1. Surety Bonds The Sensible Choice For Managing Risk

2. U.S. Department of Housing & Urban Development Presented By:

3. Can Surety Bonds Help You? How do you evaluate & manage risk? How do you ensure projects are completed on time, on budget, and to contract specifications? How do you ensure contractors successfully meet obligations?

4. Can Surety Bonds Help You? Bid Bond Performance Bond Payment Bond

5. Surety Bonds vs. Traditional Insurance Surety BondsInsurance 3-party2-party Risk transfer Duty to obligeeDuty to insured Regulated by State Insurance Departments Premium fee for prequalification services Premium actuarially determined Project specificUsually term specific Penal sumPolicy limits

6. Contract Surety Bonds Bid Bond Performance Bond Payment Bond

7. Contract Surety Bonds Bid Bond Performance Bond Payment Bond

8. Contract Surety Bonds Bid Bond Performance Bond Payment Bond

9. Fundamentals of Surety Contractor default is preventable Surety companies & producers prequalify contractors Surety companies back the bond with their own assets

10. The 3 Cs Of Prequalification Capital Capacity Character Capital Capacity Character

11. Analyzing Financial Strength Capital Financial statements Working capital Work-in-progress Indemnity

12. Evaluating Ability To Perform Capital Financial statements Working capital Work-in-progress Indemnity Capacity Resumes Contingency plan Business plan Equipment

13. Assessing Reputation Capital Financial statements Working capital Work-in-progress Indemnity Capacity Resumes Contingency plan Business plan – short & long term Equipment Character Reputation Relationships References

14. Reviewing Business Ventures Document business commitments that can affect the contractor’s business –Owning property –Side ventures Surety

15. Contractor Failure Source: Dun & Bradstreet

16. Why Do Contractors Fail? Failure Materials Shortages Over Expansion New Owner Cost Escalations Sub Failure Change in Scope Inadequate Management Failure

17. Why Do Contractors Fail? Work Environment Economic Downturn Death or Illness of Key Employee Onerous Terms Inclement Weather Failure

18. Claims Surety ObligeePrincipal

19. Expediting The Claims Process Clearly define default in contract Submit status reports to surety Promptly notify surety of performance or payment problems Owner must file formal declaration of default

20. Responsibility Of The Surety Acknowledge claim Investigate claim Determine & fulfill obligations Surety

21. Performance Bond Protection Re-let the job Provide replacement contractor Retain original contractor Reimburse owner penal sum Surety

22. Payment Bond Protection Assures payment No mechanics’ liens Keeps subcontractors on the job Surety

23. Surety Bonds vs. Letters of Credit Surety CreditBank Credit PremiumInterest Expect reimbursement if loss Repay loan Principal benefit of surety credit Borrower has benefit of bank $

24. The Value Of Surety Bonds Bid Bonds Performance Bonds Payment Bonds

25. The Value Of Surety Bonds Bid Bonds Performance Bonds Payment Bonds

26. Bid Bonds Performance Bonds Payment Bonds The Value Of Surety Bonds

27. Cost of Surety Bonds Project Amount Approx. Bond Premium $1 Million$7,700 – $13,500 $5 Million$33,200 – $47,250 $10 Million$56,950 – $81,000 $20 Million$101,950 – $146,000 * Premiums may vary depending on size, type & contractors bonding capacity. *For a small and emerging contractor, premiums can start around 2.5-3%.

28. Premium Calculation Examples Established Contractor –$500,000 Contract –Reviewed/Audited Financial Statements –Frequent Bond User –<1.0-1.5% Bond Rate (average – 1.35%) <$5,000-7,500 –Likely no other costs involved (collateral, escrow, SBA)

29. Premium Calculation Examples Emerging Contractor –$500,000 Contract –Limited Financial Info. (Tax Returns/Quickbooks) –Limited Bonding History –1.8-3.0% Flat Rate (average – 2.5%) $9,000-12,500 –May not include cost of getting bond (i.e., funds control, collateral, SBA fees)

30. How Is Premium Paid? Premium is billed BY the contractor TO the owner Usually paid on first billing, along with: –Mobilization –General Conditions –Bond Cost of bond is included in final contract price Contractor pays the bond premium to the surety –Prompt Pay Is Key To A Contractor’s Success!

31. The Underlying Agreement Look at obligations Determine risks Match capable principal to fulfill agreement Surety

32. 1.Owner specifies surety bonds in contract documents 2.Contractor contacts surety bond producer 3.Producer guides contractor through prequalification 4.Contractor obtains bonds & delivers to owner Bond Specifications

33. The Owner’s Responsibilities Provide working set of plans and specifications Establish terms of the agreement Ensure full & timely payment Maintain adequate insurance Pay property taxes Communicate Owner

34. Qualify Your Contractor’s Surety A.M. Best Companywww.ambest.comwww.ambest.com Dun & Bradstreetwww.dandb.comwww.dandb.com Standard & Poor’swww.sandp.comwww.sandp.com Moody’swww.moodys.comwww.moodys.com Treasury Dept. www.fms.treas.gov/c570/c570.htmlwww.fms.treas.gov/c570/c570.html State Insurance Dept.www.naic.orgwww.naic.org

35. For More Information Construction Bonds, Inc. A Division of Murray Risk Management and Insurance 1110 Herndon Parkway, Suite 307 Herndon, VA 20170 703-934-1000 www.sbabonds.com