Surety Bonds &Construction Risk: SAC s Enhanced Process Performance Bond

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1 Public Construction Council of BC Vancouver November 15, 2013 VRCA Surety Bonds &Construction Risk: SAC s Enhanced Process Performance Bond

2 Surety Companies The Surety Industry o SAC members write 95% + of all bond premium in Canada There are hundreds of sureties listed on OSFI s website roster fewer than 20 are SAC members and they write almost all the bonds Industry is bonding on an annual basis approximately $55 billion of public infrastructure Surety Brokers o Look for SAC member brokers they are dedicated to providing superior service (on SAC webiste) 26 November

3 Surety Stats o In the last three years, the Surety industry has paid out more than $500 million in claims; more than the previous 6 years combined. o Total Premium written in 2012 was approximately $450 million and loss ratio was 32%. In Alberta the loss ratio in the last couple two years has been over 50%. o 2013 is not looking well for the Surety Industry, in particular in Alberta with more recent contractor defaults.

4 I Construction Risk

5 Construction Risk 2013 o Ongoing global economic uncertainty o Increased foreign competition from European, Chinese, and American Contractors competing in Canada and in particular in Alberta too many contractors o Changing procurement models (most based on CM) Governments bundling projects together mid size contractors are trying to participate in order to survive o Smaller contractors being squeezed out or are stretching to try to compete

6 Construction in Canada 2013 o Canada punching above its weight : Ongoing commitment to infrastructure Federal commitment $48B over 10 years; BC has a big commitment to infrastructure (BC Hydro) By 2015 Canada to be world s 5 th largest construction market (9 th in 2010) Increased foreign investment from depressed areas (e.g. Europe) o Larger, longer and more complex projects o Challenges to small and mid-sized contractors

7 II Surety Bonds What are They? How do they Work?

8 Surety vs. Insurance Surety Bonds 3-party contract Principal Reimburses Surety Duty to obligee Bond can not be cancelled Contractor default coverage (defined in contract) Acceptable loss ratio = 0 Contract Law Insurance 2-party contract No Reimbursement Duty to insured Can be cancelled Perils coverage (insurance policy) Losses expected Good faith

9 Surety Bonds: 3 Party Relationship OBLIGEE (Owner) SURETY (Guarantor) PRINCIPAL (Contractor)

10 Surety Bonds: 3 Essential Services o Prequalification: Assurance that the bonded contractor is qualified for the job for which they are contracted. o Ongoing monitoring (and hidden services): Sureties monitor bonded contractors continuously and can provide assistance if needed (inject capital, technical support, accounting, etc.) o Security: Financial Protection in the event that the bonded contractor should default on its obligation.

11 Capital Capacity Character Continuity

12 Surety Documents Tender - Prequalification Stage Prequalification Letter Bid Bond Consent of Surety Contract Award - Performance Security Stage Performance Bond Labour & Material Payment Bond Renewable Multi-Year Bonds

13 Performance Bonds o Guarantees Contractor will perform contract in accordance with its terms & conditions. o Contractor must be in default and the default must be declared o Owner must perform its obligations o 4 options available to Surety if there is a default: Remedy the default Complete the Contract Arrange for new contractor to complete Tender Payment o Two years to file suit against the Surety

14 III Claims What Happens when a Contractor Defaults?

15 Before a Default is Declared o Surety has extensive experience with contracts and solving construction problems. o Surety has intimate knowledge of the contractor and its operations o Can provide informal assistance to solve problems that can lead to a default o (e.g.): Can convene meeting or teleconference among the parties to address problems. o Will assist in formalizing solutions.

16 Claims What should happen when a contractor defaults: o Surety will promptly acknowledge notice of default and being to gather information. o Surety will begin an investigation as soon as possible. o Surety will conclude the investigation as soon as possible. o If requested by owner, surety will provide periodic written updates on investigation status and best estimates as to completion date.

17 Claims What also should happen during and after the investigation: o Surety will co-operate with the owner to protect work from damage or deterioration. o Surety will work with the owner to: Identify and implement a solution. Minimize delays, keep the job going and protect the rights of all parties. Pay valid labour and material payment bond claims as promptly as possible to ensure continuity of subs and suppliers.

18 How can you as owner help? o o o o Comply with bond & contract terms (e.g. proper notifications, payments and certifications) Communicate: keep surety appraised of problems in advance and provide default notice promptly. Cooperate: Ensure surety has access to knowledgeable staff and relevant documents. Keep expectations realistic.

19 IV New & Improved SAC s Enhanced Process Performance Bond

20 WHAT S NEW IN SURETY BONDS? The industry, working through SAC, is constantly analyzing trends and meeting with owners to improve the surety product 26 November 2013

21 SAC S ENHANCED PROCESS SURETY BOND Owners told us they wanted better communication, more responsiveness and control this new bond form delivers The new bond took over 3 years to develop, including consultations with CCDC, owners and the Canadian Construction Association 26 November

22 What has not changed CCDC features retained: The SAC Performance Bond will continue to provide the same benefits of standardization that comes with the CCDC approach, including: Successful Track Record: The core components have not changed so no unnecessary litigation and lower costs. Fairness: The form balances the needs of all parties to the construction process all provided input into the drafting of the this bond wordings Explicitness: The language of the SAC bond is concise and clearly states the rights and obligations of the contractor, owner and bonding company in the event of the contractor s default.

23 New bond provides more timely & responsive claim service: o Pre-Demand Conference to allow surety and owner to prevent problems from turning into a default. o Timelines for Surety s Response: 5 days to acknowledge a response & request info. 21 days (from receipt of information) for surety to respond to owner with their response.

24 Features (cont d): o Emergency Remedial Work: Allows Owner to address urgent issues (e.g. safety) under the bond. o Post-Demand Conference: Mechanism to minimize or eliminate work stoppages while surety investigates. o Contact Coordinates: Contact information for all parties to facilitate notices and communication.

25 SAC s New Bond Form growing o o acceptance across Canada SAC has submitted the new form to CCDC, and the response to date has been positive o However, the CCDC process is a long one, and it will likely be another year or two before this form is approved as a CCDC document That s why SAC has been promoting this bond form to owners for the past year; examples of owners using it now include: o Alberta Infrastructure o Shell Oil

26 Contact Us Copies of SAC s Enhanced Process Bond Form can be downloaded from the website: Phone: [email protected]