What Is A Contract Surety Bond? Learn Contract Surety 101

CONTRACT SURETY 101: BONDING AND INSURANCE

“What You Need To Know For Contract Surety Support”

Steven Swartz President

South Coast Surety

http://southcoastsurety.com/

Information Provided By:South Coast Surety Ins. Svcs., Inc

National Association of Surety Bond ProducersThe 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 vs. Insurance – What’s the Difference?

• Surety bonding is a three party contract – Insurance is two• Unlike Insurance which protects you, 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, so it’s good to plan ahead• Unlike Insurance, no losses are expected


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.


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.


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.

In public works contracts, the parties covered by the payment bond are specified in the Civil Code.


The Warranty Bond

The warranty bond assures that the contractor will correct any deficiencies in material or workmanship for a specified period of time, 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.


Cost of Bonds

• Depends on a number of factors

• 1.0% - 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


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


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, 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• Current work load – cost to complete• 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• Alternative solutions to lack of financial strength


Character: References and Reputation

• Of the construction firm:• Business relations with

• Primes, subcontractors and vendors• Previous owners, Architects, Engineers• Banks

• Credit reports Business Dunn & Bradstreet

Personal credit reports of owners


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?

Why is it Difficult for Small Contractors to Obtain Bonding Capacity?• Capacity to perform• Financial Strength• Track Record & History of Company• Organizational Structure• Business Continuation Plans• Trade References• Analysis of all Projects in Progress• Credit History• Good Character• Working Capital• Quality CPA Prepared Financial

Statements• Broker Representation

Surety Prequalification/Underwriting

Track Record

Net WorthDemonstrable

Capacity

Access to Surety Credit

The Vicious Cycle

Gradually Grow your

Bond Business

Reinvest in Your

Company

Use a CPA That Knows Construction

Use Surety Agent

Expertise

The $uccess Cycle

How Do I Obtain or Increase My Bonding Capacity?

• Quality CPA Prepared Financial Statements

• Choose jobs wisely• Critical Analysis of all Projects

in Progress• Increase Personal Credit

Rating• Trade References• Increase Working Capital• Protect Company Credit

History• Good Character• Broker Representation


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 GETQUALIFIED FOR BONDING OR

GROW THEIR BOND CAPACITY???( ANSWER: NO. )


The Surety Underwriter

• Primary goal is to prevent default

• Makes decisions on surety capacity

• Extends surety capacity to ensure success of contractor


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 planning, especially discussions on risk management

• Helps the contractor grow his or her surety program

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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, Attorneys, Bankers• NASBP – National Association of Surety Bond Producers

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


Earning Trust: Maintaining the Surety Relationship

• Immediately notify surety of problems• Communicate openly, no surprises• Provide accurate, detailed & consistent information

How Do I get more Surety Capacity?

• Use your independent counseling team of your Accountant, Attorney and Professional Surety Agent

• Of the three, 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, everything usually comes back to them

Any More Questions? Call us!

Steve Swartz, President/CEO

[email protected]

SouthCoastSurety.com

1100 Via Callejon, Suite ASan Clement, CA 92673

(800) 361-1720

DOI Lic# 0B57612

http://southcoastsurety.com/

Date post:	12-Apr-2017
Category:	Small Business & Entrepreneurship
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What Is A Contract Surety Bond? Learn Contract Surety 101

Small Business & Entrepreneurship