. When you ask for a contractor's limits this is the number you generally get. It does not represent the maximum sized project a contractor can be bonded for but is more a reflection of addressing their day to day needs to enable the broker to issue bonds within those parameters without having to get approval from the bonding company. I have a client who financially qualifies for bonding in excess of $10,000,000. The largest project they have done to date is $3,000,000 but that was years ago. The type of work they do means the only difference between a $10,000,000 and a $3,000,000 job is more of the same - not anything more technically challenging. My limit is $1,000,000 because in 99.9% of the bond requests of the past decade - that is all that is necessary. Once it is over my limit I have to approach the underwriter on that account. He or she will then review it and if it is over his or her limit for that account it goes up the lines within the bonding company.

8 The Bonding Broker and Limits When you ask for their limit it is a problem in that the underwriter's limits are not released to us and thus we give the broker's limits. If a bonding company prepares that letter it will also give that number as a limit. There are also actually 2 limits - one a single job limit and one called an aggregate limit which includes all the contractor's outstanding tenders and any work actually on the go. When you ask for their capacity of portion available it is a number so fluid as to be useless. It can change 100% in an hour because they may have a couple of huge jobs outstanding and then get the word they were not successful. While I understand exactly what you are trying to achieve it puts us all in an awkward position as there is so much grey area. We don't know how much weight you are giving that "limit" and so we hesitate to give information we know is being misconstrued.

9 Myth If you contact the Bonding Company they will freeze the Contractor s bonding Hopefully most of you are familiar with the Contract Status Report already. This is the form sent out by the bonding company directly to you the obligee. As to when and how frequently these forms are sent out depends on the individual bonding company and the size/complexity of the project. More often than not these forms are not returned and I ve spoken with some of you to determine why. It seems unless we sent them to a specific person they get lost and I would suggest we as the people signing the bonds; start including our address on the actual bond. This would give you a person to keep in touch with. You could even develop your own contract status report and set your own policies as to when your project manager sends them out which would mean it is a simple Here s how things are going instead of a red flag. No bonding company would object to this kind of communication because it allows them to get a better idea of how well their client performs and may even lead to supporting them on larger projects in the future so it s definitely not a bad thing for the contractor. On the other hand if things are not going well the sooner the bonding company hears of it the better while there is still time for the project to get back on track.

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13 The Contract Status Report serves another purpose.. It allows the bonding company to see the changing job value. If it is less than the original contract; a portion of the bond premium paid will be refunded and if it has increased that will be invoiced so please keep this in mind when negotiating changes with the contractor there will be extra bond costs. Bond rates are based on the contract price (not bond amount) and are annual so if a project goes over a year, expect a surcharge on the bonds. Please Note: If the obligee knows of problems on a job and does not report them to the bonding company by responding to requests for information, they may have nullified their protection under the bond by prejudicing the position of the surety.

14 Misunderstanding Prequalification. This is a process that was started 15 years ago to prevent the situation whereby a bidders list consisted of 80 or 90 bidders. It was a very real problem at the time to go through all that paper and the prequal did prevent this. What we have now is a prequalification document which takes longer to review than those 80 or 90 bidders. If a municipality team member was misinformed and started asking for something new it would typically spread like wildfire and then nobody wanted to be responsible for taking something away and so the document continues to grow. I can only comment on the bonding and insurance sections and so I will point out my 10 things I hate about you and invite you to help me understand why it s done this way. Maybe with some communication we can get you the information you need to make a great choice because as it stands now you are likely not getting what you think you are.

15 In preparation for this seminar I asked an underwriter to read over what I d written and his response is as follows: they are supposed to be legally non-committal when you boil it all down, they are more of a 'marketing' letter than anything else by stating the size of the project, it doesn't really mean the bonding company doesn't have any objection it just means it s in the realm of possibility To sum it up, if I were a municipality wanting to know, what does the letter really mean?, I would say: 'It means a bonding company is willing to speak positively on behalf of a contractor in reference to a specific job'.

16 Unlike bonding; anyone can purchase insurance so there is no purpose to this document. It doesn t matter what a contractor has now you will tell them in your spec what they will need to sign the contract. I have been told that this requirement is included so the broker is aware but quite honestly we do thousands of these and it is not until tender stage that I am interested because I want my client to be able to build extra costs into his tender. What valuable information do you gain from this? The contractor has an insurance policy. Is that valuable? If a contractor passes the rest of the prequal process he most certainly is a viable company and thus is insured.

17 To enable us to state a contractor s capacity to obtain bonds for a specific job we need to know how big the job is, and our usual basic underwriting info such as %sublet, maintenance period, payment terms, bond forms etc. In other words we need to underwrite a job in order to give you a written document confirming the contractor s ability to obtain bonding on a given project. Which bond limit are they referring to? When I set up a client with a bond facility it is much like a line of credit at the bank. I make a submission to a surety bond company and if it goes ahead the contractor broker and underwriter will discuss general levels of support being requested and offered. Some bonding companies refuse to limit their clients and take it all on a case by case basis but the broker who actually issues the bonds will

18 be given limits of authority. This means under a certain single job price I can authorize bonds for my clients without going to the underwriter as long as it is also under the aggregate limit I will be given. The aggregate limit takes all uncompleted work and all outstanding tenders into account. If I were to give you the aggregate limit and useage today but 3 huge tenders closed tomorrow the useage could easily change by 100% overnight and typically does. If you job isn t tendered immediately it could change every day. The single job limit is MY limit not the contractors. There is nothing hard and fast in underwriting is this job in the contractor s backyard? Has he worked with the obligee or architect before? Is a large portion of the project subcontracted out? I ve often seen a contractor with a $5,000,000 single limit get support for a $15,000,000 job. The limits assigned to the broker are intended to be working limits to speed up the bond issuance process so if you look at a contractor s bidding history you can pretty closely guage what their normal needs will be going forward. I have a client who qualifies for $10,000,000 single job limit and has a $2,000,000 limit because again that is MY limit and it does the job really well.

19 At least here we are given a budget but how do we confirm willingness when there is no spec to underwrite? Amount of time with a bonding company - I once gave this as an example of something more meaningful than what someone was asking for and now I see it popping up.so I take full responsibility here. What if someone changed bonding companies last month? While being with a bonding company for 20 years is not as rare as one might think; there can be all kinds of reasons to switch and they may have to do with surety company weaknesses not contractor weaknesses. A contractor may follow a trusted underwriter to his/her new job.the surety company may have had a mandate or ownership change making doing business there a problem so nothing bad should be read into a short period but it s nice to see a long term relationship. As the people supplying this info we don t have the comfort that the reader is understanding how this plays out and ultimately how insignificant it might be and yet we don t want him disqualified because we didn t comply.the information a positive but lack of it if not a negative. I get nervous answering that without the comfort of knowing if the person making a judgement on this client will understand that.

20 What is the purpose of this document? If a contractor carries only 2 million it is a simple thing to make a call and increase it when a contract is awarded. It says a builders risk for instance my be requested. This prequal will be filed away and never seen again. The time to give us this information is at tender stage.

21 We can t commit to giving anyone either tender bonds or contract bonds until we have a spec on which to base a decision. There is absolutely no point in being so precise about the size of the potential bonds. It is not part of the underwriting process. Either the contract is qualified in the surety s eyes to successfully complete a given project or they are not. The size of the bonds are of no interest to us and have no bearing on the decision to support of decline.

22 My pet peeve. It leaves me speechless Instead of doing us a service by making us aware of the potential requirements for a potential project which one of our clients could potentially decide to tender, just ask us for the information you need to make your decision. In this case not only are we given a lot of information with no value to us at this stage but we are also asked to complete a 2 page form telling you where we are going to purchase the coverage for this potential issue.

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24 The Ontario Auto Policy prevents us from adding anyone as additional insured We have no idea what insurance company we would deal with until we go to get quotes. So we make something up to placate you. All in all a total waste of our time and yours. This would all be important at tender stage.

25 Tell us about this at tender stage so we can give our client a quote in order to include in his price

26 My suggestions The Surety Association of Canada developed a standard prequal letter which tells you a) the contractor has a bonding facility b) b) the bonding company is aware of the size of your project and has no objection. These are the 2 most important pieces of information because if a contractor doesn t have a bond facility he may not qualify for one and even if he does the process to set one up is generally a few weeks. c) The only thing I would add is a sentence saying In the past this client has received bond support on projects in excess of $. Those three things tell you everything you need to know. If you want to know the contractor has insurance even though I don t think this is necessary and again you are making your life harder than it need be; ask for proof of insurance. Don t go into any big discussion as to what they would need. As I said before what they have now is irrelevant and what they will need if successful is at this point in the process; also irrelevant.

27 What if we added something like: We can confirm this contractor has received surety support on a project valued in excess of $10,000,000 in the past.

28 Bond Rates Since the bond is underwritten with little expectation of loss, the premium is primarily a fee for prequalification services, although sureties also use industrywide loss costs and loss severity studies to determine premium. Surety bond premiums vary from one surety to another and from one contractor to another. Typically, there is no charge for individual bid bonds or agreements to bond but instead you are charged an annual bid bond administration fee. The contractor includes the bond premium amount in the bid and the premium generally is payable upon execution of the bond. If the contract amount changes, the premium will be adjusted for the change in contract price. A Contractor s bond rates will be decided by a number of conditions which include the market conditions, the contractor s financial strength and the amount of bond premium likely to be produced to a lesser degree.

29 Bond Rates Here is a typical rating chart 50% 100% Performance Bond Labour and Material Payment Bond Maintenance in Excess of 1 year Broad Form L&M Payment** Annual Rates Includes standard one year maintenance (more than 2 a problem) Based on CCDC forms Will be adjusted if job value changes GST added to contract price before computing but premium not taxable *** A standard labour and material payment bond covers subs and suppliers who have a direct contract with the principal. A broad form includes subs and suppliers of subs and suppliers and thus is more onerous and more expensive Owners forms will sometimes be surcharged as a matter of course and sometimes they will be rated according to the differences between that bond and the CCDC equivalent.

30 Electronic Bonding Electronic Bonds The Department of Transportation in the United States is currently using electronic signatures in the procurement process. Others are looking into it on both sides of the border. In Canada the bonding industry is very interested in this concept as we have been held hostage to the corporate seal requiring couriers and all the potential problems that incurs. Electronic bonding would make our process or at least our delivery system much faster and more reliable. The issue is would the obligee approve a bond with a digital certificate instead of a signed sealed original? The next few slides will show you one possible scenario

31 How does an electronic bid bond work?

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35 Electronic Signatures

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37 What are Digital ID s? Digital ID signature or certificate is an installed file resident on a computer which validates who you are. Digital signatures are used to confirm your identity to any third party concerned. Digital signatures have been confused with electronic signatures. Electronic signatures are scanned copies of a physical written signature. Digital certificates insure data Integrity giving the user piece of mind that the message or transaction has not been accidentally or maliciously altered. The certificate is purchased from a Certificate Authority (CA) and contains your name, a serial number, expiration dates, a copy of the certificate holder's public key (used for encrypting messages and digital signatures), and the digital signature of the certificate-issuing authority so that a recipient can verify that the certificate is real. Digital certificates can be kept in registries so that authenticating users can look up other users' public keys.

38 A digital certificate contains the digital signature of the certificate-issuing authority so that anyone can verify that the certificate is real. Who is the Certificate Authority (CA)? The CA is an entity which issues digital certificates for use by other parties. It is an example of a trusted third party. There are commercial and free facilities (governments or institutions can issue free certificates) and the commercial CA s would be the same companies that issue other types of electronic and internet security like Verisign, GeoTrust, Thawte etc. There is a special facility now for certifying Adobe pdf s available at a cost of $595/year which simplifies the process for the recipient. The application process is quite complex and requires online and fax documentation and a letter of authorization from your organization/employer.

39 The Surety Association of Canada is monitoring the progress of electronic bonding but currently there is no approved protocol. Personally I am delving into this area by identifying a couple of license and permit bonds wherein the obligee could refuse to accept it and a signed sealed original could be produced in 24 hours thus no serious ramifications like a tender being declared void. I am digitally certifying the documents and making a copy available online to the obligee from our bond repository for added comfort that the bond is indeed valid. It will be interesting to see how this new chapter in bonding will progress in the coming years.

40 Municipalworks Annual Blanket Bond Commonly municipalities hesititate to get performance and labour and material payment bonds on smaller projects for two reasons: Economically it doesn't make sense as the bond premium adds a significant cost to the project. Smaller projects are typically sought by smaller contractors but many of them are unable to obtain a bonding facility This resulted in the municipalities requiring a letter of credit or certified cheque on a blanket basis as part of their prequalification process for contractors interested in these smaller projects.

41 While this system worked to a degree, there remains the issue of tracking that security. Since many municipalities want to go through the prequalification process less frequently many have turned to a 3 year term which resulted in their keeping that security for this extended term. Contractors would obviously rather their money remain in their possession and the municipalities would rather not have the added administrative responsibility. Seeing both sides of this dilema we decided to create a hybrid bond which addresses this situation without requiring a contractor to have a bonding facility. There have historically been 2 types of surety bonds: Contract Surety - Construction bonds which guarantee a construction contract such as bid bonds, performance bonds and labour & material payment bonds Commercial Surety - Annual bonds which guarantee a license or permit typically

42 We married those 2 distinct types of surety guarantees and created a brand new category which replaces the LOC or Certified Cheque. We discussed the concept with two surety companies, municipalities and contractors in an attempt to satisfy the needs of all parties. We have worked with Western Surety Company and an as yet unnamed surety in the production of this new product - a Canadian company who has been writing surety bonds for more than 100 years. Our firms worked together so the intent of the bond and how claims will be addressed is understood clearly by all parties and we are all members of the Surety Association of Canada.

43 Benefits for Municipalities There is no need for a tracking system to confirm status. We designed this bond to be valid until cancelled. If you don't receive a cancellation notice then the security is valid. Most municipalities are requesting $10,000 in security. We are doubling that to $20,000 By using a bond you are getting coverage during the standard one year maintenance term which you are not currently getting Smaller companies - your local friends and neighbours - will not be prevented from doing work for the municipality which they are entirely capable of doing simply because the minimum requirements for a standard bond facility are so high. You can offer contractors the option of replacing existing forms of security with a bond form

44 Benefits for Contractors You don't have to hand your money to a municipality for the term of their RFP - whether that be 1 year or 3 The bond premium is set at a very reasonable $300/year + $50 fee In the case of a claim only the amount in question will be paid whereas with a certified cheque they can take the whole amount You do not need to qualify financially as you do with a standard bond facility. No financial reporting either. A financial report will be taken from one of the commercial suppliers and if there are significant issues you will have the opportunity to explain it. If you currently have a bonding facility this bond does not interfere with it. There is no need for you to move your bonds to us. This is a one-off policy and is of no interest to your current bonding company.

45 A classic example of why this product is needed would be a client of ours who only did sewer hookups for one municipality. That municipality wanted bonds on everything. These hookups were $500. The minimum bond premium was another $500. Then in the mid 90 s the surety industry which had always been a very stable section of the insurance industry went through trying times as did the contractors we serve. The rules changed. The requirements to qualify for a bond facility went from a working capital position of $50,000 to $150,000. Our little contractor was out of business because someone doing that sized project would not have the minimum working capital required to qualify for a bonding facility. The municipality suffered as well because the little contractor had virtually no overhead and thus was able to offer lower prices and yet had done this for many years and was entirely capable. In all the years that followed nothing has been done to rectify that situation. Until now.

46 Basically I would have a level 2 digital certificate which allows me to put a digital signature on my bonds. It would have a picture of my signature along with verification that I am who I claim to be. Since new technology is frightening I would then put a password on the bottom of the bond which would allow you to go online to a repository of such bonds and view the bond in question to ensure it is legitimate. Here is a picture of a document with such a signature and I would that to my client - the contractor; and he would then sign and seal it and submit it to you. Eventually we will be at a stage where they will able to digitally sign the document as well and forward it to you electronically but until everyone is comfortable with the concept and that includes the contractors being able to manage their own digital signature; this is baby step. The goal here is to find a legally binding alternate to the original signature/seal. This is that solution but old habits die hard.

47 Unless you, the obligees or end users of bonds are willing to accept a bond there is no point in making it available to contractors. If your municipality decides to accept it you will then be able to join the network that will contribute to it's evolution. Any changes or future versions will be done with your knowledge and taking your thoughts and concerns into account. As the end users of this new product we want to ensure it is responding to your needs. Once that decision has been made it is a simple matter of making it an option in your spec or RFP.

48 Commercial Bonds - License and Permit Bonds License bonds are surety bonds filed with a license to help protect the public. All different types of businesses are required to file license bonds: mortgage brokers, car dealers, contractors, etc. License and permit bonds are required by various levels of government, normally as a condition to operate a business. These bonds ensure that businesses comply with the federal, provincial and municipal rules and regulations. The one thing that they all have in common is that they typically deal directly with the public the bond is in place to protect. I am going to list a number of these bonds to give you ideas as to what you might potentially wish to use.

49 Commercial Bonds - License and Permit Bonds Auctioneers Automobile Dealers Boiler Contractors Bond Cemetaries Collection Agency Direct Sellers Electricians Energy Sales Environmental Gaming/Liquor Guardianship Insurance Agency Livestock Bond Mortgage Dealers Private Investigators Private Training Schools Road Cut Tax Bond Real Estate Sewer Tappers Street Opening Union

50 Claims Performance Bonds First the surety can t act until you declare the contractor in default. Secondly the surety must investigate and determine that the principal is indeed in default. Therefore it is imperative that when you declare a contractor in default decide to make a claim that you supply the bonding company with accurate facts and documentation as quickly as possible to allow them to make such a decision Your responsibilities at this time would include: 1. Comply with the bond and contract terms (proper notifications, payments and certifications) 2. Communicate keep the surety appraised of problems and provide default notice promptly 3. Ensure insurance on the project remains in effect 4. Do not make further payments to the contractor 5. Mitigate to keep costs at a minimum as a result of the default situation

51 Surety s Responsibilities: Promptly acknowledge notice of default and begin to gather information Conduct an investigation as quickly as possible If requested by owner provide periodic written updates on investigation status and best estimate as to completion date Notify the indemnitors of the bond They may hire outside adjusters or use their own claims specialists and may hire experts to assess the situation in order to get an outside opinion on the dispute. If the surety agrees with their contractor s position the claim will be denied and it s all likely going to court. If you have formally declared the contractor in default, and if the surety determines in their investigation that the contractor may be in default AND if you as obligee have fulfilled all your contractual obligations then we have a bond claim

52 The bond wording determines the surety s options at this point If the CCDC wording was used: Whenever the principal shall be, and declared by obligee to be, in default under the contract, the obligee having performed obligee s obligations thereunder, the surety may promptly 1. Remedy the default or 2. Complete the contract in accordance with its terms and conditions, 3. Obtain a bid or bids for submission to the Obligee for completing the Contract in accordance with it s terms and conditions and upon determination by the Obligee and the Surety of the lowest responsible bidder, arrange for a contract between such bidder and the Obligee and make available as work progresses (even though there should be a default, or a succession of defaults, under this paragraph) sufficient funds to pay to complete the Principal s obligations in accordance with the terms and conditions of the contract and to pay those expeses incurred by the Obligee as a result of the Principal s default relating directly to the performance of the work under the contract less the balance of the Contract price; but not exceeding the bond amount. The balance of the Contract price is the total amount payable by the Obligee to the Principal under the Contract, less the amount properly paid by the Obligee to the Principal or 4. Pay the Obligee the lesser of (1) the Bond Amount or (2) the Obligee s proposed cost of completion, less the balance of the contract price.

53 Examples of Real Claims

54 General Contractor Gets Into Trouble with Condo Deal Canada The surety provided a bond facility to a general contractor located in a major Ontario city. The contractor had been in business for twenty years, with the current shareholders having owned and operated the business for 5 years. The contractor performed a mix of private and public work. Virtually all of the work was subcontracted to others, with the contractor providing supervision and some labour. The contractor generated annual sales in the range of $10 million. Unbeknownst to the bonding company, the contractor decided to assist in the development of a condominium project. In exchange for being given the contract to build the condominium, the contractor agreed to defer payment of some of its costs until financing was finalized by the developer. To secure its position, the contractor obtained a collateral mortgage on the property.

55 Regrettably the developer was unable to secure financing for the project and the contractor was forced to accept a slow monthly repayment schedule from the developer for the work it had performed. The total amount owed to the contractor on this project was $590 thousand. The non-payment of this amount created financial difficulties for the contractor. Even after drawing down his line of credit, the contractor did not have sufficient financial resources to fully finance his operations. The surety became aware of the financial problems facing the contractor and scheduled a meeting with the contractor and his accountant. The accountant disclosed that, in addition to the uncollectible condominium receivable, the contractor had lost $700,000 in the first four months of the year, with most of the losses arising on contracts that did not require bonds. It was evident that the contractor was in dire straits. Shortly thereafter, the contractor made a voluntary assignment in bankruptcy for the purposes of making a proposal to its creditors. Ultimately, the creditors did not accept the contractor s proposal and the contractor s business was liquidated by the trustee in bankruptcy.

56 The contractor had not completed three bonded contracts at the time of its bankruptcy. One contract in the amount of $650,000 was for the construction of a fire station, the second contract in the amount of $4.3 million was for the construction of an elementary school, and the final contract was in for the construction of a $10 million rink addition at a sports complex. Fortunately all three of these contracts were nearing completion. The surety company worked closely with the contractor during the contractor s financial difficulties and into the period of its bankruptcy protection. The contractor was able to continue to provide supervision services on these contracts and the surety made payment to the many unpaid subcontractors and suppliers on those contracts. The payments to the subcontractors and suppliers prevented liens, gave confidence to the subcontractors and suppliers to finish their work and enabled the timely completion of the contracts. In total the surety made payments to 104 subcontractors and suppliers in the total amount of $1.7 million.

57 Sewer and Watermain Contractor with Multiple Jobs Canada The surety provided a bonding facility to a contractor who performed sewer, watermain, curb/gutter, haulage, roadwork and aggregate recycling in one of the major cities in Southern Ontario. Much of the contractor s work was performed for municipalities. The contractor generated annual sales of about $10 million. Its largest job was a $9 million water storage facility that was performed for a local municipality, although the contractor typically performed contracts ranging from $500,000 to $3 million.

58 Because of its large equipment fleet, the company was reliant on its bank to provide a significant operating line of credit. As a result of some poor contracts, the company s financial position deteriorated at the end of the construction season. The contractor breached the covenants contained in its line of credit and the bank appointed a receiver to liquidate the company s assets and repay the bank loan. The company ceased operations after the appointment of the receiver. At the time of its demise the contractor had not completed 13 bonded contracts, 12 of which were with the local regional municipality. The other contract was with another local city. The total value of these 13 contracts was $7.4 million. One of the jobs had not yet started, two were partially complete, 3 contracts were complete except for the top coat of asphalt and other finishing work, and seven were in the maintenance period and required remedial work to be performed. All jobs were for the installation of roads, curbs and gutters or sewers and watermains.

59 The surety worked with the owners to ascertain the status of each contract and identify the remaining work to be performed under each contract. Quotations were obtained to perform the outstanding work. After reviewing the quotations with the surety, the owners hired the contractors that submitted the most suitable quotations. Simultaneously, the surety received numerous claims from subcontractors and suppliers who had worked on these 13 contracts and had not yet been paid for the work performed. The surety reviewed each of these claims and made payments to a total of 48 subcontractors and suppliers. In total, the surety incurred losses totaling in excess of $1.4 million. Since the owners were entitled to use contract funds that normally would be paid to the subcontractors and suppliers to complete the contracts, the owners did not incur losses for the completion of the contracts. All of the payments were made to subcontractors and suppliers who had not been paid for the work they performed work on the contracts prior to the contractor s demise.

60 Paying the Bond Premium is Cheaper than the Alternative U.S.A. A well-established, family-owned contracting company had 16 bonded projects underway. When the State of California began licensing contractors, this company received the second license issued, but even contractors that have been in business for years can run into trouble. In this case, the last surviving family member had sold the company to five employees six years earlier. The contractor was working on a bonded $20 million school building project that had significant cost overruns. It was the beginning of a huge financial strain on the company, which started spreading to the contractor s other projects. The company defaulted on four projects: three senior citizen homes and one low-income community rehabilitation center. The default was a serious situation because many people would not be able to occupy their new living facilities. Furthermore, delays could result in a substantial loss in funding from the U.S. Department of Housing and Urban Development (HUD) and tax credits.

61 The surety acted swiftly by hiring a replacement contractor with an excellent track record on HUD projects. A special team was assembled to handle the complex federal and state documentation required to keep the job on track and in compliance with HUD regulations. The original subcontractors, laborers, and suppliers were retained and paid for completed work. The surety satisfied all the liens on the projects and all necessary paperwork moved through channels without delay. The work was completed on time with no loss of tax credits or special financing. Most importantly, residents were able to occupy the premises in time to satisfy agency deadlines. The owner was protected from financial loss and four important projects were finished on time. Without a bond, the loss to the owner on these four bonded projects would have been $1.86 million dollars. The premium on the bond that protected the owner from that expense was only $129,290.

62 Owner to Surety, "Job Well Done" U.S.A. A California specialty contractor with a long history of successful projects faced financial disaster after the managing shareholder of this family-owned business suffered a stroke. An inexperienced son-in-law took over but was unable to manage the company successfully. Finances were in serious disarray, and past due federal tax and bank loan obligations totaled several hundred thousand dollars. As a result, the contractor voluntarily defaulted on six bonded projects, of which four were not completed. More than 85 subcontractors and suppliers filed claims against the payment bond.

63 Because of timely investigation and intervention, the surety worked with the project s owners to replace the contractor on one project and took over and completed work on two other projects. The surety also paid the penal sum of the bond on another project that had barely begun. One project owner wrote, [The completion contractor under the takeover agreement] has completed all of the work required and all of the additional warranty and corrective work that was necessary to satisfactorily complete the project. Your cooperation and professionalism in handling this contract has been appreciated.

64 Firm Falls Apart, Surety Sends Rescue Team U.S.A. The president and vice president of a highway-contracting firm were killed in an airplane crash. The heirs brought in a new management team who managed 21 contracts worth $109.5 million. Within a short time the formerly successful operation was in financial difficulty. With $27 million in work remaining, the firm owed $8 million to subcontractors and suppliers and had no cash flow. The surety brought in two recently retired successful highway contractors who determined that the company was a good organization. Under their direction, the company liquidated an equipment repair plant and set up effective cost accounting methods. The surety infused $6.8 million into the contractor s company, including $1.7 million to complete a non-bonded project to avoid jeopardizing the bonded projects.

65 Surety Keeps Job Moving Without Key Subcontractor U.S.A. A subcontractor sustained losses on a number of bonded contracts and didn t have the cash flow to handle job costs on a $24 million subcontract for the installation of reinforcing steel and concrete at a large building complex, even though the prime contractor furnished the concrete and reinforcing steel. The surety advanced funds for payroll and critical bills to keep the job moving. When it became apparent that the subcontractor still could not continue, the surety arranged for the prime contractor to employ the subcontractor s work force while it found a new subcontractor. The surety and prime contractor jointly arranged contract terms with the new subcontractor and the surety purchased heavy equipment to avoid disruption of the work schedule. The new subcontractor started operations after a brief one-week shut down and mobilization period.

66 The owner was aware that a key subcontractor had defaulted and observed the subsequent events, but did not in any way participate in the arrangements. The architect for the owner estimated that throughout the default and relet period, less than three days production was lost. The new subcontractor made up for lost time and completed the project on schedule. The owner s representatives expressed appreciation to all parties for the smooth transition. The surety paid $4 million in completion costs and $3 million to subcontractors and for correction of defective work.

67 If you would like information on the claims process under a bid bond or a labour and material payment bond please contact me at lkieswetter@ogilvy.ca I can also send you a tutorial on bonding should you wish a copy.