Bonding for Contractors Barrie Construction Association September 17, 2015 1
Topics What do bonds do? How does a bond benefit you? How do you get a bond? What are the information requirements? What is the bond company looking for? How do I maximize my chances of being approved? Subguard What is it, what is it not? 2
What is a bond and what does a bond do? 3
The Short Answer Contract surety bonds are used in lieu of contractor cash or letters of credit: At time of tender, guarantees contractor will sign contract and surety will issue final bonds Guarantees performance of contract once awarded by owner Guarantee payment to subtrades and suppliers once work starts Surety bonding is not insurance! 4
Bond - Three Party Agreement REINSURERS 1) SURETY BROKER 2) OWNER (OBLIGEE) 3) CONTRACTOR (PRINCIPAL) 5
Surety vs. Insurance INSURANCE 2-Party Contract Demand Instrument Cancellable Premiums Based on Losses Transfers Insured s Risk No Reimbursement by Insured SURETY 3-Party Contract Default Instrument Not Cancellable Fee for Services Transfer Obligee s Risk Principal indemnifies Surety against losses 6
Bid Bond The bond guarantees the price spread between the lowest and 2nd lowest bidder if the contractor is awarded the job and doesn t enter into a contract with the owner. Capped at bond penalty (e.g. 10%) If contract is awarded and contractor doesn t sign, can pay the bid spread and walk away. 7
Consent of surety Also called Agreement to Bond. Surety commits to issue a performance and a labour & material payment bond provided the contractor enters into the contract. If Contractor is awarded the job and signs the contract, the surety can not refuse to issue the Performance and Labour & Material Payments bonds. 8
Performance Bond Protects the obligee by guaranteeing that, in the event of the contractor s default, the contractor s obligations under the contract will be fulfilled. Whatever the contract says, the bond guarantees. E.g. 2 year warranty period, design, etc. 9
Labour & Material Payment Bond Covers outstanding payments to subcontractors, labourers, and material suppliers who had a direct contract with the principal. If you are a subtrade and want to be protected by the GC s payment bond, speak with the owner/consultant and ask that bonding be made a requirement (especially for public projects). 10
11 How does a bond benefit you?
Benefits of bonds Qualify for work where bonds required - hospitals, schools, governments, others. Indication of solvency and capability to owners. Use surety s money frees up line of credit and cash used for job security. Claims process in event of a dispute, not on-demand like a letter of credit. Protects the subtrades. 12
Benefits of bonds (Cont.) Leverages working capital of the firm. E.g. To use a letter of credit from the bank, you must provide at least $1 of collateral for each $1 credit. With a surety facility, the bond facility can often be leveraged 10x working capital (or even more depending on circumstances), allowing the company to bid more projects. An underwriter would need to review the usual underwriting information to advise on potential limits (see Information Requirements). 13
14 How do you get a bond?
Applying for bonding Bonding is arranged through your insurance broker or agent. The Guarantee does not require a contract for your broker to conduct business with us. Ask your broker to send you the forms to apply for bonding. Typically takes 2-3 weeks, though can be done in days if the application is straightforward. 15
16 Information requirements?
Information requirements Company s previous three years financial statements Related company statements Copy of bank terms and conditions letter Work on hand schedule 17
Information requirements Most recent quarter-end statements Aged listings of receivables and payables Summary of Insurance Coverages Contractor s Questionnaire Personal Financial Statement (each shareholder) 18
What is the bond company looking for? 19
3 C s of Underwriting Character Capital Capacity 20
Underwriting - Character Integrity Reputation References Business record Trade payment record Contract disputes and litigation (frequency) 21
Underwriting - Capital Equity, Working Capital, Debt Load Profitability Non-Construction Investments Shareholder / Related Company Advances Contingent Liabilities 22
Underwriting - Capacity History of completing similar jobs of a similar size Completing on time, per specs, without disputes Type, Size and Number of Jobs Expertise of Owners, and Key Staff 23
Underwriting - Capacity Geographic area of operations Controls and Reporting Access to Labour, Materials and Equipment Historical working relationships with Owners, Consultants, Subs and Suppliers 24
How do I maximize the chance my application will be approved? 25
Getting Approved Apply early, before you need the bond. Statements prepared by a CPA on a Review Engagement basis. Leave profits in the company to boost working capital and net worth. In-house accounting package kept up to date. Job costing system. 26
Subguard What is it, and what is it not? 27
Subguard What is it? Subguard is marketed as an alternative product to surety bonds. Subguard is an insurance policy, not a bond, that protects the general contractor from the failure of a subtrade. If a subtrade fails, the insurance policy pays the GC for costs of the subtrade failure. Only the largest contractors in Canada can qualify for subguard. 28
Subguard What is it not? Subguard is not a product that provides direct protection to the owner or subtrades. The subtrades cannot make a claim against Subguard. In only very limited circumstances (i.e. GC goes bankrupt) can the owner make a claim. Whereas Subguard protects the GC, surety bonds protect the owner and the subtrades. 29
30 The Guarantee - Who we are
THE GUARANTEE - SURETY Canadian company, family owned, serving the Canadian and US construction industry Founded in 1872, the first Surety in North America 2nd largest Surety in Canada, 10th largest Surety in North America Clients include many small and medium sized family businesses like yours, up to some of the largest construction companies in Canada, and every size in between. 31
Considerations When Choosing a Surety Company Substantial Canadian staff dedicated to serving clients? Surety offices across Canada? Surety establish and maintain a relationship by meeting with their clients each year? Have they been in the Canadian marketplace long? Provide cross-border surety support in-house? In-house claims staff in the event there is an issue? Experienced claims staff include professional engineers, accountants, and lawyers who seek to understand the situation? 32
THANK YOU theguarantee.com 33
34 2014 The Guarantee Company of North America. All rights reserved.