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Surety Basics Surety Basics
Phil Condra- Bonds Southeast, Inc.
2013 Construction Opportunities ConferenceTennessee Small Business
Development CentersFebruary 26th, 2013
Oak Ridge, Tennessee
What is Surety Bonding?
Surety
Obligee(Owner)
Principal (Contractor)
Page 3
Suretyship vs. Insurance
Principal / Insured
Insurer
Policy = Two Party Contract
Surety
Principal Obligee
Bond = Three Party Agreement
Contract/Obligation
Page 4
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”
Types of Surety Bonds
• Bid Bond
• Performance Bond
• Payment Bond
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.
Page 6
Functions of BondsFunctions of Bonds
REQUIRED BY LAWNo liensSmooth transition
from construction to permanent financing
Provide support to contractor
Project completion
Surety Bonds
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
1 C = CAPITAL1 C = CAPITAL
Working CapitalNet WorthDebt : EquityBank- Line of CreditAging of Accounts Receivable
Page 10
Opinion Page
Balance Sheet
IncomeStatement
Cash FlowStatement
Background Investigation
AccountSchedules
Contract Schedules
ExplanatoryNotesFinancial
Statement
2 Different Surety 2 Different Surety ApproachesApproaches
WORKING CAPITAL Underwriting
(Majority View)
Vs.
NET WORTH Underwriting
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
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)
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
Advice for Today's MarketAdvice for Today's Market
Contract termsBond formsConstruction CPAAdjust overheadBank line of creditConserve capitalBond subcontractorsCPA, Surety, Legal
Contractors
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
