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

Surety Bonds Mandated on Public Works Federal –Heard Act (1894) & Miller Act (1935) State & Local –“Little Miller Acts”

Surety Bonds Vs. Traditional Insurance Surety BondsInsurance 3-party2-party Risk transfer Duty to obligeeDuty to insured Regulated by State Insurance Departments Premium fee for prequalification services Premium actuarially determined Project specificUsually term specific Penal sumPolicy 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 BondNo charge Performance Bond ½ - 2% of contract price Payment Bond Price included with performance bond

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

Role of the Producer Contractor Surety Company Attorneys Producer Lenders Auditors Advisory Group Prequalification Process

Attributes of a Quality Surety Bond Producer Construction Specialty National Trends Local Markets Construction Finance Reputation & Integrity Contract Docs & Law Strategic Planning Industry Associations Surety Bond Producer

Value of the Producer Matches Needs Offers Advice Compiles Documents Reviews Documents Background Investigation Recommends Credit Guides contractor Communication Surety Bond Producer

Second Step Select knowledgeable CPA AICPA Audit Guide Audited financial statements

Financial Statement Analysis Opinion Page Balance Sheet Income Statement Cash Flow Statement Background Investigation Account Schedules Contract Schedules Explanatory Notes Financial 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 Organization Chart Key Employee Resumes Business Plan Work In Progress Emergency Plan Sub References Line of Credit Recommendations Underwriting Requirements

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 Sharon Murff, (317)

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 Information Surety Association of Indiana (SAI) National Association of Surety Bond Producers (NASBP) Surety Information Office (SIO) The Surety & Fidelity Association of American (SFAA)