Obtaining Surety Credit An Introduction to the Surety Process for Contractors and Subcontractors

Surety Bonds Mandated on Public Works FEDERAL Heard Act (1894) & Miller Act (1935) Require performance & payment bonds for public work contracts over $100,000 STATE & LOCAL “Little Miller Acts” (vary by state) Require performance & payment bonds on state & local public works projects

What is a Surety Bond? Surety Company Contractor Owner

Bid Bond Bid submitted in good faith Contractor intends to enter into the contract at price bid Contractor will provide required performance & payment bonds Types of Bonds

Performance Bond Protects obligee from financial loss should contractor fail to perform Types of Bonds

Payment Bond Contractor will pay certain subcontractors, laborers & material suppliers Types of Bonds

Obtaining bonds is similar to obtaining bank credit Surety companies use financial resources to support the contractor Surety bonding is a risk transfer mechanism Surety companies are regulated by state insurance departments Surety bonds are limited to those who qualify Fundamentals of Surety Bonds

Prequalification In-depth look at the contractor's entire business operation to determine contractor’s: Ability to meet current & future obligations Character Experience matching requirements of the job Equipment to perform the work Financial strength History of promptly paying subcontractors & suppliers Good standing with bank & established line of credit

First Step Select knowledgeable surety bond producer www. nasbp. org

Role of the Producer Integral part of the contractor’s external advisory group Prepares contractor for rigorous prequalification process Helps contractor establish business relationship with a surety company

Attributes of a Quality Surety Bond Producer  Specializes in construction insurance & bonding  Awareness of local, regional & national trends  Knowledge of construction accounting & finance  Knowledge of contract documents & contract law  Respected in construction industry  Experience in strategic planning & management practices  Active in construction & surety industry associations

Value of the Producer Match contractor needs & strengths to a surety company that supports the contractor Offer business advice, consulting services & technical expertise Compile financial documents Review contract documents to evaluate risk Conduct background investigation of contractor’s past work Recommend responsible line of credit Guides contractor through formal presentation to surety Maintain communications

Second Step Select a CPA who is knowledgeable of construction accounting Financial statements should conform to the AICPA Audit Guide Sureties prefer audited financial statements

Financial Statement Analysis Fiscal Year-End for Past 3 to 5 Years

Financial Statement Should Include: Accountant’s Opinion Page Balance Sheet Income Statement Statement of Cash Flow Discloses whether audit, review or compilation Shows assets, liabilities & net worth Measures how well the business performed From operating, investing & financing activities

Financial Statement Should Include: Work in progress & contracts completed Accounts receivable & payable schedules G&A expenses Accountant’s explanatory notes

Third Step Producer submits to surety company for underwriting Contractor should be prepared to discuss all aspects of current operations & future plans

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 Organization chart of company Resumes of key personnel Contractor’s business plan Work in progress

Information Surety Needs Continuity & contingency plans Subcontractor & supplier references Bank line of credit Letters of recommendation

Three Cs of Surety Underwriting apital CCCCCC apacity haracter

Cost of Surety Bonds Fee for underwriting services Typically ½ - 2% of contract price Rates vary depending on company, size & type of contract & bonding capacity Owner pays bond premium

For More Information Surety Information Office 5225 Wisconsin Avenue NW, Suite 600 Washington, DC (202)