risk management: surety bonds jill tucker

Risk Management: Surety Bonds

Jill Tucker

September 22, 2015

Current Construction and Construction-Related Services Industry

• $1 trillion industry in US

• 8% of U.S. economy and 10% of world GDP

• 2nd largest economic sector in US in terms of

revenue and employment

• Demographic shift in construction company

ownership towards minorities and women

Barriers to Emerging Contractors Entry and Growth

• Contracting Opportunities

• Information and Management Expertise

• Trained and Reliable Workforce

• Capability and Capacity

• Performance Issues and Dispute Resolution

• Bonding and Financing

Bonding vs. Insurance

• Surety Bonds are a non-traditional insurance

product

• Surety bonds are similar to bank credit

• Surety provides assurance that contractor

can complete project and pay bills

• Surety companies guarantee 100% of

contract amount

A Bond is a Three-Party Contract

• Contractor

• Surety

• Obligee

Contractor

Owner

Surety Company

Types of Surety Bonds

• Bid

• Performance

• Payment

The Bid Bond

1. Assures that the bid is submitted in good

faith, and

2. The contractor will enter into the contract

at the price bid, and

3. Provide the required performance and

payment bonds.

The Performance Bond

Protects the owner from financial loss should

the contractor fail to perform the contract in

accordance with its terms and conditions.

The Payment Bond

Assures that the contractor will pay

specified subcontractors, laborers, and

materials suppliers associated with the

project.

Cost of Bonds

• 1.0% - 3.0% of total contract price

• Cost of bond is acceptable project cost that

is passed on to the owner

• Bond premium paid out of first draw

The Surety Bond Producer

• Performs initial prequalification of contractor

• Primary surety industry contact

• Communicates with underwriter & helps negotiate level of surety capacity

• Provides sound business advice

The Surety Bond Producer

• Primary goal is to prevent default

• Makes decisions on surety capacity

• Extends surety capacity to ensure success of

contractor

Prequalification Process

• Sound financial statements

• Committed & competent personnel

• Business plan

• Personal & corporate indemnification

Prequalification Criteria – The 3 “C’s”

• Capacity – Can the contractor perform the

obligations of the contract?

• Capital – Does the contractor have the

financial strength to fulfill the terms of the

contract?

• Character – Historically, how has the

contractor performed? What is the

contractor’s reputation?

Capacity: Ability to Perform

• Can contractor fulfill obligations?

• Analysis of past projects

• Current work load

• System check on work & cash flow

Capital: Financial Strength

In-depth, detailed

evaluation of contractor’s

financial strength:

– Annual report

– Interim statements

– Investment strategies

– Cost control

– Continuity and

succession planning

Character: References and Reputation

Of the construction firm

– Business relations with

• Primes, subcontractors and

vendors

• Previous owners

• Banks

Of the construction firm owner

– Personal financial statement

– Credit reports

Other Prequalification Criteria

• Good references and reputation

• Ability to meet current and future obligations

• Experience that matches contract requirements

• Necessary equipment or the ability to obtain it

• Financial strength

• History of paying subcontractors and suppliers

Information that the Surety Requires

• Organizational chart of company

• Resume′s of key personnel

• Contractor’s business plan

• Financial Statements (last 3 to 5 years)

Information that the Surety Requires

• Work in Progress

• Continuity and contingency plans

• Subcontractor and supplier references

• Bank line of credit (if any)

• Letters of recommendation

Quality of Financial Statements

• Audit

• Review

• Compilation

Project Monitoring

• Are there large costs and earnings in excess

of billings?

• Are billings in excess of costs?

• Is the profit margin holding?

Prequalification Action Plan

Capacity – Assemble an effective management

team and manage projects effectively.

Capital – Cash and equipment in relation to

contract size.

Character – Perform on agreements – contracts

and loans - as agreed.

Work with TA providers to assemble documents

Identify surety agents NOW!

Communications and Feedback

• Changes in surety capacity

• Business assistance

• Job assistance

• Recommendations & referrals on other

contractors

Earning Trust: Maintaining the

Surety Relationship

• Immediately notify surety

of problems

• Provide profit & loss

statements based on

percentage of completion

• Communicate openly

• Provide accurate, detailed

& consistent feedback

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• SBA guarantees bid, performance and

payment bonds issued by surety

companies.

• This Federal guarantee encourages

surety companies to bond small

businesses who are having difficulty

obtaining bonding on their own.

SBA Bond Guarantee Program

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Prior Approval Program

Bond guarantee applications are submitted to SBA for

prior review and approval.

SBA guarantees 90 percent of the losses incurred on

1) contracts up to $100,000, and 2) on contracts

awarded to the following types of businesses:

• Socially and economically disadvantaged small

businesses

• Historically Underutilized Business Zones (HUBZone)

Program small businesses

• 8(a) businesses

• Veteran or Service-Disabled Veteran-Owned small

businesses


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Prior Approval Program - continued

• SBA offers an 80% guarantee on bonds for all

other individual contracts up to $6.5 million

in value or

• up to the $10 million if a Federal Contracting

Officer certifies that SBA’s guarantee is

necessary for the small business to obtain

bonding.


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Preferred Program

The Preferred Program enables sureties to

issue, monitor, and service bonds without prior

approval by SBA. The guarantee rate is 70%.

For more information about either the Prior

Approval or Preferred program, please contact

SBA’s Office of Surety Guarantees in

Washington, D.C. at (202) 205-6540.


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Eligibility Requirements for Small Business Contractors

1) The business combined with its affiliates must

not exceed the size standard designated for the

primary industry of the business together with

its affiliates.

2) You must need an SBA guarantee to obtain a

bond.

3) The size of the public or private contract or

subcontract <$6.5 million or $10 million if a

Federal contracting officer certifies that

SBA’s guarantee is necessary


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Eligibility Requirements for Small Business

Contractors

4) Business must satisfy credit, capacity and

character evaluations completed by the surety

company/agency

5) There must be a reasonable expectation of

successful contract performance.

6) The contract must require a bond.


September 22, 2015

Risk Management

Al Delaparte, CPCU, Risk Manager

City of New Orleans

What is Risk?

Exposure to Loss that comes

about in the course of doing

business.

1. Known, e.g., property

2. Unknown, e.g., operations

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What to do about Risk

• Avoidance—Don’t do it

• Finance—Insure it

• Transfer—Somebody else

• Retention—Loss Control

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Liability Transfer - Contractual

• Defense

• Indemnifcation

• Hold Harmless

• Waiver, etc.

• Mutual Obligations

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Liability Transfer - Insurance

• Coverages

• Limits

• Additional Insured Status

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Sample Insurance Recommendation MINIMUM SCOPE OF INSURANCE

1. Commercial General Liability (CGL): Insurance

Services Office Form CG 00 01or similar acceptable

to the City, covering CGL on an “occurrence” basis,

including products and completed operations,

property damage, bodily injury and personal &

advertising injury with limits no less than

$1,000,000 per occurrence. If a general aggregate

limit applies, either the general aggregate limit

shall apply separately to this project/location or

the general aggregate limit shall be twice the

required occurrence limit.

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2. Automobile Liability: ISO Form Number CA 00 01

or similar acceptable to the City covering any auto

(Symbol 1, or Symbols 7, 8, 9), or if Contractor has no

owned autos, hired, (Code 8) and non-owned autos

(Code 9), with limit no less than $500,000 Combined

Single Limit per accident for bodily injury and

property damage.

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3. Workers’ Compensation: as required by the State

of Louisiana, with Statutory Limits, and Employer’s

Liability Insurance with limit of no less than

$1,000,000 per accident for bodily injury or disease.

4. Professional Liability (Errors and Omissions):

with limits no less than $1,000,000 per claim.

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Other Insurance Provisions

The insurance policies are to contain, or be endorsed

to contain, the following provisions:

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Additional Insured Status

Contractor will provide, and maintain current, a Certificate of Insurance naming The City of New Orleans, its departments, political subdivisions, officers, officials, employees, and volunteers are to be covered as “Additional Insureds” on the CGL policy with respect to liability arising out of the performance of this agreement. General liability coverage can be provided in the form of an endorsement to the Contractor’s insurance (at least as broad as ISO Form CG 20 10 11 85 or both CG 20 10 and CG 20 37 forms if later revisions used). The Certificate of Insurance, as evidence of all required coverage, should name the City of New Orleans Risk Manager as Certificateholder and be delivered via U.S. Mail to 1300 Perdido Street, 9E06—City Hall, New Orleans, LA 70112.

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Primary Coverage

For any claims related to this contract, Contractor’s

insurance coverage shall be primary insurance as

respects the City, its departments, political

subdivisions, officers, officials, employees, and

volunteers. Any insurance or self-insurance

maintained by the City shall be non- contributing to

Contractor’s coverage.

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Claims Made Policies

The retroactive date must be shown and must be

before the date of the contract or the beginning of

work.

If the coverage is canceled or non-renewed, and not

replaced with another claims-made policy, Contractor

must purchase “extended reporting” coverage for

minimum of five (5) years after the termination of

this agreement.

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Waiver of Subrogation

Contractor and its insurers agree to waive any right

of subrogation which any insurer may acquire against

the City by virtue of the payment of any loss under

insurance required by this contract.

Notice of Cancellation

Each insurance policy required above shall provide

that coverage shall not be canceled, except with

prior notice to the City of no less than

60 days.

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Acceptability of Insurers Insurance is to be placed

with insurers licensed and authorized to do

business in the State of Louisiana with a current

A.M. Best’s rating of no less than A:VII, unless

otherwise acceptable to the City.

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Embrace Uncertainty

Maximize Risk

•Strong, clear contractual

language.

•Appropriate insurance coverage

and limits.

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Contact Information

Al Delaparte, CPCU Risk Manager

City of New Orleans 1300 Perdido Street

City Hall 9E-06

New Orleans, LA 70112

[email protected]

504-658-8909

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mailto:[email protected]

risk management: surety bonds jill tucker

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