A Workshop Module of the Model Contractor Development Program (MCDP) The Surety & Fidelity Association of America

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1 What You Need To Know For Contract Surety Support A Workshop Module of the Model Contractor Development Program (MCDP) The Surety & Fidelity Association of America

2 Barriers to Emerging Contractors Entry and Growth Contracting Opportunities Information and Management Expertise Trained and Reliable Workforce Capability and Capacity Performance Issues and Dispute Resolution Bonding and Financing

Expertise Trained and Reliable Workforce Capability and

3 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 Obtaining First Bond or Increasing Bonding Capacity

bond Advocating for bond waivers Advocating for alternative

4 Bonding vs. Insurance Protects another party You cannot buy it like Insurance You must qualify for it similar to bank credit Unlike Insurance, no losses are expected

5 A Bond is a Three-Party Contract Contractor Surety Obligee/Owner

6 Types of 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.

contractor will enter into the contract at the price

7 The Performance Bond The performance bond protects the owner The performance bond protects the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions.

from financial loss should the contractor fail to

8 The Payment Bond The payment bond assures that the contractor The payment bond assures that the contractor will pay specified subcontractors, laborers, and materials suppliers associated with the project.

contractor will pay specified subcontractors,

9 Cost of Bonds 1.0% - 3.0% of total contract price Cost of bond is acceptable project cost that is passed on to the owner Bond premium m paid out of first draw

10 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

Communicates with underwriter & helps negotiate level of surety capacity Provides sound

11 The Surety Underwriter Primary goal is to prevent default Makes decisions on surety capacity Extends surety capacity to ensure success of contractor

12 Information for Prequalification Process Contractor or Supply/Service Questionnaire Business and Personal Financial Statements Work in Progress Schedule Bank Line of Credit Resumes of key personnel in sales, operations and accounting Marketing material Business plan Continuity and contingency plan

Schedule Bank Line of Credit Resumes of key personnel in sales, operations

13 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?

Capital Does the contractor have the financial strength to fulfill the

14 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?

15 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 Working capital and net worth requirements Alternative solutions to lack of financial strength

the % of completion basis Personal financial statements Bank line of credit Working

16 Character: References and Reputation Of the construction firm Business relations with Primes, subcontractors and vendors Previous owners Banks Of the construction firm owner Personal financial statement Credit reports

subcontractors and vendors Previous owners Banks Of

17 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.

18 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?

19 Earning Trust: Maintaining the Surety Relationship Immediately notify surety of problems Communicate openly, no surprises Provide accurate, detailed & consistent information

20 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

, banker, lawyer, accountant) Helps to establish and maintain your Surety Support

21 PUBLIC AGENCIES BOND ASSISTANCE PROGRAMS City and County of San Francisco Alameda County Bernida Reagan, Director of Community and Client Relations Merriwether & Williams Insurance Services, Inc.

22 Bond Assistance Programs Program Mission To reduce the barrier of bonding, financing, and enable greater participation of small, local, emerging contractors in public contracting.

23 Bond Assistance Programs Bond guarantees Accounting cost subsidy for financial statements (one time only) Funds Administration payment of fees 1% of contract price Eligibility ~ Small Local Contractors

24 Bond Assistance Programs Program Core Components Contractor Bonding Assessment/Technical Assistance Meet with contractor Obtain and review financial information/work history Determine contractors bonding capacity Establish bonding relationship Broker Surety

25 Types of Insurance Liability Insurance Commercial General Liability (CGL) Workers Compensation Business Auto Policy (BAP) Umbrella Coverage (Excess Liability)

26 Types of Insurance (cont d.) Property and Casualty Insurance Property Insurance Building Insurance Business Personal Property Insurance Equipment Floater (Tools and equipment)

THE USE OF CONSTRUCTION BONDS IN THE USA FLANDERS INVESTMENT & TRADE MARKET SURVEY

THE USE OF CONSTRUCTION BONDS IN THE USA FLANDERS INVESTMENT & TRADE MARKET SURVEY In the United States, the use of construction bonds is common in construction projects. It is issued by an insurance company