1. Surety BondingClint Diers & Hunter Bendall February 12, 2015

2. Overview • Surety 101 • State of the Industry • Subcontractor Default Insurance • Surety Bond vs Letter of Credit

3. Surety Bonds101 The Basics of Bonding

4. Principal Obligee Surety What is Surety Bonding?

5. Types of Surety Bonds • Bid Bond • Performance Bond • Payment Bond

6. Types of Surety Bonds • Bid Bond • Performance Bond • Payment Bond

7. Types of Surety Bonds • Bid Bond • Performance Bond • Payment Bond

8. Prequalification Capacity Financial Strength Company History Organization Continuation Plans References Work In progress

9. Surety Company Checklist • Good character • Experience matching contract requirements • Financial strength • Excellent credit history • Banking relationship • Line of credit • Necessary equipment

10. Benefits of Bonds Financial Security Construction Assurance

11. Functions of Bonds • No liens • Smooth transition from construction to permanent financing • Provide support to contractor • Project completion Surety Bonds

12. Cost of Surety Bonds

13. For More Information Surety Information Office 1828 L St. NW, Suite 720 Washington, DC 20036 202-686-7463 | Fax 202-686-3656 www.sio.org | sio@sio.org

14. State of the Industry

15. State of the Industry Surety Results 1995-2013

16. State of the Industry Surety Results 1995-2013 Total Direct Losses 2000-2005 $12,768

17. Surety Comparison Data

18. Subcontractor Default Insurance

19. Subcontractor Default Insurance • What is Subcontractor Default Insurance? An insurance policy which indemnifies the Project Owner and General Contractor for costs associated with Subcontractor default and adds value to the project as a risk mitigation method. Typically these are rolling programs and cover multiple contract. High limits and High deductibles. • Why was SDI created? Large General Contractors expressed concern with increasing risks of Subcontractor default, and their dissatisfaction with the structure and process involved with making claims against Subcontractor Surety Bonds. The idea is that the sophisticated GC can do a better job of prequalifying, selecting, and mitigating subcontractor risk and SDI aligns the incentive to do so with the lower cost of insurance coverage.

20. Subcontractor Default Insurance - Continued • Objectives of SDI: • Control: puts control back in the hands of the GC project team. • Coverage: provides consistent and efficient coverage. • Cost: a cost-effective solution. • Profit: by utilizing the GC’s ability to prequalify, select, and mitigate subcontractor risk. • Why Would a Project Owner or Lender be Interested in SDI? • Subcontractors will typically perform more than 75% or more of the work on a project. • Subcontractors fail at a rate of over 90,000 firms per year. • During the course of your project, including the maintenance period, the GC can anticipate that as many as 25% of their Subcontractors will experience financial or operational difficulties leading to potential default. • SDI generally carries a longer term tail coverage for default.

21. Subcontractor Default Insurance - Continued • How can SDI help a GC? • SDI provides protection against DIRECT LOSS including but not limited to costs: • Supplement sub’s work to stay on schedule. • Terminate and replace defaulting sub. • Replace any non-conforming work. • Pay for any unpaid suppliers or sub/subs. • Any expenses or defense of disputes with subs (attorney’s, consultants, etc.). • SDI provides protection against INDIRECT LOSS including but not limited to costs: • Accelerate the work (extra payments to other subs to catch up after delay by defaulting sub). • Extended overhead of GC to oversee additional workforces. • GC of any liquidated damages directly related to a defaulted sub. • - A well managed program with a low loss ratio can give the GC an opportunity to earn additional profits over time.

22. Subcontractor Default Insurance - Continued • Other Value To the Project Owner and GC: • SDI provides expert consultant at the jobsite to assist in evaluation and resolution of default. (Insurance Company Risk Engineer) • Enhanced schedule security - helps ensure on-time project. • More capability to use MBE/DBE/WBE. • Reduces potential litigation and property liens. • Provides long tail years of completed operations coverage

23. Subcontractor Default Insurance - Continued • Project Cost Comparison – This is influenced by several factors • • Is the GC bonded? What is the GC’s policy on requiring sub bonds? • • Bonding both would typically cost 1.5% to 2.5% of the contact value. • • SDI can help project contingency funds. • • SDI, on average, is 50% - 75% the cost of sub bonds. • • SDI covers all subs, not just the largest. • Coverage: • • Surety bond will pay up to the penal sum of the bond • • SDI covers all subs and union benefits funds. • • Bond provides limited or no coverage for Indirect Loss. • • In the event of loss SDI can provide cash flow to the project if needed to keep on schedule. • • SDI provides a long tail to report claims after project completion. • SDI can have a more efficient claims Process: • When your GC notifies a Surety of a problem with a sub, an investigation occurs. • • The investigation uses valuable time and prevents the project from moving forward. • • The Surety will pay for the resolution the Surety decides is correct, sometimes this is not the best resolution for the GC or the owner’s project.

24. Subcontractor Insurance • Procedures the GC Implements to Prevent and Mitigate Risk of Subcontractor Default: •  • Pre-Qualification of Subs - financial, credit, performance, quality, safety, experience, • personnel. • • Selects Qualified Low Bid Subs who add value to your project. • • Aggressive management / monitoring of subs: scrutinize schedules of values with pay • submittals; 1st and 2nd tier partial and final lien releases; periodic supplier validations of • payment; quality checks. • • SDI procedures are reviewed by the insurance company Risk Engineers. • What are the procedures when defaults do occur? • • SDI allows the GC to take immediate action to remedy the default: • - Hire a replacement subcontractor. • - Supplement defaulting subcontractor’s workforce. • - Assist the subcontractor with financial/payroll or other means to help complete the work. • Complete the work ourselves. • • SDI provides the GC with coverage to: • - Replace non-conforming work. • - Fund additional costs to hire replacement subcontractors. • - Indemnify 2nd tier subs, suppliers or employees who may not have been paid. • - Accelerate the schedule if default results in delay. • - Fund costs of any necessary litigation or legal fees associated with subcontractor default.

25. Surety Bond vs. Letter of Credit

26. Surety Bond vs. Letter of Credit

27. Hunter Bendall +1 703 813 6515 hunter.bendall@rutherfoord.com Clint Diers +1 804 915 5624 clint.diers@rutherfoord.com