1. Surety Bonds The Sensible Choice for Managing Risk

2. What is surety bonding? 3-Party agreement Regulated by state insurance commissioners Professional process to assure owners that contractor will perform

3. Who Requires Bonds? Federal Government Miller Act of 1935 requires performance & payment bonds on contracts over $100,000 Public Sector State and Local Government “Little Miller Acts” require performance & payment bonds on state & local public works projects (provisions vary by state)

4. Who Requires Bonds? Private Sector Private Owners For assurance that the project will be completed in accordance with the contract & to assure subcontractors & suppliers will be paid Lending Institutions To protect construction lending capital General Contractors To mitigate default due to subcontractor failure

5. Surety Bonds v. Traditional Insurance Contractor must qualify 3 party agreement Premium is fee for service No deductible

6. Bid Bond  Bid submitted in good faith  Contractor intends to enter into the contract at price bid  Contractor will provide required performance & payment bonds Contract Surety Bonds

7. Performance Bond  Assures owner that contractor is capable & qualified  Protects owner from financial loss caused by default Contract Surety Bonds

8. Payment Bond  Contractor will pay certain subcontractors, laborers & material suppliers  Prevents subcontractors from filing mechanics’ liens on a project Contract Surety Bonds

9. Fundamentals of Surety Contractor default is preventable Surety companies & producers prequalify contractors Surety companies back the bond with their own assets

10. CCC apital apacity haracter Financial Strength Ability to Perform Reputation The 3 Cs of Prequalification

11. Analyzing Financial Strength Annual & interim statements Investment strategies Cost control mechanisms Work in progress Cash flow Working capital Credit relationships Net worth

12. Evaluating Ability to Perform Prior experience Equipment Organization & personnel Past, current, & future work load Business plan Continuity plan

13. Assessing Reputation Investigate business relationships with:  Subcontractors  Suppliers  Project owners  Lenders

14. Reviewing Business Ventures Document business commitments that can affect the contractor’s business –Owning property –Side ventures

15. Contractor Failure

16. Source: Bizminer

17. Why Do Contractors Fail?  Inadequate accounting, financial & project management systems  Change in ownership and/or personnel  Change in scope  Rapid over-expansion Management ProblemsLabor & Material Problems  Subcontractor failure  Labor shortages  Material shortages  Cost escalations

18. Uncontrollable Factors Why Do Contractors Fail?  Inclement weather  Economic downturn  Onerous contract terms or work environment  Job site conditions  Death or illness of key employee

19. Claims

20. Expediting the Claims Process Clearly define default in contract Owner must file formal declaration of default Submit status reports to surety Promptly notify surety of performance or payment problems

21. Responsibility of the Surety Acknowledge claim Investigate claim Determine & fulfill obligations

22. Performance Bond Protection Re-let the job If a contractor is in default, surety may... Provide replacement contractor Retain original contractor –Provide trained personnel –Provide financial assistance Reimburse owner penal sum

23. Payment Bond Protection Assures payment Keeps subcontractors on the job No mechanics’ liens

24. Case in Point Surety’s Involvement Saves Projects

25. The Facts Large well-established family owned contracting company was bonded on 16 projects ranging from $2.5 to $5.6 million 6 years prior to default, family member sold company to 5 key employees $20 million school project had significant cost overruns

26. The Facts Default occurred on 3 senior citizen homes & 1 low income community rehab center Delays would hinder substantial HUD financing and tax credits

27. The Surety’s Solution Hired replacement contractor with track record on HUD projects Assembled team to handle complex federal & state requirements Retained and paid subcontractors, laborers & suppliers Satisfied liens

28. The Outcome Paperwork not delayed Work completed on time No loss of tax credits or financing Occupied in time to satisfy agency deadlines

29. Surety protects owners from $1,865,753 loss Premium paid for bonds $129,290

30. The Goal is Project Completion

31. How Do Letters of Credit Measure Up to Surety Bonds?

32. Surety Bonds v. Letters of Credit Surety BondsLetters of Credit Analyze contractor’s ability to perform the contract Analyze contractor’s ability to repay LOC Performance & payment bond each cover 100% of contract Term of coverage is a contractual obligation Surety provides third-party investigation of claims Qualified subs and suppliers have payment protection LOC limited to stated amount Term of coverage is time- specific Owner investigates claims Subs & suppliers cannot draw on LOC

33. The Value of Surety Bonds Ensure prequalified bidders Bid Bonds Protect owner if low bidder refuses final contract

34. The Value of Surety Bonds Performance Bonds Assures compliance with contract Surety may offer assistance to contractor to prevent default

35. The Value of Surety Bonds Payment Bonds Assure payment to covered subs & suppliers if contractor defaults on payment Protect owner from liens & double payments Smooth transition to permanent financing No cost when issued with performance bond

36. Cost of Surety Bonds Project Amount Approximate Bond Premium $1 Million $7,700 - $13,500 $5 Million $33,200 - $47,250 $10 Million $56,950 - $81,000 $20 Million $101,950 - $146,000 * Premiums may vary depending on size, type & contractors bonding capacity.

37. The Underlying Agreement Look at obligations Surety underwriter is trained to: Determine risks Match capable principal to fulfill agreement

38. The Owner’s Responsibilities Provide working set of plans and specifications Establish terms of the agreement Ensure full & timely payment Maintain adequate insurance Pay property taxes Communicate

39. Bond Specifications Owner specifies surety bonds in contract documents Contractor obtains bonds & delivers to owner

40. Qualify Your Contractor’s Surety A.M. Best Company www.ambest.com US Treasury Department www.fms.treas.gov/c570/c570.html State Insurance Departments www.naic.org Dun & Bradstreet www.dandb.com Standard & Poors www.sandp.com Moody’s www.moodys.com

41. Surety Information Office 1828 L St. NW, Suite 720 Washington, DC 20036 (202) 686-7463 sio@sio.org www.sio.org For More Information Contact