BONDING & ACCESS TO CAPITAL SMALL CONTRACTORS INITIATIVE

SESSION 7 BONDING

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration INTRODUCTION −This session will review the basics of bonding −First part focuses on reviewing the key principles in construction bonding and the bonding application process −Second part focuses on completing a bond application and reporting standards 3

4 U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration PART A: APPLICATION PROCESS

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration LEARNING OBJECTIVES 1.Grasp the principles of construction bonding 2.Understand the application process 5

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration SURETY BOND BASICS (REVIEW) −What is a Surety Bond? −Why get a bond? −What are the types of construction bonds? −What are the key underwriting criteria? 6 U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration WHY DO CONTRACTORS FAIL? −Question helps understand why bonding agents asks for a lot of information −When a contractor fails on a project, who loses money? ○ Client ○ Lender ○ Public Agency ○ Bonding Company ○ You −Who has the most experience with this kind of “hurt”? ○ Typically it’s lenders and bonding companies 7

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration WHAT MAKES A CONTRACTOR A “GOOD RISK”? Beyond performance and credit quality, sureties are interested in firms with solid reputations that demonstrate an ability to generate quality internal financial and work-in-process information in a timely fashion. Michael Cusack Senior Vice President & Managing Director of Surety Aon Construction Services Group 8 U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration AN OVERVIEW OF THE PROCESS 9

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration PREQUALIFICATION −Before surety underwrites a bond, contractor typically undergoes careful, rigorous, and thorough process, often referred to as prequalification −Each surety company has its own underwriting standards and requirements −But there are shared fundamentals common to most surety companies 10

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration HOW TO FIND A BONDING AGENT 11

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration A CONVERSATION WITH A BONDING AGENT [AGENT] “Why should we write a bond on your project?” [CONTRACTOR]“Well, let me tell you about my company…” 12

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration “We know what we’re doing, and we do it well.” −Track record −Good management −Trustworthy 13

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration “My company’s finances are in good shape, and getting better.” −Good financial management systems −Sufficient and growing working capital on hand −Solid projections for volume and earnings −Banking relationship 14

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration “We’ve got solid plans for growth, and this job is one we can do well.” −Business plan −Marketing plan −Contracting opportunities −Certifications −Job size relative to capacity and projections 15

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration WHAT IF NOT APPROVED? 1.Ask for clear, specific feedback 2.Discuss with the bonding agent how you can address the deficiencies 3.Devise an Action Plan for re- submitting 4.You and the agent consider approaching other surety companies 5.Take advantage of SBA programs 6.Consider other approaches to getting the work (i.e., partnering, subcontracting) 16 U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration RESOURCES 17 These links provide good background information on bonding: −SBA “Surety Bonds: The Basics” −How do bid and performance bonds work? Video from JW Surety −Good overview on construction bonding: −Surety Bonds in Plain English

18 U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration PART B: APPLICATION FORM

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration LEARNING OBJECTIVES 1.Gather and present the business information and plan in a format acceptable to bond agents and SBA 2.Identify strategies for addressing concerns or weaknesses in the application 19

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration REQUIREMENTS −There are common elements to all applications for a bond −Some items will be specific to a particular Bonding Agent, or to Surety −Certain items are specific to job you are bidding on −Agent will let you know what they need Be prepared! 20

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration WHAT TO SUBMIT: ALL BOND APPLICANTS −Historical and current financial statements −Jobs in progress schedule −Evidence of working capital −Forms provided by bonding agent: ○ Contractor questionnaire ○ Bond request form ○ Financial statements and jobs in progress schedule −Continuity plan backed by life insurance 21

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration WHAT TO SUBMIT: LARGER BONDS −Business plan −Multi-year revenue and cash-flow projections −Financial statements compiled and/or reviewed by CPA −Evidence of financial management systems sufficient to handle ○ Accounting for construction ○ Job cost tracking ○ Estimating ○ Cash flow projections 22

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration PERSONAL CREDIT BONDS 23

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration PREPARING YOUR APPLICATION −Assemble everything that you have prepared −Complete the forms provided −Review with facilitator and/or bonding agent 24

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration WHAT HAPPENS NEXT? 25

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration TIMING If your information is all together and complete, entire process from first meeting with an agent to getting bond approval could take two to four weeks. 26 U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration SAMPLES These are sample documents which will be similar to what is expected of a contractor applying for a bond: −Cover Letter from Bonding Agent −Contractors Questionnaire −Personal Financial Statement −Jobs in Progress Schedule −Bond Request Form with Job Cost Breakdown 27

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration LINK TO ACTION PLAN −Contractors review where they stand relative to their bonding needs −Update Action Plan −Review Plans with facilitator 28 U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration

U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration RESOURCES 29 These links provide detailed information on bonding: −Choosing the Right Surety Bond Producer −How to Obtain Surety Bonds −Application for SBA Surety Bond Guarantee −Why do Contractors Fail?