SURETY 101: BONDING AND INSURANCE
“What You Need To Know
What
For Contract Surety Support”
A Workshop Module of the
Model ...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
Barriers to Emerging Contractors Entry and
Growth
•
•
•...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
How Contractors Have Addressed Barriers
to Bonding
•
•
...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
Bonding vs. Insurance
•
•
•
•

Protects another party
Y...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
A Bond is a Three-Party Contract
y
• Contractor
• Suret...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
Types of Bonds:
The Bid Bond
The bid bond assures that ...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
The Performance Bond
The performance bond protects the ...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
The Payment Bond
The payment bond assures that the cont...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
Cost of Bonds
• 1.0% - 3.0% o total co t act p ce
.0%
o...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
The Surety Bond Producer
• Primary surety industry cont...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
The Surety Underwriter
• Primary goal is to prevent def...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
Information for Prequalification Process
•
•
•
•
•
•
•
...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
Prequalification Criteria – The 3 “C’s”
• Capacity – Ca...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
Capacity: Ability to Perform
•
•
•
•
•

Can contractor ...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
Capital: Financial Strength
• In-depth, detailed evalua...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
Character: References and Reputation
• Of the construct...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
Quality of Financial Statements
• Audit – Highest level...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
Project Monitoring
• Are there large costs and earnings...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
Earning Trust: Maintaining the Surety
Relationship
• Im...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
Value of a Surety Insurance Agent
• Acts as a consultan...
PUBLIC AGENCIES BOND ASSISTANCE
PROGRAMS

City and County of San Francisco
Alameda County

Bernida Reagan, Director of Com...
Bond Assistance Programs
Program Mission
To reduce the barrier of bonding, financing,
and enable greater participation of ...
Bond Assistance Programs
Bond guarantees
Accounting cost subsidy for financial statements (one time only)
Funds Administra...
Bond Assistance Programs
Program Core Components
Contractor Bonding Assessment/Technical
Assistance
•
•
•
•

Meet i h
M wi...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
Types of Insurance
• Liability Insurance
– Commercial G...
SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
Types of Insurance (cont’d.)
• Property and Casualty In...
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10/3/13 Meet the Primes workshop: bonding and insurance

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For construction firms interested in bidding on government contracts.

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

  1. 1. 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
  2. 2. SURETY 101: BONDING AND INSURANCE 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
  3. 3. 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 p products • Obtaining First Bond or Increasing Bonding Capacity
  4. 4. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS 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
  5. 5. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS A Bond is a Three-Party Contract y • Contractor • Surety • Obligee/Owner
  6. 6. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS 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.
  7. 7. 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.
  8. 8. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS The Payment Bond The payment bond assures that the contractor will pay specified subcontractors, laborers, and materials suppliers associated with the project.
  9. 9. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS 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
  10. 10. 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 • 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
  11. 11. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS 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
  12. 12. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS 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
  13. 13. 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 – Historicall how has the contractor Historically, ho performed? What is the contractor’s reputation?
  14. 14. 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, profitability Current work l d – cost to complete C k load l Does contractor have enough work crews? Does contractor have necessary equipment?
  15. 15. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS 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
  16. 16. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS 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
  17. 17. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS 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.
  18. 18. 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?
  19. 19. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS 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
  20. 20. 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.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
  21. 21. 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.
  22. 22. 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
  23. 23. 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
  24. 24. Bond Assistance Programs 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
  25. 25. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS Types of Insurance • Liability Insurance – Commercial General Liability (CGL) – W k ’C Workers’ Compensation i – Business Auto Policy (BAP) – Umbrella Coverage (Excess Liability)
  26. 26. SURETY 101: BONDING AND INSURANCE FOR NEW AND EMERGING CONTRACTORS 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)

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