10/3/13 Meet the Primes workshop: bonding and insurance

SURETY 101: BONDING AND INSURANCE
“What You Need To Know
What
For Contract Surety Support”
A Workshop Module of the
Model Contractor Development Program (
p
g
(MCDP)
)

The Surety & Fidelity Association of America

FOR NEW AND EMERGING CONTRACTORS
Barriers to Emerging Contractors Entry and
Growth
•
•
•
•
•
•

Contracting Opportunities
Information and Management Expertise
Trained d Reliable Workforce
T i d and R li bl W kf
Capability and Capacity
Performance Issues and Dispute Resolution
Bonding and Financing

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
p
products
• Obtaining First Bond or Increasing Bonding Capacity

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

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

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.

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.

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

Cost of Bonds
• 1.0% - 3.0% o total co t act p ce
.0%
of
contract price
• Cost of bond is acceptable project cost that is
passed on to the owner
• Bond premium paid o t of first dra
premi m
out
draw

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
• P id sound b i
Provides
d business advice
d i
• Referral resources for CPA’s, Attorneys, Bankers
• NASBP – National Association of Surety Bond Producers

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

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

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 – Historicall how has the contractor
Historically, ho
performed? What is the contractor’s reputation?

Capacity: Ability to Perform
•
•
•
•
•

Can contractor perform this type of work?
Analysis of past projects – size, profitability
Current work l d – cost to complete
C
k load
l
Does contractor have enough work crews?
Does contractor have necessary equipment?

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

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
p
– Credit reports

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.

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?

Earning Trust: Maintaining the Surety
Relationship
• Immediately notify surety of problems
• C
Communicate openly, no surprises
i t
l
i
• Provide accurate, detailed & consistent information

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 p
p
planning,
g,
especially discussions on risk management
• Helps the contractor grow his or her surety program

PUBLIC AGENCIES BOND ASSISTANCE
PROGRAMS

City and County of San Francisco
Alameda County

Bernida Reagan, Director of Community and Client Relations
g ,
y
Merriwether & Williams Insurance Services, Inc.

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

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

Program Core Components
Contractor Bonding Assessment/Technical
Assistance
•
•
•
•

Meet i h
M with contractor
Obtain and review financial information/work history
Determine contractors bonding capacity
Establish bonding relationship
– Broker
– Surety

Types of Insurance
• Liability Insurance
– Commercial General Liability (CGL)
– W k ’C
Workers’ Compensation
i
– Business Auto Policy (BAP)
– Umbrella Coverage (Excess Liability)

Types of Insurance (cont’d.)
• Property and Casualty Insurance
– Property Insurance
• B ildi I
Building Insurance
• Business Personal Property Insurance
• Equipment Floater (Tools and equipment)

10/3/13 Meet the Primes workshop: bonding and insurance

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10/3/13 Meet the Primes workshop: bonding and insurance