INTRODUCTION TO BID/PERFORMANCE AND PAYMENT BONDS AND THE SBA BOND GUARANTEE PROGRAM:

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Milo Simmons
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1 INTRODUCTION TO BID/PERFORMANCE AND PAYMENT BONDS AND THE SBA BOND GUARANTEE PROGRAM: U.S. Small Business Administration Phoenix SBA Office March 21, 2013 Mark S. Hewitt, CPCU, AFSB, AIM Western National Insurance Group The Relationship Company

Administration Phoenix SBA Office March 21, 2013 Mark S.

2 Bonding is not the same as Insurance 3-party Surety Bonds Risk transfer Duty to obligee Regulated by State Insurance Departments Premium fee for prequalification services Project specific Penal sum 2-party Insurance Risk transfer Duty to insured Regulated by State Insurance Departments Premium actuarially determined Usually term specific Policy limits

Project specific Penal sum 2-party Insurance Risk transfer Duty to insured Regulated by

3 What is a Surety Bond? Principal Obligee Surety

4 Cost of Surety Bonds Bid Bond Performance Bond Payment Bond No charge ½ - 3% of contract price Price included with performance bond

5 Types of Bonds Bid Bond Performance Bond Payment Bond

6 First Step: Select Knowledgeable Surety Producer/Agent Attorneys Prequalification Process Lenders Contractor Producer Surety Company Auditors Advisory Group

7 Second Step Select knowledgeable CPA AICPA Audit Guide C.P.A. Reviewed or Audited financial statements

8 Third Step File submission to surety company Contractor & underwriter meetings

9 Information Surety Needs Organization Chart/ Questionnaire Business Plan & Resumes Business and Personal Financial Statements Work In Progress Emergency Plan Job and Supplier References Banking Relationships Line of Credit/Reference Underwriting Requirements Recommendations

Progress Emergency Plan Job and Supplier References Banking

10 Prequalification Financial Strength Character Experience Equipment Credit History Banking Relationships

11 Financial Statement Analysis Opinion Page Balance Sheet Income Statement Cash Flow Statement Background Investigation Account Schedules Contract Schedules Financiali Statement Explanatory Notes

12 Four Cs of Surety Underwriting Capital Capacity Character Contract /Conditions i

13 SBA Surety Bond Guaranty Program Purpose is to help small and emerging contractors obtain bonding and gain experience The maximum contract that can be guaranteed by the SBA is $6, It is possible to consider up to $10,000,000 if project is a federal project and the federal contracting officer certifies that it is necessary New Size standards $31MM annual revenues for G.C. s, Water/Sewer, Highway, Street and Bridge contractors. $13MM annual revenues for most specialty contractors. Must not be previously disbarred or declared ineligible.

It is possible to consider up to $10,000,000 if project is a federal project and the federal contracting officer certifies that it is

14 SBA Financial Statement Guidelines Small Projects under $500, Internal Financial statements can be accepted Up to $1,000,000, C.P.A. Compiled Financial Statement or high quality In House Financial Statement should include schedules of receivables and payables. A six month interim that is either C.P.A. compiled or internal statement is acceptalbe. Over $1,000,000 C.P.A. Reviewed fiscal year end with revenues recognized under the percentage of completion basis of accounting. A six month interim financial statement is required and should be a C.P.A. Compiled financial statement.

A six month interim financial statement is required and should be a C.P.A. Compiled financial statement.

15 SBA Program Continued SBA guarantees between 70 90% of losses on SBA bonds to the Surety Contractor pays a fee of $7.29 per thousand to the SBA when applying for performance and payment bond. Surety issues the bonds SBA is not indicated on bond forms to the public.

29 per thousand to the SBA when applying for performance and

16 SBA Forms Needed Besides the submission i to the surety the contractor completes the following forms: SBA 912 Statement of Personal History SBA 994 Application for Surety Bond Assistance

17 Advice for Today's Market Contractors Know rights & responsibilities Stay within capabilities Manage growth & overhead Learn why contractors fail Communicate

18 Advice for Today's Market Contractors Contract terms Bond forms Construction CPA Adjust overhead Bank line of credit Conserve capital Bond subcontractors Qualify surety

19 Questions? Thank you for attending!

Surety Bond Guarantee Program

Contractor Bond Seminar Surety Bond Guarantee Program 1 The Basics of Bonding Contract Bonds Bond Agents Pre qualification What Bond Underwriters Look For Banking, Credit & Bond Costs SBA Bond Guarantee