Contractor Bond Seminar

SuretyBondGuaranteeProgram

The Basics of Bonding

ContractBonds
BondAgents
Prequalification
WhatBondUnderwritersLookFor
Banking,Credit&BondCosts
SBABondGuaranteeProgram
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What is a Surety Bond?

Agreement between:
Contractor
SuretyCompany
Obligee(projectowner).

TheContractorandagentsignthebondsandthecontractordelivers
themtotheObligee,promisingtocompletethecontractaccordingto
itstermsandconditions.

Upondefault,theSuretymustpaytheObligeemonetarydamagesor
completethecontractthroughprojectfinancingorreplacement
contractors.Thesuretythenproceedstorecoverfromtheprincipal.

The3typesofcontractsuretybondsarecalledbid,performance and
payment bondsandmaybeguaranteedbytheSBA.
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Contract Surety Bonds

BidBond Prequalifiesthecontractortobidonspecific
projects.Assuresthecontractorwillreceivethenecessary
paymentandperformancebondsifawardedtheproject.
PerformanceBond Guaranteesthecontractorwillperformthe
jobaccordingtoalltermsandconditionsofthecontract.
PaymentBond
Guaranteesthatthesuppliersofmaterials,labororservices
willbepaidforworkperformedand/ormaterialtheyhave
provided.
Note Donot bidwithacashierscheck,useabidbond!
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Why Surety Bonds are Required

SuretybondsarerequiredonGovernmentprojectstoensurethatthese
contractsareproperlycompletedwhichprotectstheobligee,suppliersof
laborandmaterialandultimately,thetaxpayer.
FederalGovernment:UnderprovisionsoftheMillerAct,allfederal
constructioncontractsgreaterthan$150,000requiresuretybonds.
State,County&LocalGovernment:Mostothergovernmentalunitshave
adoptedsimilarprovisionsreferredtoasLittleMillerActs.
PrivateSector:Manyprivatesectorobligeesalsorequiresuretybonds.
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Locate a Surety Bond Agent

AskyourInsuranceAgent
UsetheSBAsBondAgenciesbyStateList
http://www.sba.gov/content/bondagenciesstate

Callafellowcontractorforareferral
Attendalocaltradeassociationmeeting
Advertisementsintradepublications,newspapers,yellow
pages,andonlinesearch
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Professional Bond Agents

are

Knowledgeable intheconstructionindustry.
Active inprovidingsuretybondstocontractors.
Access tomorethanonesuretycompanymarket.

Professional Bond Agents

- continued

Assistinassemblingtheinitialbondapplicationpackage
Provideongoing&timelyassistance
Findsolutions tobondingproblems
Advocate stronglyforthecontractor
Providereferralcontacts suchasCPAs,bankers,attorneys,
etc.

Pre-Qualification

Prequalifyingmeansknowingwhatyourallowable
bondcreditlevelswillbe,inadvanceofbiddingto
assurebondswillbeavailabletoyou.

Forexample,youneedtoknow:

Contractamount($300,000)
WorkProgram($1,000,000)
Numberofbondedcontractsatonetime(4)
Allowedtypeofcontract(general,electrical,etc.)

Pre-Qualification - continued
Askyourbondagenttohelpyougetprequalified (ifyouhave
notobtainedbondsinthepast)
Giveyourselfplentyofleadtime.
Settingupbondingmaytake2 3weeksormoreattheBond
Company.
Note:Becomingbondableissimilartotheprocessofobtaining
bankcredit.Itsnotsimplyamatterofjustpayingthebondor
insurancepremium.

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Bond Underwriters Focus on:

Technical&ManagerialAbility
TrackRecord theapplicantspastexperiencedemonstratesthe
abilitytoperformfutureprojects.
FinancialStatements(reliableinhousenumbersorCPA)
FinancialResources(workingcapital,networth,etc.)
Profitability
CreditResources(Banks,Suppliers,Factors)
CreditHistory(Companyandpersonal)

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What is Working Capital?

Oneofthemostimportantfinancialitemstothebondunderwriter.

Measuresyourabilitytomeetcurrentandfuturefinancialobligations
duringtheyear.

Thenumberiscalculatedfromyourcompanybalancesheet:
cash+accountsreceivable+1/2inventory
less:currentliabilities
=WorkingCapital

Youwanttomaximizethisnumberwhenplanningfortheproduction
offinancialstatements.
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Bank Support
A GoodBankingRelationshipisimportant:
Thebondagentwillrequestinformationon:
Accounts(ODs,NSFs)
Cashbalances
LineofCredit(LOC)

LineofCredit? theSBAmaybeabletocountavailableLOCdollarsas
workingcapital.
Gettoknowabankerwhetheryouneedcredityet,ornot.

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Bank Support -

continued

SBAExpressLoan:
Financeshorttermworkingcapitalneeds
$350,000maximumrevolvinglineofcredit
50%guaranteemaximum
36hourturnaroundtime
ContactyourlocalSBAguaranteedLendertoapply
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Credit History
TheBondAgencywillinvestigateyourcredit
ObtainyourCreditReportinadvanceofapplyingforbonds.
Correctinaccuracies

Bondagentwillquestionanycreditproblemsfound:
Bereadyto:
Explainwhathappened
Clearor
Bringcurrent

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Bonding Costs
Includetheseitemsinyourbidestimate(Project
ownersexpecttopayforbondcosts):
AverageBondPremium:2.0to2.5%ofthecontractamount
SBAFee:$7.29perthousandofthecontractamount($729.00
fora$100,000contract)
Averagetotalbondcost:approximately2 3.0%
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Bonding Costs

continued

CPAFinancial
Statements
Banklineofcredit

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Surety Bond Guarantee Program

Mission:
Providesuretybondguaranteeassistancefornewand
existingsmallbusinessesinpartnershipwithoursurety
companiesandtheirbondagents.
TheSBAguaranteeallowsthesefirmstoobtainsurety
bondswhichwouldotherwisenotbeavailable.

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Surety Bond Guarantee Program

Wehavebeenassistingsmallandemergingcontractors
obtainsuretybondssince1972
TheSBAgivesthebondcompanyaguarantyof80%or
90%allowingthebondcompanytoissueyouthebond
(duetotheirreducedrisk)underPlanA:

90% 8(a)contractors,certifiedHubZonecontractors,minority
contractors,veteranownedandservicedisabledfirmsand all
contractsnotexceeding$100,000.

80% everyoneelsenotcoveredinthe90%categoryabove
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Contractor Profiles we can Assist

Startupsandfirmsinbusinesslessthan3years
Limitedresources(cash,workingcapital,networth)
Recentlosses
Limitedtrackrecordinsizeofpastjobscompleted
Nopriorpublicworksexperience
Smallbusinesseswhowanttoincreasecurrentbondlimits
Creditissues

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Eligibility for SBA Guarantees

Maximumcontractamount:$2million
EligibleIndustries:
Construction,service,supply&manufacturing
Smallbusinessmust:
Certifythebondisnotavailableelsewhere
Notbeonprobation,paroleorbarredfromdoing
businesswiththefederalgovernment
Thefirmtogetherwithitsaffiliatesmustbesmallforthe
primaryindustryitisengagedin.
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Eligibility for SBA Guarantees

- continued

Smallisdeterminedby:
NAICSCodes (13CFR121.201):
Manufacturing:1yearaverage#employees
Allotherindustries:3yearaverageannualrevenues
ConstructionContractorsareeligible:
If3yearaverageannualrevenuesdontexceed:
$33.5millionGeneral/Building/Underground/Heavy
$14millionSpecialtySubTrades,electrical,concrete
AccesstoallSizeStandardcodesandinformation:
http://www.sba.gov/category/navigationstructure/contracting/contracting
officials/sizestandards
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Applying for SBAs Bond Guarantee

Contractorgoestohttp://www.sba.gov/content/bondagenciesstate
Selectabondagenttocontact,requestingassistance.
Agentevaluatescredit,character&capacity
AgentappliesfortheSBAbondguaranteeelectronically.
SBAreviewsandapprovesthebondguaranteewithin2 4days.
Agentprovidesthebondtothecontractor.

Note:theagentmayprovidethebondwith,orwithouttheSBAguaranteeordecline
thebond.

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Bond Application Package

Thebondagentmayrequesttheseitems:

ContractorQuestionnaire
Personalfinancialstatement
Companyfinancialstatements(includingaffiliates)3years
Bankrelationshipinformation
WorkonHandschedule
Completedjobreferences
Resumeforstartups

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Bond Application Package

- continued

GeneralIndemnityAgreement(GIA)
ToobtainbondingyouwillfirstsignanIndemnityAgreement inwhich
youagreetoreimbursethesuretyforanylossestheypayout.
Youareplacingboth yourpersonalandcompanyassetsatriskifyou
failtoperformortopaybillsassociatedwiththeproject.

SBAContractorForms:
SBAForm994 eachbondguaranteerequest
SBAForm912 onetimeform
http://www.sba.gov/content/bondguaranteeapplicationforms

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Common Reasons Applications are Declined

Inadequateworkingcapital
Poorpastperformancerecord
Incompletesubmission
Doesnotqualifyasasmallbusiness
Contractsizeexceeds$2million
Ineligiblebondsuchaslicense,subdivisionorfinancial
guaranteebond(exceptTimberSales)

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Maximize your Bond Credit - A Summary

Findagoodfulltimeprofessionalbondagent&be
thoroughinthebondinformationyoupresent.
GetPreQualified(knowyourlimitsinadvance)
Retainprofitsinthefirm(buildupthefollowing
balancesheetitemsandratio):
workingcapital
networth
debt/networth

Goodqualityfinancialstatements(CPAbest)
Obtaincreditwithyourbank&suppliers
Documentpastcontractperformancetobuildup
yourbondcredit
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Surety Participation Process

SuretyCompanies:

CertifiedbyTreasuryDept.(TList)
ApplyforSBAParticipantStatus:
http://www.sba.gov/content/admittingnewsuretycompaniesprogram

Receivenotificationofapprovedstatus(OSG)
PriorApprovalProgram(PlanA)80/90%guarantees
PreferredProgram(PlanB)70%guarantee
BothPlans

Certifybondagentstousetheelectronicapplication(PlanA)
BondAgencies:
Agentsapplyforguarantycertificationstatus(throughapprovedSBA
sureties PlanA)
http://www.sba.gov/content/admittingnewsuretycompaniesprogram

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For further Information & Questions

SuretyBondGuaranteeProgram Agencywebsite:
http://www.sba.gov/category/navigationstructure/loans
grants/bonds/suretybonds

SeattleBondOffice Southern&WesternUS
TomC.Ewbank,Director
2065530961

Usefulinformationonallaspectsofbonding:
www.sio.org
Freeorminimalcostbrochures&CDs
February21,2012

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