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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