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

SURETY 101: BONDING AND INSURANCE SURETY 101: BONDING AND INSURANCE “What You Need To Know “What You Need To Know What You Need To Know What You Need To Know

For Contract Surety Support”For Contract Surety Support”

A Workshop Module of the Model Contractor Development Program (MCDP)p g ( )

The Surety & Fidelity Association of America

SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORSFOR NEW AND EMERGING CONTRACTORS

Barriers to Emerging Contractors Entry and Growth

• Contracting Opportunities• Information and Management Expertise

T i d d R li bl W kf• Trained and Reliable Workforce• Capability and Capacity• Performance Issues and Dispute Resolution• 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 bond waivers• Advocating for alternative insurance/guarantee

productsp• 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 Contracty

•Contractor

•SuretySurety

•Obligee/Owner•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 the contract at the price bid and provide the required performance and payment bonds.


The Performance Bond

The performance bond protects the owner 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 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% of total contract price.0% 3.0% o total co t act p ce

• Cost of bond is acceptable project cost that is passed on to the owner

Bond premi m paid o t of first dra• Bond premium paid out of first 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 capacityP id d b i d i• Provides sound business advice

• 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 capacityy p y• Extends surety capacity to ensure success of

contractor


Information for Prequalification Process

• Contractor or Supply/Service Questionnaire• Contractor or Supply/Service Questionnaire• Business and Personal Financial Statements• Work in Progress Schedule

Bank Line of Credit• Bank Line of Credit• Resumes of key personnel in sales, operations and accounting• Marketing material

Business plan• 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 ho has the contractor • Character – Historically, how has the contractor performed? What is the contractor’s reputation?


Capacity: Ability to Perform

• Can contractor perform this type of work?• Analysis of past projects – size, profitability

C k l d l• Current work load – cost to complete• Does contractor have enough work crews?• Does contractor have necessary equipment?• 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 creditBank 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• Previous owners• Banks

• Of the construction firm ownerOf the construction firm owner– Personal financial statement– Credit reportsp


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 problemsC i t l i• Communicate openly, no surprises

• 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)accountant)

• Helps to establish and maintain your Surety Support• Helps the contractor with business planning, p p 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 FranciscoAlameda County

Bernida Reagan, Director of Community and Client Relationsg , yMerriwether & Williams Insurance Services, Inc.

Bond Assistance ProgramsBond Assistance Programs

Program Mission

To reduce the barrier of bonding, financing, and enable greater participation of smalland enable greater participation of small, local, emerging contractors in public contractingcontracting.

Bond Assistance Programs

Bond guarantees

Accounting cost subsidy for financial statements (one time only)

Funds Administration payment of fees – 1% of contract price

Eligibility ~ Small Local Contractors

Bond Assistance Programs

Program Core Components

Contractor Bonding Assessment/Technical Assistance

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

– Broker – Surety


Types of Insurance

• Liability Insurance– Commercial General Liability (CGL)

W k ’ C i– Workers’ Compensation– Business Auto Policy (BAP)

Umbrella Coverage (Excess Liability)– 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)• Equipment Floater (Tools and equipment)

Date post:	07-May-2015
Category:	Economy & Finance
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10/3/13 Meet the Primes workshop: bonding and insurance

Economy & Finance