For construction firms interested in bidding on government contracts.

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. 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. 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. 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. SURETY 101: BONDING AND INSURANCE
FOR NEW AND EMERGING CONTRACTORS
A Bond is a Three-Party Contract
y
• Contractor
• Surety
• Obligee/Owner

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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)