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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
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)
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
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
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).
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:[email protected]
or visit our www.suretycanada.com website: