Anatomy of a Surety Bond Claim David Pesce Director of Surety AXIS Insurance Company

Transcription

1 Inaugural CFMA Southwest Regional Conference Long Beach, CA September 13-15, 2015 Anatomy of a Surety Bond Claim David Pesce Director of Surety AXIS Insurance Company

2 The Typical Submission Process Agent to Branch Typical Submission Requirements 3 5 years of Financial Statements, WIP s, Aging Schedules, Tax Returns, Personal Financials, Interim Financials Organization Charts Résumé's of Key Personnel Questionnaire Submission Letter from Agent Details of Job History, Class of Business, Specialties, In-House Financial Capabilities, Program Limits Requested Branch Underwrites Develop an historical trend analysis Financial Statement Trends WIP Trends Account Visit Answer questions and allow critical face to face Anatomy of a Surety Bond Claim 2

3 Branch Submits to Home Office Possible Additional Questions Concerns/Discussions HO Approval (or Declination) to Branch Branch Relays Final Decision to Agent Anatomy of a Surety Bond Claim 3

4 This Company Structural Concrete, Flatwork, and Masonry Contractor Started in 2008 Owner had minority ownership in another qualified firm Could not buy out majority owner, so sold back Prior firm had strong bonding relationship with major surety Start up firms not handled by prior surety Owner in this class of business for 20 years Strong GC Relationships Very Good Construction Oriented CPA Firm does FYE Anatomy of a Surety Bond Claim 4

5 Largest Projects $3,045,000 Structural Concrete Subcontract 8.8% FGP No profit fade $2,691,000 Structural Concrete Subcontract 23.2% FGP Strong profit increase 70% complete with $4,016,000 Structural Concrete Project GC replaced so job faded, but still showing 21% margin and overbilled Claim for extras filed with GC s surety but not accrued on financials Owner and Key PM s had experience handling Structural Concrete projects in excess of $15,000,000 Anatomy of a Surety Bond Claim 5

6 Account submitted June 2014 Account came to Surety via book roll-over when prior surety withdrew from contract surety market No other issues with prior surety Minor profit fade trends Explained in (function of known labor rates in market) No financial trend issues Largest prior CTC backlog around $10,000,000 Initial request is for $4,310,000 bond for Structural Concrete with repeat GC Job will start in July 2014 and Finish in January 2015 Already Included on current WIP $15,000,000 CTC at this request Title of Presentation 6

7 Jobs Over $100,000 Gross Profit Comparison Report ABC Construction, LLC 12/31/ /31/ /31/2013 4/30/2014 Job Number: Contract Price $ 214,260 $ 218,445 Bond Number: Est. Gross Profit $ 20,921 $ 16,076 Description: Gross Profit Margin 9.76% 7.36% Diversified Percent Complete 81.15% % Under(Over)Billings $ (17,292) Job Number: Contract Price $ 2,691,185 Bond Number: Est. Gross Profit $ 625,553 Description: Gross Profit Margin 23.24% Ocean 1-10, 12 Percent Complete 1.80% Under(Over)Billings $ (4,922) Job Number: Contract Price $ 273,815 Bond Number: Est. Gross Profit $ 120,990 Description: Gross Profit Margin 44.00% Ocean 11 Percent Complete 47.65% Under(Over)Billings $ 5,815 Job Number: Contract Price $ 203,670 $ 523,993 Bond Number: Est. Gross Profit $ 64,290 $ 104,262 Description: Gross Profit Margin 31.57% 19.90% Hill Percent Complete 23.88% % Under(Over)Billings $ (11,681) Job Number: Contract Price $ 218,883 $ 221,219 Bond Number: Est. Gross Profit $ 12,763 $ 9,034 Description: Gross Profit Margin 5.86% 4.08% Health Percent Complete 91.92% 95.82% Under(Over)Billings $ 3,616 $ 15,508 Job Number: Contract Price $ 1,490,090 $ 1,386,188 Bond Number: Est. Gross Profit $ 390,090 $ 286,188 Description: Gross Profit Margin 26.18% 20.65% Museum Percent Complete 1.20% 1.25% Under(Over)Billings $ (61,087) $ (66,307) Job Number: Contract Price $ 1,473,849 $ 1,615,095 Bond Number: Est. Gross Profit $ (105,370) $ (183,074) Description: Gross Profit Margin -7.15% % Tunnel Percent Complete 92.48% 99.21% Under(Over)Billings $ 7,924 $ (1,449) Job Number: Contract Price $ 3,045,117 $ 3,568,680 Bond Number: Est. Gross Profit $ 179,473 $ 302,045 Description: Gross Profit Margin 5.89% 8.46% Ocean Percent Complete 97.47% 96.10% Under(Over)Billings $ 2,022 $ (1) Job Number: Contract Price $ 4,016,671 $ 4,269,871 Bond Number: Est. Gross Profit $ 1,258,666 $ 919,854 Description: Gross Profit Margin 31.34% 21.54% Hotel Percent Complete 65.27% 86.30% Under(Over)Billings $ (88,514) 7

8 Jobs Over $100,000 12/31/ /31/ /31/2013 4/30/2014 Job Number: Contract Price $ 1,099,380 $ 1,184,464 Bond Number: Est. Gross Profit $ 472,769 $ 161,533 Description: Gross Profit Margin 43.00% 13.64% School Percent Complete 30.86% 89.75% Under(Over)Billings $ 4,904 $ 5,809 Job Number: Contract Price $ 1,103,978 $ 1,265,941 Bond Number: Est. Gross Profit $ 379,808 $ 338,071 Description: Gross Profit Margin 34.40% 26.71% JBL Percent Complete 34.83% 94.47% Under(Over)Billings $ 498 $ 1 Job Number: Contract Price $ 378,200 Bond Number: Est. Gross Profit $ 158,399 Description: Gross Profit Margin 41.88% Tunnel 2 Percent Complete % Under(Over)Billings $ - Job Number: Contract Price $ 4,800,000 Bond Number: Est. Gross Profit $ 77,968 Description: Gross Profit Margin 1.62% Gatew ay Percent Complete 8.51% Under(Over)Billings $ (482,641) Job Number: Contract Price $ 4,310,101 Bond Number: Est. Gross Profit $ 449,999 Description: Gross Profit Margin 10.44% BLD Percent Complete 0.00% Under(Over)Billings $ (1) Job Number: Contract Price $ 6,023,119 Bond Number: Est. Gross Profit $ 723,000 Description: Gross Profit Margin 12.00% Job Number: Bond Number: Description: Job Number: Bond Number: Description: Job Number: Bond Number: Description: Club Percent Complete 0.00% Under(Over)Billings $ (1) Contract Price Est. Gross Profit Gross Profit Margin Percent Complete Under(Over)Billings Contract Price Est. Gross Profit Gross Profit Margin Percent Complete Under(Over)Billings Contract Price Est. Gross Profit Gross Profit Margin Percent Complete Under(Over)Billings Gross Profit Comparison Report ABC Construction, LLC 8

9 FINANCIAL TREND ANALYSIS FIRM: ABC Construction, LLC Tax Basis: Cash ADDRESS: Statement Basis: POC Business Type: LLC F.Y.E.: Statement Type: Review Review Review Internal (000's) Statement Date: 12/31/ /31/ /31/2013 4/30/ ALLOWABLE CURRENT ASSETS: New CPA Cash and Cash Equivalents (166.0) C.D.s, Bid Deposits, etc. Marketable Securities Accounts Receivable , , ,806.3 Retainages Inventory 0.6 Cash Value of Life Insurance Cost + Est. Earnings in Excess of Billings Interest Receivable Tax Refund Receivable TOTAL CURRENT ASSETS , , , SECONDARY ASSETS: Other Accounts Receivable Notes Receivable A/R Stockholders Securities-Other Inventory 0.6 Prepaid and Other TOTAL SECONDARY ASSETS FIXED ASSETS: Equipment Leasehold Improv./Furn. & Fix Real Estate Less: Accum. Depreciation ( ) (10.8) (17.3) (26.5) (17.3) TOTAL FIXED ASSESTS TOTAL ASSETS , , , ========== =============== =============== =============== =============== =============== =============== =============== CURRENT LIABILITIES: Notes payable - Banks Equipment Stockholders Other Accounts Payable , ,695.3 Retainages Payable 1.6 Accruals - Exp., Misc., Etc Federal Income Tax Capital Lease Obligations Billings in Excess of Cost + Est. Earnings Deferred Tax Chargeable TOTAL CURRENT LIABILITIES , , LONG TERM LIABILITIES: Equipment Notes Real Estate Mortgages Capital Lease Obligations Other Notes Payable 75.2 Subordinated Notes Payable - Stockholder TOTAL LIABILITIES , , EQUITY: Deferred Tax Adjustment Common Stock Additional Paid in Capital Retained Earnings ,656.4 Accumulated other comprehensive loss Treasury Stock TANGIBLE NET WORTH $204.7 $628.7 $911.8 $1,656.4 $0.0 NET WORTH + SUBORDINATED DEBT $204.7 $628.7 $911.8 $1,656.4 $ TOTAL LIABILITIES & NET WORTH , , , ========== =============== =============== =============== =============== =============== =============== =============== Current Assets , , , Current Liabilities , , WORKING CAPITAL $184.0 $604.3 $875.3 $1,687.1 $0.0 ========== =============== =============== =============== =============== =============== =============== =============== Volume 2, , , ,421.6 Net Profit Change in Retained Earnings (1,656.4) 9

10 CONTRACTOR CASH FLOW IN WIP ANALYSIS Account Name: ABC Construction Fiscal Period: 12/31/2013 Inflow of Cash Outflow of Cash Total Contract Price from WIP $13,932,324 less: Billed to Date from WIP $9,403,988 = Left to Bill $4,528,336 + A/R <90 days + Retainage $2,241,947 + Other Cash Inflows* = Total - Inflow of cash $6,770,283 Cost to Complete from WIP $3,167,162 + Accounts Payable + Retainage Payable $1,059,691 + Accruals + Current Portion LTD + Bank Notes Payable $135,000 + Other Current Liabilities* Total - Outflow of cash $4,361,853 Net Cash Flow before OH $2,408,430 less: Estimated Annual G&A Expenses $953,809 less: Estimated Annual Net Interest Expense $4,627 Projected Net Operating Cash Flow $1,449,994 Cash & Equivalents $113,329 Available Balance on Revolving Line of Credit $490,000 Total Cash Flow Available $2,053,323 Anatomy of a Surety Bond Claim 10

11 CONTRACTOR CASH FLOW IN WIP ANALYSIS Account Name: ABC Construction Fiscal Period: 4/30/2014 Inflow of Cash Outflow of Cash Total Contract Price from WIP $30,484,312 less: Billed to Date from WIP $14,082,349 = Left to Bill $16,401,963 + A/R <90 days + Retainage $3,656,118 + Other Cash Inflows* = Total - Inflow of cash $20,058,081 Cost to Complete from WIP $15,332,074 + Accounts Payable + Retainage Payable $1,695,319 + Accruals + Current Portion LTD + Bank Notes Payable $128,098 + Other Current Liabilities* Total - Outflow of cash $17,155,491 Net Cash Flow before OH $2,902,590 less: Estimated Annual G&A Expenses $1,237,932 less: Estimated Annual Net Interest Expense $4,627 Projected Net Operating Cash Flow $1,660,031 Cash & Equivalents -$166,053 Available Balance on Revolving Line of Credit $496,902 Total Cash Flow Available $1,990,880 Anatomy of a Surety Bond Claim 11

12 P&L Estimate ABC Construction, LLC Period From: 1/1/2014-4/30/2014 Figures From Current WIP Cost to Date - Open Jobs $ 12,083,422 $ 12,083,422 Earned Profit to Date - Open Jobs $ 1,368,435 $ 1,368,435 Total Open Jobs $ 13,451,857 $ 12,083,422 $ 1,368,435 Total Costs - Closed Jobs $ - $ - Total Gross Profit - Closed Jobs $ - $ - Total Closed Jobs $ - $ - $ - less: Figures from Last FYE WIP Cost to Date - Open Jobs $ 8,335,028 $ 8,335,028 Earned Profit to Date - Open Jobs $ 1,036,510 $ 1,036,510 Total Prior Year WIP $ 9,371,538 $ 8,335,028 $ 1,036,510 Revenues Costs Gross Profit Totals for Current Year $ 4,080,319 $ 3,748,394 $ 331,925 Estimated G&A $ 412,644 Est. Operating Income $ (80,719) Est. Other Income Est. Net Income $ (80,719) Anatomy of a Surety Bond Claim 12

13 Issued the requested bond Late September requests another $2,770,000 Bond Underwriter Requests financial update Agent gets 8/31/14 In-house Financial, WIP, and Aging and sends to the underwriter Anatomy of a Surety Bond Claim 13

14 FINANCIAL TREND ANALYSIS FIRM: ABC Construction, LLC Tax Basis: Cash ADDRESS: Statement Basis: POC Business Type: LLC F.Y.E.: Statement Type: Review Review Review Internal Internal (000's) Statement Date: 12/31/ /31/ /31/2013 4/30/2014 8/31/ ALLOWABLE CURRENT ASSETS: Cash and Cash Equivalents (166.0) 74.2 C.D.s, Bid Deposits, etc. Marketable Securities Accounts Receivable , , , ,785.6 Retainages ,041.9 Inventory Cash Value of Life Insurance Cost + Est. Earnings in Excess of Billings Interest Receivable Tax Refund Receivable TOTAL CURRENT ASSETS , , , ,922.1 SECONDARY ASSETS: Other Accounts Receivable Notes Receivable A/R Stockholders Securities-Other Inventory Prepaid and Other Over 90 A/R TOTAL SECONDARY ASSETS FIXED ASSETS: Equipment Leasehold Improv./Furn. & Fix Real Estate Less: Accum. Depreciation ( ) (10.8) (17.3) (26.5) (17.3) (26.6) TOTAL FIXED ASSESTS TOTAL ASSETS , , , ,149.3 ========== =============== =============== =============== =============== =============== =============== =============== CURRENT LIABILITIES: Notes payable - Banks Equipment Stockholders Other (3.5) Accounts Payable , , ,129.0 Retainages Payable Accruals - Exp., Misc., Etc Federal Income Tax Capital Lease Obligations Billings in Excess of Cost + Est. Earnings Deferred Tax Chargeable TOTAL CURRENT LIABILITIES , , ,826.5 LONG TERM LIABILITIES: Equipment Notes Real Estate Mortgages Capital Lease Obligations Other Notes Payable 75.6 Subordinated Notes Payable - Stockholder TOTAL LIABILITIES , , ,826.5 EQUITY: Deferred Tax Adjustment Common Stock 30.0 Additional Paid in Capital Retained Earnings , ,322.7 Accumulated other comprehensive loss Treasury Stock Net Income TANGIBLE NET WORTH $204.7 $628.7 $911.8 $1,656.4 $1,322.7 NET WORTH + SUBORDINATED DEBT $204.7 $628.7 $911.8 $1,656.4 $1, TOTAL LIABILITIES & NET WORTH , , , ,149.2 ========== =============== =============== =============== =============== =============== =============== =============== Current Assets , , , ,922.1 Current Liabilities , , , WORKING CAPITAL $184.0 $604.3 $875.3 $1,687.1 $1,095.6 ========== =============== =============== =============== =============== =============== =============== =============== Volume 2, , , , ,713.3 Net Profit Change in Retained Earnings

15 Jobs Over $100,000 Gross Profit Comparison Report ABC Construction, LLC 12/31/ /31/ /31/2013 4/30/2014 8/31/2014 Job Number: Contract Price $ 214,260 $ 218,445 Bond Number: Est. Gross Profit $ 20,921 $ 16,076 Description: Gross Profit Margin 9.76% 7.36% Diversified Percent Complete 81.15% % Under(Over)Billings $ (17,292) Job Number: Contract Price $ 2,691,185 Bond Number: Est. Gross Profit $ 625,553 Description: Gross Profit Margin 23.24% Ocean 1-10, 12 Percent Complete 1.80% Under(Over)Billings $ (4,922) Job Number: Contract Price $ 273,815 Bond Number: Est. Gross Profit $ 120,990 Description: Gross Profit Margin 44.00% Ocean 11 Percent Complete 47.65% Under(Over)Billings $ 5,815 Job Number: Contract Price $ 203,670 $ 523,993 Bond Number: Est. Gross Profit $ 64,290 $ 104,262 Description: Gross Profit Margin 31.57% 19.90% Hill Percent Complete 23.88% % Under(Over)Billings $ (11,681) Job Number: Contract Price $ 218,883 $ 221,219 $ 223,276 Bond Number: Est. Gross Profit $ 12,763 $ 9,034 $ 15,260 Description: Gross Profit Margin 5.86% 4.08% 6.83% Health Percent Complete 91.92% 95.82% % Under(Over)Billings $ 3,616 $ 15,508 $ - Job Number: Contract Price $ 1,490,090 $ 1,386,188 $ 1,386,188 Bond Number: Est. Gross Profit $ 390,090 $ 286,188 $ (150,649) Description: Gross Profit Margin 26.18% 20.65% % Museum Percent Complete 1.20% 1.25% 9.89% Under(Over)Billings $ (61,087) $ (66,307) $ (214,618) Job Number: Contract Price $ 1,473,849 $ 1,615,095 $ 1,623,799 Bond Number: Est. Gross Profit $ (105,370) $ (183,074) $ (260,549) Description: Gross Profit Margin -7.15% % % Tunnel Percent Complete 92.48% 99.21% % Under(Over)Billings $ 7,924 $ (1,449) $ - Job Number: Contract Price $ 3,045,117 $ 3,568,680 $ 3,176,275 Bond Number: Est. Gross Profit $ 179,473 $ 302,045 $ 315,629 Description: Gross Profit Margin 5.89% 8.46% 9.94% Ocean Percent Complete 97.47% 96.10% % Under(Over)Billings $ 2,022 $ (1) $ - Job Number: Contract Price $ 4,016,671 $ 4,269,871 $ 4,162,087 Bond Number: Est. Gross Profit $ 1,258,666 $ 919,854 $ 449,004 Description: Gross Profit Margin 31.34% 21.54% 10.79% Hotel Percent Complete 65.27% 86.30% 98.03% Under(Over)Billings $ (88,514) $ (1) 15

16 Jobs Over $100,000 12/31/ /31/ /31/2013 4/30/2014 8/31/2014 Job Number: Contract Price $ 1,099,380 $ 1,184,464 $ 1,184,682 Bond Number: Est. Gross Profit $ 472,769 $ 161,533 $ 31,083 Description: Gross Profit Margin 43.00% 13.64% 2.62% School Percent Complete 30.86% 89.75% 99.13% Under(Over)Billings $ 4,904 $ 5,809 $ 2,174 Job Number: Contract Price $ 1,103,978 $ 1,265,941 $ 1,256,103 Bond Number: Est. Gross Profit $ 379,808 $ 338,071 $ 271,923 Description: Gross Profit Margin 34.40% 26.71% 21.65% JBL Percent Complete 34.83% 94.47% 99.29% Under(Over)Billings $ 498 $ 1 $ 1 Job Number: Contract Price $ 378,200 $ 378,200 Bond Number: Est. Gross Profit $ 158,399 $ 158,398 Description: Gross Profit Margin 41.88% 41.88% Tunnel 2 Percent Complete % % Under(Over)Billings $ - $ - Job Number: Contract Price $ 4,800,000 $ 5,014,328 Bond Number: Est. Gross Profit $ 77,968 $ 1,151,625 Description: Gross Profit Margin 1.62% 22.97% Gatew ay Percent Complete 8.51% 68.20% Under(Over)Billings $ (482,641) $ (69,166) Job Number: Contract Price $ 4,310,101 $ 4,310,102 Bond Number: Est. Gross Profit $ 449,999 $ 686,645 Description: Gross Profit Margin 10.44% 15.93% BLD Percent Complete 0.00% 3.15% Under(Over)Billings $ (1) $ (120,525) Job Number: Contract Price $ 6,023,119 $ 5,916,620 Bond Number: Est. Gross Profit $ 723,000 $ 736,534 Description: Gross Profit Margin 12.00% 12.45% Club Percent Complete 0.00% 6.44% Under(Over)Billings $ (1) $ (319,903) Job Number: Contract Price $ 1,998,000 Bond Number: Est. Gross Profit $ (96,631) Description: Gross Profit Margin -4.84% MDX Percent Complete 33.46% Under(Over)Billings $ (64,300) Job Number: Contract Price $ 2,777,750 Bond Number: Est. Gross Profit $ 547,957 Description: Gross Profit Margin 19.73% Job Number: Bond Number: Description: BLD 41 Percent Complete 3.61% Under(Over)Billings $ (277,756) Contract Price Est. Gross Profit Gross Profit Margin Percent Complete Under(Over)Billings Gross Profit Comparison Report ABC Construction, LLC 16

17 ABC Construction, LLC Work on Hand as of 8/31/14 Job Name Contract Price Billed to date Cost to date Cost to Complete % Complete Estimated Gross Profit Estimated GP% Profit Earned to Date Total Earned to Date Over Billings Under Billings College $ 1,461,434 $ 1,458,822 $ 1,635,636 $ % $ (174,202) % $ (174,202) $ 1,461,434 $ 2,612 Health $ 223,276 $ 223,276 $ 208,016 $ % $ 15, % $ 15,260 $ 223,276 Ocean $ 3,176,275 $ 3,176,275 $ 2,860,646 $ % $ 315, % $ 315,629 $ 3,176,275 Museum $ 1,386,188 $ 215,964 $ 151,995 $ 1,384, % $ (150,649) % $ (150,649) $ 1,346 $ 214,618 Tunnel 1/2 $ 1,623,799 $ 1,623,799 $ 1,884,348 $ % $ (260,549) % $ (260,549) $ 1,623,799 Hotel $ 4,162,087 $ 4,079,985 $ 3,639,837 $ 73, % $ 449, % $ 440,147 $ 4,079,984 $ 1 School $ 1,184,682 $ 1,172,239 $ 1,143,599 $ 10, % $ 31, % $ 30,814 $ 1,174,413 $ 2,174 JBL $ 1,256,103 $ 1,247,218 $ 977,219 $ 6, % $ 271, % $ 270,000 $ 1,247,219 $ 1 Tunnel 2/2 $ 378,200 $ 378,200 $ 219,802 $ % $ 158, % $ 158,398 $ 378,200 Court T&M $ 1,718,286 $ 1,718,286 $ 1,039,000 $ % $ 679, % $ 679,286 $ 1,718,286 Vista T&M $ 123,324 $ 123,324 $ 22,422 $ % $ 100, % $ 100,902 $ 123,324 Gateway $ 5,014,328 $ 3,488,872 $ 2,634,313 $ 1,228, % $ 1,151, % $ 785,393 $ 3,419,706 $ 69,166 Clum $ 5,916,620 $ 701,075 $ 333,722 $ 4,846, % $ 736, % $ 47,450 $ 381,172 $ 319,903 BLD $ 4,310,102 $ 256,242 $ 114,096 $ 3,509, % $ 686, % $ 21,621 $ 135,717 $ 120,525 MXD $ 1,998,000 $ 668,508 $ 700,839 $ 1,393, % $ (96,631) -4.84% $ (96,631) $ 604,208 $ 64,300 T/M $ 97,531 $ 97,531 $ 29,528 $ % $ 68, % $ 68,003 $ 97,531 BLD 41 $ 2,777,750 $ 378,000 $ 80,469 $ 2,149, % $ 547, % $ 19,775 $ 100,244 $ 277,756 $ 36,807,985 $ 21,007,616 $ 17,675,487 $ 14,602,280 $ 4,530,218 $ 2,270,647 $ 19,946,134 $ 1,066,269 $ 4, % Analysis: Profit Left to Earn $ 2,259,571 Contract Price: $ 36,807,985 - Billed to Date: $ 21,007,616 Remaining Billings: $ 15,800,369 - Cost to Complete: $ 14,602,280 + A/R and Ret. Rec: $ 2,300,981 - A/P and Ret. Pay.: $ 2,129,000 Total Cash Flow in WIP $ 1,370,070 Annual G&A $ 1,339,600 Projected Cash Flow $ 30,470 Anatomy of a Surety Bond Claim 17

18 CONTRACTOR CASH FLOW IN WIP ANALYSIS Account Name: ABC Construction Fiscal Period: 8/31/2015 Rolling 12 Month Inflow of Cash Outflow of Cash Total Contract Price from WIP $36,807,985 less: Billed to Date from WIP $21,007,616 = Left to Bill $15,800,369 + A/R <90 days + Retainage $2,300,981 Note: $1,014,000 Ret. Not to be + Other Cash Inflows* collected in one year = Total - Inflow of cash $18,101,350 Cost to Complete from WIP $14,602,280 + Accounts Payable + Retainage Payable $2,129,000 + Accruals $14,300 + Current Portion LTD + Bank Notes Payable $615,300 + Other Current Liabilities* Total - Outflow of cash $17,360,880 Net Cash Flow before OH $740,470 less: Estimated Annual G&A Expenses $1,339,600 less: Estimated Annual Net Interest Expense $4,627 Projected Net Operating Cash Flow -$603,757 Cash & Equivalents $76,341 Available Balance on Revolving Line of Credit $9,700 Total Cash Flow Available -$517,716 Anatomy of a Surety Bond Claim 18

19 P&L Estimate ABC Construction, LLC Period From: 1/1/2014-8/31/2014 Figures From Current WIP Cost to Date - Open Jobs $ 14,602,280 $ 14,602,280 Earned Profit to Date - Open Jobs $ 2,270,647 $ 2,270,647 Total Open Jobs $ 16,872,927 $ 14,602,280 $ 2,270,647 Total Costs - Closed Jobs $ - $ - Total Gross Profit - Closed Jobs $ - $ - Total Closed Jobs $ - $ - $ - less: Figures from Last FYE WIP Cost to Date - Open Jobs $ 8,335,028 $ 8,335,028 Earned Profit to Date - Open Jobs $ 1,036,510 $ 1,036,510 Total Prior Year WIP $ 9,371,538 $ 8,335,028 $ 1,036,510 Revenues Costs Gross Profit Totals for Current Year $ 7,501,389 $ 6,267,252 $ 1,234,137 Estimated G&A $ 893,065 Est. Operating Income $ 341,072 Est. Other Income Est. Net Income $ 341,072 Anatomy of a Surety Bond Claim 19

20 From: Agent Sent: Tuesday, September 30, :47 PM To: Contractor Subject: BOND LINE ABC Construction Owner The underwriter asked me to touch base with you on your 8/31/14 interim and results. At 4/30 you were showing a $360K profit on $5.4M in volume and only had $128K out on your bank line. At 8/31 you were only making $294K on $11.7M in volume and are out $615K on the line that was only recently increased to $625M. Please compare page 13 of your 12/31/13 CPA Review (Contracts in Progress) with the attached 8/31/14 Excel spread sheet. Provide your insight on the following: Ocean The job is 100% complete, however you are underbilled by $467K, which is a red flag for a surety. What is the reason you have not been able to bill this? Additionally, the gross profit went from $179K to $688K. Is this $509K increase accurate? Science Went from an estimated GP of $390K to a loss of $150K ($540K fade). Tunnel ½ - Went from $105K loss to a $260K loss ($155K fade). Hotel Went from a $1.258M GP to a $449K ($800K fade). School GP went from $472K to $31K ($441K fade). JBL GP went from $379K to $271K ($108K fade). Almost all of the jobs have taken steep profit fades. I am out on business tomorrow (Wednesday) and wont be available until after 2:00. Please evaluate this information and provide your insight. Anatomy of a Surety Bond Claim 20

21 From: Agent Sent: Saturday, October 04, :42 PM To: Underwriter Subject: FW: Bond D41 - ABC Construction Please find the attached revised WIP, ABC Construction s projections through 12/31/13, and my revised WIP analysis based on the revised WIP attached. Here is some insightful information from my meeting: ABC Construction s accounting software is called SouthWare, something I am not familiar with. The income statement is straight accrual and not POC. SouthWare also produces their job costs, which was extremely thorough and very detailed from what Owner showed me. Then the info is manually transferred to the WIP. I suggested he meet with my friend who reps for Sage (Timberline and Master Builder). On his WIP presentation, I have advised Owner that I would prefer to see Total Estimated Cost in lieu of Original Estimated Cost same for Original Estimated Profit. Also, Owner s cost estimates on the WIP don t include any contingencies or allowances. The numbers he uses, the job would have to have no problems to produce his original estimated profits. I have suggested he rethink this approach and be more conservative for purposes of his WIP to reduce the number of fades. Club Did not have the correct cost to complete entered in and now correct on revised WIP. Ocean did not have the correct contract price and billings. This had some time and material work outside the contract that had already been included on the completed contract portion on the WIP ($237K and $158K). It has been corrected on revised WIP. Science ABC Construction had very little work when he bid this project and intentionally took it cheap. The original GC was terminated and replaced by a new GC. What should have been a 4 ½ month job for ABC Construction has turned out to be in excess of 18 months. ABC Construction has not signed New GC s replacement subcontract and has a claim and advised them it will cost an additional $500K for him to move forward. They are not on the job until they hear further and this is NOT bonded. Tunnel You will see there are two Tunnel projects and Owner advised that he combines them and it is a total loss of $100K. He mentioned that it was a prevailing wage project and he couldn t get the production. He is likely to not work for GC again. Hotel has an Owner GC issue. We have another client on this job and they are getting clobbered by GC, but will hopefully work it out. Supposedly a very unreasonable owner. They are about 98% complete and have a $350K claim on this project. School This was a bid bust on quantities. There were some time and material jobs that Owner was not accounting for on the previous WIP, which are doing well. There is no doubt he has experienced some growing pains. If his projections are half of what he is showing for the last 4 months of the year, it will be strong. Of course cash flow is currently very tight. If I know you correctly, the above and attached information will not make you comfortable enough to support this bond. I ask that you advise me as soon as possible before I shift gears. Thanks and have a great weekend. Anatomy of a Surety Bond Claim 21

22 From: Underwriter Sent: Sunday, October 05, :00 PM To: Agent Subject: RE: Bond D41 ABC Construction Agent, It may be a few days before I can do a complete analysis on this, but my rough basis does not look good. If the revised WIP is correct and they are net overbilled by over $1MM, have less than $100M in cash in the bank and are tapped out on the line, this would indicated a significant cash flow issue. I understand your need to remarket this, but caution you that I have a significant concern about this company's ability to complete the job we bonded. I strongly suggest they engage a CPA to come in and do a full POC statement for 8/31 or 9/30 so they know where they really are. Also, the projections again appear to be billings minus cost and do not factor in collections of the billings, retainage, and other items that relate to cash flow rather than accrued profit. My concern is their ability to cash flow through the current hole they are in. Let me know if you additional information regarding cash flow. Once I complete a full analysis of the numbers I'll be in touch. Anatomy of a Surety Bond Claim 22

23 Surety B came in and wrote the $2.7M bond and another in January 2015 for $6.3M. Company also acquired 5 unbonded jobs since October, three of which are covered by SDI In April 2015, ABC ran out of cash and was terminated on the $6.3M job by GC We did not find out until May 26 th of the issues when they could not make payroll on our job Remember was supposed to be completed in January 2015 Owner related delays in start Anatomy of a Surety Bond Claim 23

24 Over $800,000 in unpaid suppliers/subs on our job Over $1,500,000 in unpaid suppliers/subs for Surety B Was using funds from SDI jobs to pay bills on other jobs No Personal Guarantees Our loss - $275,000, Surety B purported to exceed $2,000,000, and SDI purported to exceed $1,000,000 After $1,000,000 Net Retention + Co-Pay on SDI for GC Anatomy of a Surety Bond Claim 24

25 Inaugural CFMA Southwest Regional Conference Long Beach, CA September 13-15, 2015 Questions? David Pesce, CCIFP Director of Surety AXIS Insurance 300 Connell Dr., Suite 8000 PO Box 357 Berkeley Heights, NJ Office: (908)