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CONTRACT SURETY 101

:
BONDING AND INSURANCE
“What You Need To Know
For Contract Surety Support”

Steven Swartz
President
South Coast Surety

Information Provided By:
South Coast Surety Ins. Svcs., Inc
National Association of Surety Bond Producers
The Surety & Fidelity Association of America

SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS Welcome! • Why are you here? • Why are we here? • Small Contractors and the Economy – Are there opportunities? • How can you prepare to take advantage of new opportunities? • How do you get started? Let’s find out… .

Bonding protects another party – the Obligee • You cannot buy it like Insurance • You must qualify for it – it’s very similar to bank credit – And the process does take some time. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS Bonding vs. no losses are expected . Insurance – What’s the Difference? • Surety bonding is a three party contract – Insurance is two • Unlike Insurance which protects you. so it’s good to plan ahead • Unlike Insurance.

. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS A Bond is a Three-Party Contract • Contractor – the “Principal” • Surety • Obligee/Owner A bond guarantees a contract – without a contract there can be no bond.

. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS Types of Contract 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.

. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS The Performance Bond The performance bond protects the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions.

and materials suppliers associated with the project. laborers. the parties covered by the payment bond are specified in the Civil Code. . In public works contracts. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS The Payment Bond The payment bond assures that the contractor will pay specified subcontractors.

usually one year from the date of completion. . Often this obligation is considered part of the performance bond and a separate bond may not be issued. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS The Warranty Bond The warranty bond assures that the contractor will correct any deficiencies in material or workmanship for a specified period of time.

3.5% of total contract price is common • Cost of bond is acceptable project cost that may be passed on to the owner • Bond premium is usually paid up front or out of first draw . SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS Cost of Bonds • Depends on a number of factors • 1.0% .

SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS Information for Prequalification Process • Contractor Questionnaire • Business and Personal Financial Statements • Work in Progress Schedule • Bank Line of Credit • Resumes of key personnel • Marketing material • Business plan • Continuity and contingency plan .

how has the contractor performed? What is the contractor’s reputation? .SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS 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.

profitability • Current work load – cost to complete • Does contractor have enough work crews? • Does contractor have necessary equipment? .SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS Capacity: Ability to Perform • Can contractor perform this type of work? • Analysis of past projects – size.

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 • Alternative solutions to lack of financial strength .SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS Capital: Financial Strength • In-depth.

Engineers • Banks • Credit reports Business Dunn & Bradstreet Personal credit reports of owners . subcontractors and vendors • Previous owners. Architects.SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS Character: References and Reputation • Of the construction firm: • Business relations with • Primes.

Objective is to obtain reasonable assurance financials are accurate according to GAAP.SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS Quality of Financial Statements • Audit – Highest level of service performed by a CPA. . • Review – Middle level of service. • Compilation – CPA takes information from management of company without undertaking to express any assurance. CPA expresses limited assurance there are no material modifications to conform to GAAP.

why? .SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS 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 is it Difficult for Small Contractors to Obtain Bonding Capacity? Surety Prequalification/Underwriting • Capacity to perform • Financial Strength The Vicious Cycle • Track Record & History of Company • Organizational Structure Access to Track Record Surety Credit • Business Continuation Plans • Trade References • Analysis of all Projects in Progress • Credit History • Good Character • Working Capital • Quality CPA Prepared Financial Demonstrable Statements Capacity Net Worth • Broker Representation .

How Do I Obtain or Increase My Bonding Capacity? • Quality CPA Prepared The $uccess Cycle Financial Statements • Choose jobs wisely Gradually Use Surety Grow your • Critical Analysis of all Projects Agent Bond in Progress Expertise Business • Increase Personal Credit Rating • Trade References • Increase Working Capital • Protect Company Credit History Use a CPA Reinvest in That Knows • Good Character Your Construction • Broker Representation Company .

) .SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS 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 DOES THIS HELP THE CONTRACTOR GET QUALIFIED FOR BONDING OR GROW THEIR BOND CAPACITY??? ( ANSWER: NO.

SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS The Surety Underwriter • Primary goal is to prevent default • Makes decisions on surety capacity • Extends surety capacity to ensure success of contractor .

SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS Value of a Surety Insurance Agent • Acts as a consultant in the selection process of other team members (e. accountant) • Helps to establish and maintain your Surety Support • Helps the contractor with business planning. lawyer. especially discussions on risk management • Helps the contractor grow his or her surety program .g.. banker.

Bankers • NASBP – National Association of Surety Bond Producers . Attorneys.SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS 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.

So if you are not a big contractor with FANCY Financial Statements… What Can You Do? • Find a Professional Surety Agent that you can work with • Discuss the Easy Entry Surety Bond Programs that are now available • What about these “Easy Application Bond Programs? • Programs start with only needing a simple application – No Financials • Can support single jobs up to $500k or more. • Can provide aggregate limits up to $1 million or more • Have programs for both General Contractors and Specialty Contractors including Service. Supply and Install businesses • Need to show Adequate Experience in performing similar size and scope of work • Have a credit profile* that shows you take care of your responsibilities • Rates vary considerably subject to the financial information provided and your credit profile Bottom Line: “Most Contractors in Today’s Surety Market CAN get some level of surety support .

detailed & consistent information . no surprises • Provide accurate.SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS Earning Trust: Maintaining the Surety Relationship • Immediately notify surety of problems • Communicate openly.

your Surety Agent provides free advice on how to grow your support • All Surety Agents should be able to lay out a path on how to get larger work bonded • Don’t hesitate in letting your Surety Agent and Accountant communicate with each other on how best to help you achieve your goal capacity • Remember those 3 C’s for Surety. Attorney and Professional Surety Agent • Of the three. How Do I get more Surety Capacity? • Use your independent counseling team of your Accountant. everything usually comes back to them .

com SouthCoastSurety. CA 92673 (800) 361-1720 DOI Lic# 0B57612 .com 1100 Via Callejon. President/CEO surety@southcoastsurety.Any More Questions? Call us! Steve Swartz. Suite A San Clement.