The Basics of Bonding & The Contractor Development Program Presented By: Navid Barkhordar

Topics Covered I. Basics of Bonding ◦ Why, What & How? II. Challenges Experienced by Small & Emerging Contractors When Attempting to Obtain a Bond III. Resources Available to Assist Small & Emerging Contractors

 About Us Full-Service Property & Casualty Insurance Brokerage Firm Dedicated Construction/OCIP Practice Specialty Programs – SPARTA / Prompt Cover Contractor Bonding & Technical Assistance Programs Offices: San Francisco, Los Angeles, Oakland, San Diego, San Bernardino & Sacramento

Surety Bonds are Mandated By Law on Public Works Projects Why Do I Need a Surety Bond? Federal “Heard Act” (1894) & “Miller Act” (1935) Require performance & payment bonds for public work contracts over $100,000 State & Local “Little Miller Acts” (vary by state) Require performance & payment bonds for on state and local public works projects (amounts vary by entity) The use of Surety Bonds makes it possible for government entities to use private contractors for public construction projects under a competitive, sealed bid, open competition system where the work is awarded to the lowest responsive bidder.

CONTRACTOR (Principal) SURETY A Three (3) Party Agreement that Guarantees a Contract: The Surety provides assurance to the Project Owner (Obligee) that the Contractor (Principal) is qualified, will perform a contract, and pay all subcontractors and material suppliers, as stipulated in the contract. What is a Surety Bond? OWNER (Obligee)

Three Party Agreement ◦Protects another party ◦You cannot buy it like Insurance ◦You must qualify for it ◦Unlike Insurance, no losses are expected ◦Indemnification What is Surety Bonding?

Components of Contract Surety Bonds: ◦Bid Bond Guarantees contractor will enter into contract at bid price, if low bidder ◦Performance Bond Guarantee completion of the contract ◦Payment Bond Guarantees laborer, suppliers, and subcontractors will be paid ◦Maintenance or Warranty Bond Guarantees against defects in workmanship or materials for a stated time after acceptance of work Types of Surety Bonds Surety bonds in construction are referred to as “Contract” surety bonds

What Surety Professionals Analyze The Three C ’s of Surety

The Process of Obtaining Bonds Obtain A Broker Gather Required Documentation Broker Sends Submission to Bond Markets (Underwriting) Obtain Letter of Bondability Identify Bidding Opportunity Request a Bid-Bond from Broker Submit Bid-Bond along with Bid Estimate to Owner Bid Results Received Request Final Payment & Performance Bonds from Broker for this Job Submit Payment & Performance Bonds and Finalize Contract with Owner (N.T.P. & N.O.A.) Begin Work! Step 1: Apply for Bonding Capacity Step 2: Bid on a Public Works Project Step 3: Submit Final Bonds to Start Job Get this done as early as possible!

Cost of Surety Bonds Bid BondNo Charge Performance Bond ½ - 3% of Contract Price Payment Bond Price included with Performance bond

Why is it Difficult for Small and Emerging Contractors to Obtain Bonding Capacity? Capacity to perform Financial Strength Track Record & History of Company Organizational Structure Business Continuation Plans Trade References Analysis of all Projects in Progress Credit History Good Character Working Capital Quality CPA Prepared Financial Statements Broker Representation Surety Prequalification/Underwriting The Vicious Cycle

How Does The Contractor Development Program Help Small & Emerging Contractors?

The Four Pillars of Contractor Development  Enrollment  Personal Account Manager  Facilitated Referrals Pillar 1: Assessment

The Four Pillars of Contractor Development  Assistance with obtaining or increasing bonding capacity  Access to City of L.A. collateral support for bid, performance and payment bonds for qualified contractors  Contract review, project assessment, and field support for program bonded contracts  Assistance with project risk identification and mitigation  Third party funds administration  Accounting cost subsidy for CPA prepared financial statements  Access to contract specific financing  Project opportunities and industry events sent weekly via the "Blitz of the Week" Pillar 2: Bonding Assistance & Technical Support

Contractor currently has $250,000 in available bond capacity A job opportunity arises and the contractor’s bid estimate is valued at $350,000 Contractor is not able to pursue this opportunity due to lack of adequate bonding capacity The Problem The Program work’s with the Contractor’s bonding company to enhance the Contractor’s available bonding capacity The program posts a collateral guarantee on behalf of the contractor to increase their bonding capacity from $250k to $350k Contractor now has the adequate bonding capacity to obtain the bonds for this project and pursue this opportunity! The Solution Example of Collateral Support Enhances The Contractor’s Bonding Capacity

The Four Pillars of Contractor Development  Group Classes on public construction best practices led by industry experts.  One on One consultation  Contract specific support on City of L.A. bond program supported contracts. Pillar 3: Education, Training & Contractor Support

The Four Pillars of Contractor Development  Strategic alliances with Program Prime contractors including matchmaking and referrals.  Networking with public agency staff and peer contractors. Pillar 4: Prime Partnership Program

Who Are Our Target Contractors? Aspiring Contractors Entry Level Contractors Experienced Contractors Contractors Transitioning from Private and or Commercial to the Public Sector Prime and Subcontractors

Contractor Bonding, Technical Assistance & Contractor Development Programs City of Los Angeles (BAPLA)  Bond guarantees up to 40% to a maximum of $250,000 (whichever is less)  Accounting cost subsidy up to $3,200 for financial statements  Funds Administration payment of fees 1% of contract price

San Bernardino Community College District  Guarantees up to 40% of bond to a maximum of $400,000  Training - Individual counseling and group workshops on bonding, financing, business management, and more  Matchmaking – Connecting awarded Primes to smaller Subs Contractor Bonding, Technical Assistance & Contractor Development Programs

Program Results In Southern California, the Program is supported by the following Public Agencies:

Contact Us Merriwether & Williams Insurance Services, Inc. 550 South Hope Street, Suite 1835 Los Angeles, CA Tel. (213)  Fax (213)