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Obtaining Surety Credit

Obtaining Surety Credit. An Introduction to the Surety Process for Contractors & Subcontractors. Surety Bonds Mandated on Public Works. Federal Heard Act (1894) & Miller Act (1935) State & Local “Little Miller Acts”. Surety Bonds Vs. Traditional Insurance. Three-Party Relationship.

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Obtaining Surety Credit

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  1. Obtaining Surety Credit An Introduction to the Surety Process for Contractors & Subcontractors

  2. Surety Bonds Mandatedon Public Works • Federal • Heard Act (1894) & Miller Act (1935) • State & Local • “Little Miller Acts”

  3. Surety Bonds Vs. Traditional Insurance

  4. Three-Party Relationship Principal Obligee Surety

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

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

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

  8. Cost of Surety Bonds

  9. First Step Select knowledgeable surety bond producer www.nasbp.org

  10. Role of the Producer Prequalification Process Attorneys Surety Company Contractor Lenders Producer Auditors Advisory Group

  11. Attributes of a QualitySurety Bond Producer Construction Specialty National Trends Local Markets Construction Finance Reputation & Integrity Contract Docs & Law Strategic Planning Industry Associations Surety Bond Producer

  12. Value of the Producer Matches Needs Offers Advice Compiles Documents Reviews Documents Background Investigation Recommends Credit Guides contractor Communication Surety Bond Producer

  13. Second Step • Select knowledgeable CPA • AICPA Audit Guide • Audited financial statements

  14. Financial Statement Analysis Opinion Page Balance Sheet Income Statement Cash Flow Statement Background Investigation Account Schedules Contract Schedules Explanatory Notes Financial Statement

  15. Third Step • File submission to surety company • Contractor & underwriter meetings

  16. Three Cs of Surety Underwriting Capital Capacity Character

  17. The Surety Company’s Checklist • Good character • Experience matching contract requirements • Necessary equipment • Financial strength • History of paying subs and suppliers on time • Bank relationship • Established line of credit

  18. Information Surety Needs Organization Chart Key Employee Resumes Business Plan Work In Progress Emergency Plan Sub References Line of Credit Recommendations Underwriting Requirements

  19. Annual Meeting • Once per year • Shortly after annual financial statement is available • Include CPA & CFO or Comptroller

  20. Underwriting Considerations • Sound financial statements • Committed & competent personnel • Business plan • Personal & corporate indemnification

  21. Communications From the Surety • Changes in surety capacity • Business assistance • Job assistance • Recommendations & referrals on other contractors

  22. Job Status Report • Primary conduit to communicate to surety • Provided bimonthly or quarterly • Reflect all jobs undertaken • Provide consistent & conservative evaluations

  23. Role of the Job Status Report • Tracks contractor’s work history • Shows patterns & project management strategies • Reveals how contractor communicates problems to surety

  24. Questions the Surety Will Ask • Are there large costs & earnings in excess of billings? • Is gross profit holding? • Has owner failed to pay? • Are progress billings unapproved? • Are unapproved change orders included in the costs? • If job is complete, why hasn’t it been billed fully?

  25. Questions the Surety Will Ask • Are billings in excess of costs? • Are overbillings recognized by contractor? • Do substantial overbillings reflect a strong cash balance?

  26. Questions the Surety Will Ask • Is the profit margin holding? • Is there a pattern of profit fade? • Are adequate job cost procedures in place? • Can contractor accurately reevaluate problems on a job? • Is contractor withholding information?

  27. Earning Trust • Immediately notify surety of problems • Provide profit & loss statements based on percentage of completion • Communicate openly • Provide accurate, detailed & consistent feedback

  28. SBA’s Surety Bond Guarantee Program (SBG) • Targets small and emerging contractors • SBA Guarantees bid, performance and payment bonds • Reimburses surety a percentage of loss if contractor defaults • Plan A or Plan B (PSB) programs available • SBA charges a $7.29 fee per thousand of contract amount for performance and payment bonds. No fee applies to bid bonds only.

  29. SBG Eligibility • Must meet surety’s bonding qualifications • Contract must be $2 million or less • Contractor’s business must be independently owned and operated and qualify as a small business under federal regulations • Average annual revenues for last three fiscal years must meet the small business size standard for the North American Industry Classification System (NAICS) Code that the federal contracting officer specified for that procurement.

  30. Contact information for the SBG program Contact the local SBA office for a list of local area producers: Indianapolis District Office 8500 Keystone Crossing, Ste 400 Indianapolis, IN 46240-2460 Sharon Murff, (317) 226-7272 Http://sba.gov/osg

  31. Advice for Today's Market • Know rights & responsibilities • Stay within capabilities • Manage growth & overhead • Learn why contractors fail • Communicate Contractors

  32. Advice for Today's Market • Contract terms • Bond forms • Construction CPA • Adjust overhead • Bank line of credit • Conserve capital • Bond subcontractors • Qualify surety Contractors

  33. Keys to a Solid Relationship • Commitment • Trust • Communication • Timely reporting • Teamwork

  34. For More Information Surety Association of Indiana (SAI) www.indianasurety.org National Association of Surety Bond Producers (NASBP) www.nasbp.org Surety Information Office (SIO) www.sio.org The Surety & Fidelity Association of American (SFAA) www.surety.org

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