Obtaining Surety Credit

Obtaining Surety Credit

An Introduction to the Surety Process for

Contractors & Subcontractors

Surety Bonds Mandatedon Public Works

• Federal– Heard Act (1894) &

Miller Act (1935)

• State & Local– “Little Miller Acts”

Surety Bonds Vs. Traditional Insurance

Surety Bonds Insurance3-party 2-party

Risk transfer Risk transfer

Duty to obligee Duty to insured

Regulated by State Insurance Departments

Regulated by State Insurance Departments

Premium fee for prequalification services

Premium actuarially determined

Project specific Usually term specific

Penal sum Policy limits

Three-Party Relationship

Surety

ObligeePrincipal

Types of Bonds

• Bid Bond

• Performance Bond

• Payment Bond

Types of Bonds

• Bid Bond

• Performance Bond

• Payment Bond

Types of Bonds

• Bid Bond

• Performance Bond

• Payment Bond

Cost of Surety Bonds

Bid Bond No charge

Performance Bond½ - 2% of contract price

Payment BondPrice included with performance bond

First Step

Select knowledgeable surety bond producer

www.nasbp.org

Role of the Producer

ContractorSurety

Company

Attorneys

ProducerLenders

Auditors

Advisory Group

PrequalificationProcess

Attributes of a QualitySurety Bond Producer

ConstructionSpecialty

NationalTrends

LocalMarkets

ConstructionFinance

Reputation &Integrity

Contract Docs & Law

StrategicPlanning

IndustryAssociationsSurety Bond

Producer

Value of the Producer

Matches Needs

Offers AdviceCompiles

Documents

Reviews Documents

Background Investigation

RecommendsCredit

Guides contractor CommunicationSurety Bond

Producer

Second Step

• Select knowledgeable CPA

• AICPA Audit Guide

• Audited financial statements

Financial Statement Analysis

Opinion Page

Balance Sheet

IncomeStatement

Cash FlowStatement

Background Investigation

AccountSchedules

Contract Schedules

ExplanatoryNotesFinancial

Statement

Third Step

• File submission to surety company

• Contractor & underwriter meetings

Three Cs of Surety Underwriting

Capital

Capacity

Character

Capital

Capacity

Character

The Surety Company’s Checklist

Good character Experience matching

contract requirements Necessary equipment Financial strength History of paying subs and

suppliers on time Bank relationship Established line of credit

Information Surety Needs

OrganizationChart

Key EmployeeResumes

Business Plan

Work In Progress

EmergencyPlan

SubReferences

Line of Credit RecommendationsUnderwritingRequirements

Annual Meeting

• Once per year

• Shortly after annual financial statement is available

• Include CPA & CFO or Comptroller

Underwriting Considerations

• Sound financial statements

• Committed & competent personnel

• Business plan

• Personal & corporate indemnification

Communications From the Surety

• Changes in surety capacity

• Business assistance

• Job assistance

• Recommendations & referrals on other contractors

Job Status Report

• Primary conduit to communicate to surety

• Provided bimonthly or quarterly

• Reflect all jobs undertaken

• Provide consistent & conservative evaluations

Role of the Job Status Report

• Tracks contractor’s work history

• Shows patterns & project management strategies

• Reveals how contractor communicates problems to surety

Questions the Surety Will Ask

• Are there large costs & earnings in excess of billings?– Is gross profit holding?– Has owner failed to pay?– Are progress billings unapproved?– Are unapproved change orders included in

the costs?– If job is complete, why hasn’t it been billed

fully?

Questions the Surety Will Ask

• Are billings in excess of costs?– Are overbillings recognized by contractor?– Do substantial overbillings reflect a strong

cash balance?

Questions the Surety Will Ask

• Is the profit margin holding?– Is there a pattern of profit fade?– Are adequate job cost procedures in

place?– Can contractor accurately reevaluate

problems on a job?– Is contractor withholding information?

Earning Trust

• Immediately notify surety of problems

• Provide profit & loss statements based on percentage of completion

• Communicate openly

• Provide accurate, detailed & consistent feedback

SBA’s Surety Bond Guarantee Program (SBG)

• Targets small and emerging contractors• SBA Guarantees bid, performance and

payment bonds• Reimburses surety a percentage of loss if

contractor defaults• Plan A or Plan B (PSB) programs available• SBA charges a $7.29 fee per thousand of

contract amount for performance and payment bonds. No fee applies to bid bonds only.

SBG Eligibility

• Must meet surety’s bonding qualifications• Contract must be $2 million or less• Contractor’s business must be independently

owned and operated and qualify as a small business under federal regulations

• Average annual revenues for last three fiscal years must meet the small business size standard for the North American Industry Classification System (NAICS) Code that the federal contracting officer specified for that procurement.

Contact information for the SBG program

Contact the local SBA office for a list of

local area producers:

Indianapolis District Office

8500 Keystone Crossing, Ste 400

Indianapolis, IN 46240-2460

Sharon Murff, (317) 226-7272

Http://sba.gov/osg

Advice for Today's Market

• Know rights & responsibilities• Stay within capabilities• Manage growth & overhead• Learn why contractors fail• Communicate

Contractors

Advice for Today's Market

• Contract terms• Bond forms• Construction CPA• Adjust overhead• Bank line of credit• Conserve capital• Bond subcontractors• Qualify surety

Contractors

Keys to a Solid Relationship

• Commitment

• Trust

• Communication

• Timely reporting

• Teamwork

For More InformationSurety Association of Indiana (SAI)

www.indianasurety.org

National Association of Surety Bond Producers (NASBP)www.nasbp.org

Surety Information Office (SIO)www.sio.org

The Surety & Fidelity Association of American (SFAA)www.surety.org