Surety Bonds for Trade Contractors

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Surety Bonds for Trade Contractors
Prepared for Canadian Automatic Sprinkler
Association
June 9, 2008
Surety Association of Canada
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How Does Surety Affect You?

• I Surety Construction Risk
• II Bonds What Are They and How Do They Work?
• III Bonds How are They Obtained?
• IV Bonds Myths and Misconceptions
• V Other Issues
• Unlicensed Sureties
• Other Forms of Security

The Voice of Surety in Canada
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I - Surety Construction Risk
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Act as surety and thy ruin is at hand

• Inscription found in the Temple of Apollo in
  Delphi Greece

The Voice of Surety in Canada
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Surety NOT for the faint of heart
In Canada

• Since1990 the Surety industry has paid out more
  than 1.5 billion in claims
• In 1992-93 the surety industry paid out 1.35 in
  claims for every 1.00 in premium
• Construction as a class of business
• 2nd highest ratio of failures to business starts
• Highest in terms of unpaid liabilities

The Voice of Surety in Canada
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Is Construction a Risky Business?
In The USA

• Dun Bradstreet reports over 9,000 contractors
  failed in 1995 with liabilities exceeding 1.8
  billion
• 42 of contractor failures in 1995 were
  contractors in business 10 years or longer
• Surety industry unprofitable from 1998 to early
  years of 21st century
• Construction surety losses in 2002 exceeded 1.5
  billion
• Major surety markets significantly curtailed
  activity or withdrew altogether

The Voice of Surety in Canada
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Protecting against Construction Risk

• Surety Bonds
• Performance Bonds
• Labour Material Payment Bonds
• Liquid Security
• Irrevocable Letters of Credit
• Cash/Negotiable instruments on Deposit
• Default Insurance Products

The Voice of Surety in Canada
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Who is Involved in the Suretyship Process?
Contractor
Owner
3 party agreement Owner Contractor Surety Company
Surety Company
The Voice of Surety in Canada
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Surety is NOT Insurance

• INSURANCE
• 2 party agreement Insured Insurer
• Premiums actuarially determined
• Losses anticipated
• No recourse against insured in the event of loss

• SURETY
• 3 party agreement Principal, Surety Obligee
• Premiums only a service charge
• No losses anticipated
• Recourse against the Principal via indemnity
  agreement

The Voice of Surety in Canada
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II - Surety Bonds
What Are They?
How Do They Work?
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Surety bonds provide a construction purchasers
and lenders with two essential services

• Prequalification
• Assurance that the bonded contractor is qualified
  to carry out the job for which they are
  contracted
• Security
• Financial Protection against loss in the event
  that the bonded contractor should default on its
  obligations

The Voice of Surety in Canada
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Prequalification

• Bid Bond
• provide the required security
• contractor will enter into contract
• pay the difference between successful bid and
  second bidder
• Consent of Surety
• bonding company will execute the required
  performance and payment bonds

The Voice of Surety in Canada
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Prequalification Bid Bond

• protection from the lowest irresponsible bidder
• provide assurance that contractor will
• enter into contract
• provide the required security
• Typically required in the amount of 10 of tender
• if contractor defaults, surety pays the
  difference between successful bid and second
  bidder
• Tender must be accepted within 60 days of
  closing, six months to file suit

The Voice of Surety in Canada
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Prequalification Consent of Surety

• Not a bond at all a letter of commitment from
  the Surety to the Obligee to execute performance
  and/or payment bonds
• No penal sum set out payment not an option
• Bonds must be required within 30 days following
  award
• suit must be filed within one year
• No standard (CCDC) form in existence, many
  variations in wording

The Voice of Surety in Canada
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Security Performance Bonds

• Contractor must be in default and the default
  must be declared
• Owner must perform their obligations
• 4 options available to Surety
• Remedy the default
• Complete the Contract
• Arrange for new contractor to complete
• Pay out in cash
• Two years to file suit

The Voice of Surety in Canada
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Security Payment Bonds

• Obligee is trustee on behalf of the claimants
• Claimant must have a direct contract with the
  Principal
• Claimants may only claim for goods and services
  supplied to the bonded job
• Claim must be filed within 120 days of the last
  day worked or the date material shipped
• One year to file suit

The Voice of Surety in Canada
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III - Surety Bonds
How Are They Obtained?
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How Does A Contractor Obtain Bonding?

• Submits Financial Statements and other background
  information to Surety
• Participates in prequalification process an
  in-depth look at contractors business operations

The Voice of Surety in Canada
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Suretys Financial Statement Analysis

• Balance Sheet
• Working Capital / Net Worth
• Ratio Analyses
• Receivable/Payables aging analysis
• Work on hand profitability, maturity, trending
• Income Statement
• Profitability
• Revenue
• Trend Analysis 3 to 5 years
• Cash Flow Analysis
• Accountants Opinion/Explanatory Notes

The Voice of Surety in Canada
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What Else Will a Surety Want to See?

• Detailed Work on Hand Schedules
• Aged Listing of Receivables and Payables
• Organization Chart of Key Employees
• Detailed Resumes of Principal Employees
• Business Plan Contingency Plans
• Subcontractor Supplier References

The Voice of Surety in Canada
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What Else Will a Surety Want to See?

• Letters of Recommendations from Owners
• Evidence and details of a Line of Credit from a
  Financial Institution
• Details of business continuity plans in the event
  of death or incapacity of owners/key people
• Reports on Similar Completed Projects
• Owner, contract price, date completed, profit
  earned

The Voice of Surety in Canada
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IV - Surety Bonds
Myths and Misconceptions
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Surety Bonds - Myths and Misconceptions

• Surety companies dont pay claims

The Voice of Surety in Canada
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Bonding Companies Dont Pay Claims ?

• Since 1990.
• 2.3 Billion in written premiums
• 1.5 Billion in claims paid
• 78.1 loss ratio
• 124.1 combined ratio
• If there had not been a bond, these losses would
  have assumed by the owner and trade contractors.

Are we having fun yet ?
The Voice of Surety in Canada
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Bonding Companies Dont Pay Claims ?

• Respond to the default of the Contractor under
  the contract NOT a demand instrument. Monies
  owed under a payment bond must be payable.
• Claimant must have fulfilled its contract
  obligations
• L M Claimants must comply with the terms of the
  bond and be prepared to document claim
• Problems or questions? Contact the Surety
  Association of Canada
• Phone [phone]
• email surety_at_surety-canada.com

The Voice of Surety in Canada
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Claiming Under a Payment Bond

• Protect Your Rights.
• Read the Bond form and comply with its terms
• Notice Periods
• Suit Period
• Materials Supplied to Bonded Job
• Direct Contract with the Bonded Contractor
• Provide Sufficient Documentation.

The Voice of Surety in Canada
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To make a Claim Under and LM Bond

• A complete copy of the contract with the
  Principal.
• Copies of all change orders issued with respect
  to the contract.
• Copies of all invoices submitted to the
  Principal.
• Copies of all statements of accounts rendered to
  the Principal.
• Summary of payments made including date and
  amount.
• Evidence of the last date upon which labour
  and/or material was supplied to the project (i.e.
  delivery slips, time sheets, etc...)
• Evidence and documentation supporting other
  amounts claimed which have not been agreed to or
  authorized in writing.
• A copy of the Claim for Lien, if any.
• A workers Compensation Board clearance letter
  (current).
• A Statutory Declaration with respect to your own
  subcontractors.

The Voice of Surety in Canada
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Surety Bonds - Myths and Misconceptions

• Surety companies dont pay claims

• Bonds are a barrier to small contractors

The Voice of Surety in Canada
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Bonds Are a Barrier to Small Contractors?

• Sometimes a time problem for contractors
  without a bond company it takes time to establish
  a facility.
• Some sureties will ONLY bond small contractors,
  others have small contractor divisions
• Small firms will secure bonding for jobs within
  their realm of expertise
• Bonds are a barrier to unqualified contractors

The Voice of Surety in Canada
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Obtaining and Maintaining a bonding
facilityFour Tips

• Establish a Relationship with a Professional
  Broker
• If youre declined, FIND OUT WHY!! Many problems
  can be solved.
• Work With The Bonding Company it is truly a
  relationship
• There IS competition among sureties.

The Voice of Surety in Canada
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V - Other Surety Issues
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Unlicensed Surety Companies

• Firms who are unlicensed have not been subjected
  to any regulatory scrutiny
• Typically located in Quebec and offshore
• May not meet minimum capitalization requirements
  for the conduct of surety business
• Real risk that unlicensed firms may be unable to
  honour claims obligations and that bid could be
  declared informal
• LET THE BUYER PURCHASER BEWARE

The Voice of Surety in Canada
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Unlicensed Surety Companies

• Two Suggestions for Subcontractors
• Deal ONLY with duly licensed surety firms. Dont
  be fooled by we are more flexible claims.
• If there are any doubts about a surety companys
  status or any clarification needed, contact the
  Surety Association of Canada

The Voice of Surety in Canada
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Other Forms of Security Liquid Security
(L.O.C.s)

• Deplete a subcontractors borrowing power can
  bring on the very problem they seek to avoid by
  denying contractor access to funds
• When posted by a general to an owner, they
  provide no protection for subs or suppliers
• Are payable on demand. NO default need be
  established.

The Voice of Surety in Canada
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Contractor Default Insurance A True Dilemma

• New finite insurance product posted by the
  general to an owner to protect against
  subcontractor default
• Provide no protection for subs or suppliers.
• Gap Bonds Separating subs from their money.
• Two party agreement. No one to take
  subcontractors side in the event of a dispute.
  General is the judge and jury
• Prequalification sharing confidential
  information
• Surety Prequalification maintains
  confidentiality and weeds out unqualified
  competition

The Voice of Surety in Canada
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Contact us

• Phone [phone]
• Fax [phone]
• email surety_at_suretycanada.com
• or visit our www.suretycanada.com
• website

The Voice of Surety in Canada
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Questions ???
? ? ? ? ?
The Voice of Surety in Canada