APPLYING FOR A BOND FACILITY. The Contractor Application Process

Transcription

1 APPLYING FOR A BOND FACILITY The Contractor Application Process

2 Welcome to the Surety Learning Module: APPLYING FOR A BOND FACILITY Learning Objective: This module will assist you, the Project Owner, to attain a greater understanding for the types of information required from a Contractor to set up a Bonding Facility by way of reviewing a typical Contractor Application.

3 Upon completion of this module: 1. You will understand what a Bond Facility is. 2. You will know what questions are generally asked by the Surety Company of the Contractor to consider a Bond Facility. 3. You will gain insight into the initial phase of the pre-qualification process.

4 What is a Bond Facility? A bonding facility is a commitment from a surety company to provide bonds for a qualified contractor to an agreed limit subject to the stated terms and conditions being met. The surety company will set a limit to the allowable amount of the bonding facility.

5 What is a facility limit? A bonding facility limit is usually stated in terms of two calculations that work together. 1. The single limit, which is often stated in terms of the largest single job the Surety Company will support; and, 2. The aggregate limit, which is the total work program (bonded and unbonded work) that the Surety Company will support for the coming year. Bonding facilities and facility limits are reviewed annually.

6 How Does a Contractor Apply for a Bond Facility? A Contractor will first seek out and find a Surety Broker to enter into a bond relationship. The Contractor will be required to complete an application form as an initial step to the standard process. The rest of this module explains what types of questions are often found on application questionnaires. We also explain why these questions are important to the Surety Company and why they become beneficial to you, the Project Owner.

7 Identifies the company applying for bonds Basic Company Identification Requirements Legal name appears on the bonds Credit reference Research on the company Background checks The name of the company on any bond you receive should be identical to the name that appears on your contract.

8 Key personnel information Ownership Senior personnel Past experience Key Personnel Information Ownership for indemnity purposes Senior personnel for experience and depth Past experience for the ability to perform Resume to support experience listed Succession Planning Reviewing the key personnel information allows the Surety to determine whether or not the company has the capability to accomplish what it sets out to accomplish.

9 Information on subsidiaries and affiliated companies Subsidiaries & Affiliated Companies To understand what other business ventures the stakeholders are involved in To identify holding companies To identify corporate structure Additional indemnity may be required from subsidiary / affiliated companies By examining the operations, capabilities and finances of affiliated organizations, the surety can assess the strength of the entire corporate organization.

10 Credit information on companies, principals (owners of the company) and spouses Identifying Strengths by Exploring Potential Threats Identifies potential problems/issues Provides history of previous surety relationships A change in control could signal a change in structure, size of project, business plan, type of work, scope of work By Reviewing the background data, the Surety can assess any threats that might currently exist: including credit, litigation, and change in control. This aids in identifying the strengths of the applicant.

11 It provides information on the type of work done by the contractor Identifying Standard Work Types If the underwriter sees a job description that doesn't match the type of work done in the past, more questions will be asked The Surety familiarizes itself with the type of work undertaken by the Contractor. Years of experience have provided Surety Companies with exceptional resources and the knowledge base to determine success factors and risk factors for each work type.

12 Identifies the type of work, types of contracts and potentially hazardous work Identifying Work Type with Additional Potential Risks If the answer to any of these questions is yes ; further explanation will be required Sureties understand that the different classes types represent varying degrees of risk. Contractors are required to describe their operations in detail to enable the surety to identify the pertinent areas of risk and ensure that the right bonding strategy is adopted.

13 Who contractor works for and his normal areas of operation Identifying Typical Customers & Areas of Operation If contractor is working for an owner with whom they have not worked before or in an area where they have never worked before, there will be additional questions Moving from working with the public sector to the private sector or vice versa, will generate questions By familiarizing itself with a bonded contractors client list, areas of expertise and geographical familiarity, it can better assess the contractors strengths and weaknesses. This is particularly important when that contractor is contemplating taking on a project outside of its comfort zone.

14 Identifies type of contract form used Environmental risks Information on work done by subcontractors Identifying Bond Forms Used & Environmental Risks Non-CCDC contracts may have terms and conditions unfavourable to the contractor. If there is environmental exposure, questions will be asked about steps taken to mitigate the risks To identify the type and value of work usually performed by subcontractors To identify policy with respect to bonding subcontractors If there are deviations from the norm, questions will be asked An examination of the types of bonds that have been issued by the contractor along with a review of any environmental risks will lessen the overall risk of contractor default.

15 Identifies normal work program size and projected work program Work Program Identifies how much work the contractor can perform at any one time Provides input on the contractor s future business plans As part of its due diligence, a surety will typically identify the size and number or projects that a contractor can concurrently undertake, manage and complete.

16 Info on largest projects completed by contractor Past Project Experience Important for underwriter know detailed info on completed projects including: Type of work Change in Contract Price Location Duration Profitability Who contractor has worked for If bonded and past surety By reviewing past performance on a job by job basis, a surety can come to a good understanding of the contractor s operational capabilities.

17 A summary of the contractor's major suppliers and subcontractors Working Relationships For credit checks Important to know the contractor has good relationships with a number of suppliers and subcontractors An examination of a contractor s working relationships with trades owners, and consultants is an important part of the underwriting process.

18 Provides details on fiscal year end and basis of preparation of financial statements Accounting Details Underwriter will want to know the details as to how, when and by whom the financial statements are prepared. Arrangements for regular follow ups for future statements can be confirmed. A surety s assessment of a contractor s financial statements will include an examination of trends, profitability, liquidity and leverage. A surety will also ascertain the accounting methods used to prepare the statement.

19 Details on Aged Accounts receivables Receivables Management Need to know accounts receivables are collectable for cash flow purposes Cash flow review and an assessment of receivables management form part of the surety underwriting process.

20 Detailed information on banking arrangements Banking Arrangements A line of credit protects a contractor from fluctuation in cash flow Banking agreement provides detailed information regarding the amount of credit provided by the bank and the security held by the bank which may limit the surety Ongoing monitoring of a Contractor s credit facilities and banking agreements, allows a surety keep tabs on the Contractor s cash flow.

21 Information on life insurance and buy-sell agreement if applicable Continuity via Key Man Insurance & Buy-Sell Agreements Insures continuity of the company in unforeseen circumstances By looking into the provisions for business continuity, the surety can assure itself that the business can continue to operate in the event of unforeseen circumstances.

22 Details of insurance program carried by the contractor Full Insurance Program Important to know the contractor is adequately insured for the work being done Having the insurance information allows the surety to point out other risk areas where risk mitigation strategies may be required By familiarizing itself with a bonded contractor s insurance program, it can ensure that certain risks are mitigated or transferred.

23 Provides information on obligations undertaken or to be undertaken by the contractor or any other related entity Other Obligations Allows surety to determine if the contractor has over extended financially or is not focused on principal business By reviewing the status of all jobs (bonded and unbonded) currently being completed by the bonded contractor, a surety can identify possible problems before they lead to default.

24 Information required to support a bonding application Pertinent Attachments Financial statements assess ongoing profitability, financial strength and growth of the contractor and related companies Status of contracts, also called Work on Hand, provides a snap shot of the financial status and progress and of each project When a Contractor receives a bond to bid on your tender, this means that the surety has examined that contractor s operations, finances and experience and has concluded that they are qualified to undertake, manage and complete the project.

25 Contractor s commitment that there is no misrepresentation in the information provided Provides authorization to the surety to do any necessary credit and reference checks True and Accurate Commitment To give comfort to the surety that all information that has been disclosed is accurate and that there is no misrepresentation of the information To allow surety to do credit and reference checks

26 What happens once this application form is completed? The information will be reviewed by the Surety Broker who will assess the information in light of the overall strength of the application and the surety needs. The Broker s next step is to submit the information to a surety company with the goal of securing the surety support required by the Contractor. The surety company will review the application and may ask for supplementary information to support the submission, including additional measures to assess character. Once a Surety Company establishes the parameters of a bond facility and those parameters are accepted by the Contractor, the necessary paperwork is completed in order to establish the bond facility.

27 Congratulations! You have now completed the Surety Learning Module: APPLYING FOR A BOND FACILITY