Surety Basics Phil Condra- Bonds Southeast, Inc. 2013 Construction Opportunities Conference...
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![Page 1: Surety Basics Phil Condra- Bonds Southeast, Inc. 2013 Construction Opportunities Conference Tennessee Small Business Development Centers February 26th,](https://reader030.fdocuments.us/reader030/viewer/2022032707/56649e035503460f94aef05c/html5/thumbnails/1.jpg)
Surety Basics Surety Basics
Phil Condra- Bonds Southeast, Inc.
2013 Construction Opportunities ConferenceTennessee Small Business
Development CentersFebruary 26th, 2013
Oak Ridge, Tennessee
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What is Surety Bonding?
Surety
Obligee(Owner)
Principal (Contractor)
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Suretyship vs. Insurance
Principal / Insured
Insurer
Policy = Two Party Contract
Surety
Principal Obligee
Bond = Three Party Agreement
Contract/Obligation
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Insurance vs. Suretyship• Suretyship
– Premium paid by Principal and the Obligee derives the benefit
– Bond obligation dictated by law or underlying agreement
– Underwrite to zero loss ratio– Premium covers expenses not
losses– Non-payment of premium does
not negate coverage/bond still in force
– Similar to obtaining bank credit– Risk is NOT transferred from
Contractor / INDEMNITY– CERTAINTY
– “Hope it’s not covered”
• Insurance
• Premium paid by Insured (Principal) and the Insured derives the benefit
• Coverage drafted by Insurer and filed in various states
• Law of large numbers
• Expect premiums to cover losses
• Non-payment of premium may terminate policy
• CHANCE/ PROBABILITY
• “Hope it’s covered”
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Types of Surety Bonds
• Bid Bond
• Performance Bond
• Payment Bond
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Types of Contract Bonds-Types of Contract Bonds-
Bid Bonds◦ Guarantees that the bidder will actually enter into the contract at
the proposed price and provide the required performance and payment bonds.
Performance Bonds◦ Indemnifies the owner for financial loss caused by the contractor's
failure to perform the contract in accordance with all the terms and conditions of the contract.
Payment Bonds◦ Guarantees that the surety will pay for certain labor, material, and
supply bills and subcontractors associated with the project if the contractor fails to pay these costs.
Supply Bonds◦ Guarantees that the supplier will provide a specified amount
materials in a specified time frame.
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Functions of BondsFunctions of Bonds
REQUIRED BY LAWNo liensSmooth transition
from construction to permanent financing
Provide support to contractor
Project completion
Surety Bonds
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Underwriting- (The YES or NO’s)Underwriting- (The YES or NO’s)
CharacterCharacter
ReputationRelationshipsReferences
CapitalCapitalFinancial
Statements Indemnity
Working CapitalWork-in-Progress
CapacityCapacity
ResumesExperience/
Previous ProjectContingency Plan
Business PlanEquipment
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1 C = CAPITAL1 C = CAPITAL
Working CapitalNet WorthDebt : EquityBank- Line of CreditAging of Accounts Receivable
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Page 10
Opinion Page
Balance Sheet
IncomeStatement
Cash FlowStatement
Background Investigation
AccountSchedules
Contract Schedules
ExplanatoryNotesFinancial
Statement
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2 Different Surety 2 Different Surety ApproachesApproaches
WORKING CAPITAL Underwriting
(Majority View)
Vs.
NET WORTH Underwriting
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Surety EvaluationSurety Evaluation Good character Experience
matching contract requirements
Necessary equipment
Financial strength History of paying
subs and suppliers on time
Bank relationship Established line of
credit
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SOURCES for Surety BondsSOURCES for Surety Bonds
• Traditional sureties Traditional Underwriting OR (Short form applications/ credit based) Smaller bond size
• Specialized sureties (Collateral based/ Funds Control)
• SBA program (Surety Company backed by government for majority of
any loss)
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Underwriter’s Warning SignsUnderwriter’s Warning Signs Slow Accounts Receivable Inability to Forecast Cash Flow Past Due Bills PROFIT FADE Bank Lines of Credit Exhausted/ Non- renewed Continued Operating Losses Bid SPREADS New (expanded) Geographic Territory / Scope of
Work
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Advice for Today's MarketAdvice for Today's Market
Contract termsBond formsConstruction CPAAdjust overheadBank line of creditConserve capitalBond subcontractorsCPA, Surety, Legal
Contractors
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Advice for Today's MarketAdvice for Today's Market
Know rights & responsibilities Stay within capabilities Show Me The Money Manage growth & overhead Learn why contractors fail Communicate & Communicate
& Communicate “DRIVE THE BOAT” Prepare for the next “Boom”
Contractors