Surety Bonds For Trade Contractors and

Suppliers

Name of GroupDate

AgendaI Construction Risk 2015

II Bonds; A Brief Introduction

III Getting a Bond: The Care & Feeding of Sureties

IV Making a Claim Under a Payment Bond

IV A Few Points to Ponder

I – Construction Risk

“Then You Shall be his Surety”

William Shakespeare

Merchant of Venice

Construction Risk 2015

Construction Risk = Risk of Contractor Failure.The number and severity of contractor failures

increased in recent years.Recent Challenges:

Reduction of available work; oversaturated market = tighter margins

Onerous contract conditions. Downloading of risk

Paradigm Shift: AFP’s, P3’s

Construction Risk 2015From 2010-14, the Surety industry paid out almost

$800 million in claims; more than all of the previous decade.

2013 a year to forget: Loss ratio; 52% - industry unprofitable Premiums flat after two years of decline Across all lines and all sectors of the country

2014 showed improvement with lower loss ratios and premium growth … but….

2015 ? Impact of Oil Prices in western Canada and political and economic instability

Construction in Canada 2015Canada the new construction “mecca”.

Ongoing commitment to infrastructure Federal commitment $48B over 10 years.

By 2020 Canada to be world’s 5th largest construction market (9th in 2010)

Increased foreign investment from depressed areas (e.g. Europe)

Larger and longer projectsChallenges to small and mid-sized contractors

Unqualified Contractors; the lowest “irresponsible” bidder

Insolvency of ContractorContractor default for non-financial reasons:

Over ExtensionInability to completeIncapacity of Key people

Unpaid subs and suppliers resulting in liensWarranty problems

Why Contractors Fail

Protect Against Construction Risk

Surety BondsPerformance BondsLabour & Material Payment Bonds

Liquid Security Irrevocable Letters of CreditCash/Negotiable instruments on Deposit

Subcontractor Default Insurance (SDI)

II – Surety Bonds What are They?

How do they Work?

Surety is not Insurance

Surety is not Insurance

INSURANCE 2 party agreement;

Insured & InsurerPremiums actuarially

determined Losses anticipatedNo recourse against

insured in the event of loss

SURETY 3 party agreement;

Principal, Surety & Obligee

Premiums only a service charge

No losses anticipatedRecourse against the

Principal via indemnity agreement

Surety Bonds: 2 Essential Services

Prequalification:Assurance that the bonded contractor is

qualified for the job for which they are contracted.

Security:Financial Protection in the event that the

bonded contractor should default on its obligation.

Standard Construction Bonds

PrequalificationPrequalification LetterLetter to owner confirming “bondability”; non-binding

Bid Bond Protection should low bidder refuse to enter into

contract. Pays Difference between the low bid and 2nd bidder

Consent of SuretyLetter to owner where surety agrees to provide the

required bonds; this one is binding.

Standard Construction Bonds

Security

Performance BondGuarantees Contractor will perform Contract in

accordance with terms and conditions.Contractor must be in defaultProvides owner with completed job; not just cash

Labour & Material Payment BondGuarantees that trades and suppliers will be paid for

goods and services provided.

Labour &Material Payment Bonds

Guarantee that the contractor will pay all direct subcontractors, suppliers for materials and services provided to bonded project.

Obligee is trustee on behalf of the claimantsClaimant must have a direct contract with the

PrincipalClaimants may only claim for goods and services

supplied to the bonded jobClaimant can claim directly against the surety (don’t

need to go through owner).

Labour &Material Payment BondsClaim must be filed within 120 days of the last day

worked or the date material shippedExistence and quantum of claim must be fully

documentedBond works in tandem with protection under the CLADoes NOT require General Contractor to be in defaultONLY form of security that is exclusively for the

benefit of trades and suppliersOne year to file suit

III – Getting a BondThe Care & Feeding of

Sureties

Barrier? Bonding companies need to write bonds.Sometimes a time problem – for contractors without a

bond company it takes time to establish a facility.Some sureties will ONLY bond small contractors,

others have small contractor divisionsSmall firms will secure bonding for jobs within their

realm of expertiseBonds are a barrier to unqualified contractorsVisit the SAC website: www.suretycanada.com

Myth: Barrier to Small Firms?

Benefits to Trade Contractors

Eliminate unqualified competition; critical in tough times when too much capacity in the marketplace.

Non-intrusive; do not tie up liquidity or borrowing power (in contrast to letters of credit)

Respond only upon actual default; protect contractors from arbitrary action by project owner

Can provide assistance (technical or financial) should contractor encounter difficulties on bonded project

Who Obtains the Bond?Neither the Project Owner nor the general

contractor are responsible for obtaining the required bonding or other contract security.

Owner or general contractor only need to include bonding requirement in tender documents or contract specifications

The trade contractor obtains the bondingSelects a professional surety bond broker or

agent who assists in submitting case to a surety underwriting company

How to Obtain a Bond

Submit Financial Statements and other background information to Surety

Participate in prequalification process: an in-depth look at contractor’s background, business operations and financial structure.

Surety Financial AnalysisBalance Sheet

Working Capital / Net WorthRatio AnalysesReceivable/Payables aging analysisWork on hand; profitability, maturity, trending

Income StatementProfitabilityRevenueTrend Analysis; 3 to 5 years

Cash Flow AnalysisAccountant’s Opinion/Explanatory Notes

What Else Does a Surety Need?

Detailed Work on Hand Schedules

Aged Listing of Receivables and Payables

Organization Chart of Key Employees

Detailed Resumes of Principal & Employees

Business Plan & Contingency Plans

Subcontractor & Supplier References

What Else Does a Surety Need?Letters of Recommendations from Owners

Evidence and details of a Line of Credit from a Financial Institution

Details of business continuity plans in the event of death or incapacity of owners/key people

Reports on Similar Completed ProjectsOwner, contract price, date completed,

profit earned

Care & Feeding of Sureties(Five Tips)

1. Establish a relationship with a professional broker.

2. If you’re declined, FIND OUT WHY!! Many problems can be solved.

3. Work With The Bonding Company; it is truly a relationship

4. There IS competition among sureties.

5. Check our our website

IV – Surety Bonds Making a Claim Under a Payment

Bond

Claiming Under a Payment BondProtect Your Rights.

Read the Bond form and comply with its terms: Notice PeriodsSuit PeriodMaterials Supplied to Bonded JobDirect Contract with the Bonded Contractor

Provide Sufficient Documentation.

Claiming Under a Payment Bond

What you Need:A complete copy of the contract with the Principal. Copies of all change orders to the contract.Copies of all invoices submitted to the Principal.Copies of all statements of accounts rendered to the

Principal.Summary of payments made including date and

amount.A Statutory Declaration with respect to your own

subcontractors.

Claiming Under a Payment Bond

What you Need (cont.):Evidence of the last date upon which labour and/or

material was supplied to the project (i.e. delivery slips, time sheets, etc...)

Evidence and documentation supporting other amounts claimed which have not been agreed to or authorized in writing.

A copy of the Claim for Lien, if any.A workers’ Compensation Board clearance letter

(current).

V – A Few Points to Ponder

Subcontractor Default Insurance (SDI)Introduced in 1996 to protect large general

contractors from subcontractor default.Indemnity product – compensates for loss

incurredIncludes deductibles and co-paymentInsured should have in house construction

administration experience and strong cash flow.Does a good job at providing the protection for

which it was designed; i.e. protecting large G.C.’s against the risk of subtrade default.

Surety Bonds & SDIDifferent products – Bonds protect owners

from default of G.C. SDI protects G.C’s from subtrade defaultHas been represented as a “substitute” for

surety bonds by some brokers and contractors

Owners don’t fit the profileNo protection for tradesBonds designed to protect owners; SDI

designed to protect G.C’s

Surety Bonds & SDIControl – a two edged sword.

Policy pays 30 days following “Proof of Loss” Are you the controller or the controlee?Trades are vulnerable to wrongful declaration

of default. G.C. – becomes sole arbiter of existence of default under the policy.

Trades forced to provide confidential information to generals.

Some “best-in-class” trades have resisted being forced into SDI program.

Surety Bonds & SDI

Surety Bonds and Subcontractor Default Insurance can both provide effective protection against the risk of contractor failure. The two instruments are very different in the manner in which they provide this protection and in the markets they were designed to serve.

The Scourge of “Pay-When-Paid”Will a Payment Bond respond to a claimant

unpaid due to “Pay When Paid language”? A bond will not provide an Obligee or Claimant

more than their contract would haveCourts have been inconsistent in their rulings:

Wm Clare Plumbing vs Timbro Devel. (Ont)Arnoldin Construction vs Alta Surety (N.S.)

Pay-When-Paid vs Pay-if-PaidIf Language is clear and unambiguous;

clauses will likely be upheld.Fair?

Prompt Payment LegislationTo require payments under construction

contracts within business cycle timeframe.Canada lags behind U.S., U.KBill 69 – Ontario’s inaugural effort; flawed and

ill-timed. Ontario to review again as part of an update of Construction Lien Act

Other provinces (Manitoba, B.C. Nova Scotia) exploring Prompt Payment legislation.

Inherently fair.Do it right! (consultation, responsive to current

needs of the construction industry)

SURETY ONLINE LEARNING CENTREThe Surety Online Learning Centre accessible

from SAC website; www.suretycanada.com.

Five learning modules that introduce the basics of surety bonds and the suretyship process

Learn at your own pace.

Ideal for review or for colleagues who can’t attend a “live” information session.

It’s FREE

Contact UsPhone: 905-677-1353

Fax: 905-677-3345

email:surety@suretycanada.com

or visit our www.suretycanada.com website: