Surety Bond Guarantee Program

Transcription

1 Contractor Bond Seminar Surety Bond Guarantee Program 1

2 The Basics of Bonding Contract Bonds Bond Agents Pre qualification What Bond Underwriters Look For Banking, Credit & Bond Costs SBA Bond Guarantee Program 2

3 What is a Surety Bond? Agreement between: Contractor Surety Company Obligee (project owner). The Contractor and agent sign the bonds and the contractor delivers them to the Obligee, promising to complete the contract according to its terms and conditions. Upon default, the Surety must pay the Obligee monetary damages or complete the contract through project financing or replacement contractors. The surety then proceeds to recover from the principal. The 3 types of contract surety bonds are called bid, performance and payment bonds and may be guaranteed by the SBA. 3

4 Contract Surety Bonds Bid Bond Pre qualifies the contractor to bid on specific projects. Assures the contractor will receive the necessary payment and performance bonds if awarded the project. Performance Bond Guarantees the contractor will perform the job according to all terms and conditions of the contract. Payment Bond Guarantees that the suppliers of materials, labor or services will be paid for work performed and/or material they have provided. Note Do not bid with a cashiers check, use a bid bond! 4

5 Why Surety Bonds are Required Surety bonds are required on Government projects to ensure that these contracts are properly completed which protects the obligee, suppliers of labor and material and ultimately, the taxpayer. Federal Government: Under provisions of the Miller Act, all federal construction contracts greater than $ 150,000 require surety bonds. State, County & Local Government: Most other governmental units have adopted similar provisions referred to as Little Miller Acts. Private Sector: Many private sector obligees also require surety bonds. 5

6 Locate a Surety Bond Agent Ask your Insurance Agent Use the SBA s Bond Agencies by State List agencies state Call a fellow contractor for a referral Attend a local trade association meeting Advertisements in trade publications, newspapers, yellow pages, and on line search 6

7 Professional Bond Agents are Knowledgeable in the construction industry. Active in providing surety bonds to contractors. Access to more than one surety company market. 7

8 Professional Bond Agents - continued Assist in assembling the initial bond application package Provide ongoing & timely assistance Find solutions to bonding problems Advocate strongly for the contractor Provide referral contacts such as CPA s, bankers, attorneys, etc. 8

9 Pre-Qualification Pre qualifying means knowing what your allowable bond credit levels will be, in advance of bidding to assure bonds will be available to you. For example, you need to know: Contract amount ($300,000) Work Program ($1,000,000) Number of bonded contracts at one time (4) Allowed type of contract (general, electrical, etc.) 9

10 Pre-Qualification - continued Ask your bond agent to help you get pre qualified (if you have not obtained bonds in the past) Give yourself plenty of lead time. Setting up bonding may take 2 3 weeks or more at the Bond Company. Note: Becoming bondable is similar to the process of obtaining bank credit. It s not simply a matter of just paying the bond or insurance premium. 10

11 Bond Underwriters Focus on: Technical & Managerial Ability Track Record the applicant s past experience demonstrates the ability to perform future projects. Financial Statements (reliable in house numbers or CPA) Financial Resources (working capital, net worth, etc.) Profitability Credit Resources (Banks, Suppliers, Factors) Credit History (Company and personal) 11

12 What is Working Capital? One of the most important financial items to the bond underwriter. Measures your ability to meet current and future financial obligations during the year. The number is calculated from your company balance sheet: cash + accounts receivable + 1/2 inventory less: current liabilities = Working Capital You want to maximize this number when planning for the production of financial statements. 12

13 Bank Support A Good Banking Relationship is important: The bond agent will request information on: Accounts (OD s, NSF s) Cash balances Line of Credit (LOC) Line of Credit? the SBA may be able to count available LOC dollars as working capital. Get to know a banker whether you need credit yet, or not. 13

14 Bank Support - continued SBAExpress Loan: Finance short term working capital needs $ 350,000 maximum revolving line of credit 50% guarantee maximum 36 hour turnaround time Contact your local SBA guaranteed Lender to apply 14

15 Credit History The Bond Agency will investigate your credit Obtain your Credit Report in advance of applying for bonds. Correct inaccuracies Bond agent will question any credit problems found: Be ready to: Explain what happened Clear or Bring current 15

16 Bonding Costs Include these items in your bid estimate (Project owners expect to pay for bond costs): Average Bond Premium: 2.0 to 2.5 % of the contract amount SBA Fee: $7.29 per thousand of the contract amount ($ for a $100,000 contract) Average total bond cost: approximately % 16

17 Bonding Costs - continued CPA Financial Statements Bank line of credit 17

18 Surety Bond Guarantee Program Mission: Provide surety bond guarantee assistance for new and existing small businesses in partnership with our surety companies and their bond agents. The SBA guarantee allows these firms to obtain surety bonds which would otherwise not be available. 18

19 Surety Bond Guarantee Program We have been assisting small and emerging contractors obtain surety bonds since 1972 The SBA gives the bond company a guaranty of 80% or 90% allowing the bond company to issue you the bond (due to their reduced risk) under Plan A: 90% 8(a) contractors, certified HubZone contractors, minority contractors, veteran owned and service disabled firms and all contracts not exceeding $ 100, % everyone else not covered in the 90% category above 19

20 Contractor Profiles we can Assist Start ups and firms in business less than 3 years Limited resources (cash, working capital, net worth) Recent losses Limited track record in size of past jobs completed No prior public works experience Small businesses who want to increase current bond limits Credit issues 20

21 Eligibility for SBA Guarantees Maximum contract amount: $ 2 million Eligible Industries: Construction, service, supply & manufacturing Small business must: Certify the bond is not available elsewhere Not be on probation, parole or barred from doing business with the federal government The firm together with its affiliates must be small for the primary industry it is engaged in. 21

22 Eligibility for SBA Guarantees - continued Small is determined by: NAICS Codes (13 CFR ): Manufacturing: 1 year average # employees All other industries: 3 year average annual revenues Construction Contractors are eligible: If 3 year average annual revenues don t exceed: $ 33.5 million General/Building/Underground/Heavy $ 14 million Specialty Sub Trades, electrical, concrete Access to all Size Standard codes and information: structure/contracting/contractingofficials/size standards 22

23 Applying for SBA s Bond Guarantee Contractor goes to agencies state Select a bond agent to contact, requesting assistance. Agent evaluates credit, character & capacity Agent applies for the SBA bond guarantee electronically. SBA reviews and approves the bond guarantee within 2 4 days. Agent provides the bond to the contractor. Note: the agent may provide the bond with, or without the SBA guarantee or decline the bond. 23

24 Bond Application Package The bond agent may request these items: Contractor Questionnaire Personal financial statement Company financial statements (including affiliates) 3 years Bank relationship information Work on Hand schedule Completed job references Resume for start ups 24

25 Bond Application Package - continued General Indemnity Agreement (GIA) To obtain bonding you will first sign an Indemnity Agreement in which you agree to reimburse the surety for any losses they pay out. You are placing both your personal and company assets at risk if you fail to perform or to pay bills associated with the project. SBA Contractor Forms: SBA Form 994 each bond guarantee request SBA Form 912 one time form guarantee application forms 25

26 Common Reasons Applications are Declined Inadequate working capital Poor past performance record Incomplete submission Does not qualify as a small business Contract size exceeds $ 2 million Ineligible bond such as license, subdivision or financial guarantee bond (except Timber Sales) 26

27 Maximize your Bond Credit - A Summary Find a good full time professional bond agent & be thorough in the bond information you present. Get Pre Qualified (know your limits in advance) Retain profits in the firm (build up the following balance sheet items and ratio): working capital net worth debt/net worth Good quality financial statements (CPA best) Obtain credit with your bank & suppliers Document past contract performance to build up your bond credit 27

28 Surety Participation Process Surety Companies: Certified by Treasury Dept. (T List) Apply for SBA Participant Status: new surety companies program Receive notification of approved status (OSG) Prior Approval Program (Plan A) 80/90% guarantees Preferred Program (Plan B) 70% guarantee Both Plans Certify bond agents to use the electronic application (Plan A) Bond Agencies: Agents apply for guaranty certification status (through approved SBA sureties Plan A) new surety companies program 28

29 For further Information & Questions Surety Bond Guarantee Program Agency website: structure/loansgrants/bonds/surety bonds Seattle Bond Office Southern & Western US Tom C. Ewbank, Director Useful information on all aspects of bonding: Free or minimal cost brochures & CD s February 21,