COOPERATIVE INCLUSION PLAN

(CIP) University Training

Bonding

What you need to know to get a bond, and how to GET IT DONE!

Brady K. CoxPartner, Baldwin-Cox Agency,

over 12 years agency experience.

What Would You Do?

Stranger comes up to you and says,

“Hey, Man, I’ve got this great construction job for $2 million that I just landed. Would you mind telling the owner that if I don’t build it right, or finish it, and I don’t pay all the subs and suppliers that YOU’LL take care of it? And, tell you what, I’ll give you 2% if you’ll tell them all that in writing!”

What is a surety bond?

Bonds are NOT insurance. Losses NOT expected

Definition of a SURETY BOND: A debt instrument issued by a surety on behalf of an owner guaranteeing that the contractor will fulfill the contractual terms of their agreement. In the event the obligations are not met, the owner will recover their losses by defaulting the contractor and making a claim on the bond.

In other words, a performance and payment bond, simply means the bonding company is guaranteeing: If you don’t do the job or if you don’t pay subs and suppliers, your

owner will kick you off the job and they will call the bonding company to take care of the problems at the bonding company’s expense and then the bonding company will come to you to pay them back (indemnity).

Bonds:Not all bond forms are alike. Some owners have

their own forms and you always need to get a copy. Some of them are UNWRITABLE in their current form.

Bid bonds: Means you’re qualified to bid the jobPerformance and Payment bonds: Bonding

company guaranteeing performance & payment and 1st year of warranty

Maintenance bonds: Warranty period – 1 or 2 yearsL&P and supply bonds

SuretyYOUR

Bonding company

ObligeeYOUR client:

The Owner or General Contractor

Principal(YOU)

Bid Bond

Performance Bond

Labor & Material Payment Bond

CapacityFinancialStrength

CompanyHistory

OrganizationContinuation

Plans

References

Prequalification

WorkIn progress

Underwriters look at what??? THE THREE “C’s”1. CAPITAL: Do you have money?

Cash is KingBonding capacity based on a multiplier

(10X+) of the lower of your Working Capital or Net Worth

Not a lot of debt (D/E < 3 to 1)MORE CASH

THE THREE “C’s”

2. CAPACITY: Can you do the job?

ExperienceEquipmentPeopleIs the job right based on your company’s

experience?Geography – have you worked there before?

THE THREE “C’s”

3. CHARACTER: Your individual moral qualities.

Will check your and your spouse’s personal credit reports.

Will check referencesDo you honor your commitments?Will you fulfill your obligations in the

General Indemnity Agreement?

Accounting and CONSTRUCTION CPA’s

Use CPA who specializes in working with BONDED CONTRACTORSYou don’t want a brain surgeon fixing your broken leg!Find them in the TEXO directory, or your agent can refer

you to specialistsCan help make decisions about taxes vs. bonding capacityNeed to understand the % complete method of accounting

(financial reporting method and tax method can be DIFFERENT)Have a construction friendly, accurate accounting system

and USE it!Join Construction Financial Management Association

(CFMA)

Financial statement types

Compilation (simple)

Review (medium, most requested)

Audit (complicated, thorough and expensive)

Required by TxDOT

Parts of the Financial StatementAccountant’s Opinion Page (w/ compliance)Balance SheetIncome StatementCash Flow StatementNotes to Financial StatementsWork in Progress Schedule (Open & Closed)Be Sure to Request ALL OF THE ABOVE

How to Calculate Working Capital

Current Assets minus Current LiabilitiesMaybe for TxDOT or your bankerNOT according to your bonding company.

They’ll take out: Prepaids Loans to shareholders Loans to employees Half of inventory – depending on how fast you turn

it over, or whether it’s prior jobs JUNK in your yard

How to Calculate Working Capital…

Current Liabilities –they count them ALL No deducts here!Lines of credit included here even if they

mature further out than 1 year.If any other entity besides a C Corp, they will

add in a tax provision for future taxes based on 30% of this year’s taxable income

Work In Progress (WIP)A KEY report for bonding capacity – usually

quarterly.Where your jobs stand at that dateAre you making money?

Are your estimates holding?Any profit fade or gain?

Estimated Cost to Complete – to see how much more work you can take on!

Overbillings ARE OK!

WIP Components

Contract Values for Each Project (Updated)

Estimated Total Costs for Each Project

Costs To Date for Each Project

Billings to Date for Each Project

WIP Schedule - OPEN

WIP Schedule - CLOSED

UNDERBILLINGSBonding companies watch them closely

Is the money collectible?Is it a temporary billing situation, back to

normal next month?Is it a change order that will, or WON’T be

approved?Is it cost overruns that can’t be billed?

Underbillings can become losses – WILL get your bonding company’s attention! Especially once a job is over 80% complete.

Credit Score ProgramsThere are a few markets that will approve

bonds on a case by case basis up to $250,000 single contracts and no more than $500,000 aggregate at one time based on you and your company’s credit score and a three page application…

If you need more bonding capacity you will need to provide more paperwork, very similar to applying for a bank loan.

You can’t write two small bid bonds and combine their values to equate to a bigger bid!

SBA Bond Guarantee Program

----In 1971 SBA launched the Surety Bond Guarantee Program to assist small, emerging and disadvantaged contractors obtain greater access to contract opportunities through bonded projects via an SBA guarantee

What exactly is it??????An agreement between a surety and SBA

where SBA agrees to assume a percentage of loss in the event a contractor breaches the terms of their contract

SBA’s guarantee strengthens a small contractor’s ability to compete and secure bonded work

How Can SBA Help Small Contractors Obtain Bonding?

SBA guarantees bonds written by any surety approved to participate in the program and listed in U.S. Treasury Circular 570

SBA provides a 70%, 80% or 90% guarantee through two separate programs

The Prior Approval Program, administered by two Area Offices, provides either an 80% or 90% guarantee based on the contractor’s demographic information. The Preferred Surety Bond Program, administered by SBA HQ in Washington, DC, provides a 70% guarantee.

What are the Eligibility Requirements?The applicant must be a small business

Average annual revenues for the past 3 years (or number of employees for manufacturing firms) cannot exceed the small business size standard established for their primary NAICS code as outlined in 13 CFR 121.201

The contract must require bonds The contract cannot exceed $6.5 million in size (Use

to be only 2 million, can go up to $10mm on federal projects that are approved by contracting officer)

How Are Applications Processed?The agent reviews the contractor’s

application package and recommends it to a surety for approval

The agent forwards an electronic application and complete application package to an OSG Area Office if the surety agrees to bond the project with SBA’s guarantee

SBA issues a guarantee to the surety when an application is determined to be qualified

The agent executes the bond

How Long Does the SBA Bond Process Take?

Agent and Surety require time to evaluate the contractor’s information prior to submission to SBA

SBA Office of Surety Guarantees has established a goal for processing applications within an average of four (4) Federal working days

SO WHAT MAKES IT SO GREAT?????Working Capital Calculation = OH MY

GOODNESS

Bank Line of Credit…. Used as Working Capital

Can be helpful if you are in a Joint Venture

BUT……Surety company still underwrites the account

What Costs Are Involved? Surety Charges

The surety charges the contractor a premium for performance, payment and ancillary bonds based on the rates approved in the state where the job is located, usually between 1.5% and 3% of the contract amount

SBA Charges a Contractor’s fee of .729% of the contract amount for each final bond guarantee

SBA does not charge a fee for a bid bond guarantee

BankingGet to know a banker who understands

bonded contractors. Watch out for COVENANTS AND COLLATERAL COMPLIANCE!

Should be a local bank – so you know each other

GET a line of credit BEFORE you need it! Someday, you might have a client not pay you – and you can’t get a line then!

Line good for job start cash flow, too.

Paperwork You’ll NeedContractor Questionnaire – fill it in COMPLETELY!ResumesFinancial Information

Three years of fiscal year end financial statements Current interim if over three months since year end Personal Financial Statement Current Work In Progress Report Accounts Receivable Aging, with retainage listed separately

Certificate of InsuranceBank reference informationCopy of Bank Line of CreditSubcontract Agreement, if you’re a GCContinuity PlanCompany brochure, or any other information to help tell

the bonding company about your organization and its successes.

Selling your company to the bonding companyUse a PROFESSIONAL BOND AGENT!

Help your agent learn what he needs to know to help sell your company to the bonding company.

How do poor plans & specs affect your bids? HIGHER price?

For bonding companiesPoor presentation = Higher Price AND LOWER capacity.

Bonding company review process.

Agent should send your file to more than one bonding company. But DON’T “Flood the Market”

Meet with the underwriter(s) offering the best preliminary program

What is the General Indemnity Agreement?

It’s your contract with your bonding companyBonding is NOT insurance – YOU WILL be reimbursing the

bonding company if they pay for anything! The premium you pay is an underwriting fee, not a pooled risk fee (losses are not expected or priced into your premium)!

They can even request that you give them collateral if they even THINK there will be a claim situation.

All owners with 5%+ ownership, AND (in Texas) spouses will be on GIA

SPOUSE includes CURRENT OR FUTURE.In Texas, homestead not on the tableRetirement plans (IRA’s, 401K’s and Keogh’s) not includedRead it carefully or have your attorney. No changes accepted!

The FOURTH “C”

COMMUNICATION, the FOURTH C

Bonding company is your NEW PARTNER.

Surprises are great for Birthdays, not Bonding

Let your bonding company know the GOOD and the BADBetter to hear it from you vs. anyone elseCompetitors WILL gossip, or make up stuffBonding companies have seen nearly every problem you

can think of: Project problems Key employee changes Profit slippage Health problems Divorce Employee theft (GET A FIDELITY BOND!) Clients not paying

BOND CLAIMSClaims on your bonds

Payment bond claims are common-subs & suppliers’ claims, even if you don’t know about them. YOU can request sub-bonds which guarantee subcontractor performance and payment to protect YOURSELVES.

Performance bond claims are less frequentIf YOU become a claim for your bonding company, be

sure to cooperate!

More bonding information sources:AGC National Office AGC.orgABC National Office ABC.orgNASBP – Professional Association of Bond Producers

NASBP.orgSIO – Surety Information Office SIO.orgSAA – Surety Assoc of America SAA.org

Q&A

Baldwin-Cox Agency5930 Preston View Blvd.,

Suite 200Dallas, Texas 75240

Brady K. Cox