Government of Yukon & Yukon Construction Sector February … · 2018-05-27 · Government of Yukon...

51
Surety Bonds &Construction Risk Construction Risk Management Presentation Government of Yukon & Yukon Construction Sector February 24, 2016

Transcript of Government of Yukon & Yukon Construction Sector February … · 2018-05-27 · Government of Yukon...

Surety Bonds &Construction Risk

Construction Risk Management

Presentation

Government of Yukon & Yukon

Construction Sector

February 24, 2016

“He that is surety for a stranger shall smart

for it: he that acts not as surety is sure.” Proverbs 11:15

03 March 2016 3

I – THE SURETY INDUSTRY Surety Companies • SAC members write 95% + of all bonds in

Canada – There are hundreds of sureties listed on

OSFI’s website roster – fewer than 20 are SAC members and they write almost all the bonds

Surety Brokers • Look for SAC member brokers – they are

dedicated to providing superior service

I – Construction Risk

Construction Risk: What we Mean Construction Risk = Risk of Contractor Failure

Ongoing global economic uncertainty

Surety Challenge: Uncertainty = more risk

Economic factors now in a permanent state of

flux (e.g.) resource development drives much of

the economy but volatility in every resource

sector is the new normal (oil; gas; minerals and

metals; agribusiness)

The number and severity of contractor failures

continues to be a concern across the country

Unqualified Contractors; the lowest

“irresponsible” bidder

Insolvency of Contractor

Contractor default for non-financial reasons:

Over Extension

Inability to complete

Incapacity of key people

Unpaid subs and suppliers resulting in liens

Warranty problems

Why Contractors Fail

Construction in Canada 2016

Canada will still have strong construction spending:

Federal infrastructure commitment $48B over 10 yrs.

Western provinces and territories remain committed to

infrastructure spending

2015 - Canada was to go to 5th from 9th largest

construction market…how times change!

foreign investment was the key; going elsewhere now

Larger and longer projects are a lasting legacy, though:

Challenges to small and mid-sized contractors

Challenges regionally (Priority Saskatchewan)

From 2010-15, the Surety industry paid out almost

$800 million in claims; more than the previous 10 yrs.

2013 a year to forget:

Loss ratio; 52% - industry unprofitable

Premiums flat after two years of decline

Across all lines and all sectors of the country

2014 a record year: DWP $560 M. Loss ratio drops 32

points to 19%.

2015: first half continues the trend; slight increase in

premium and loss ratio of 16%.

Note: The industry hit new all-time highs for the value

of contracts underwritten in 2014/15 ($75B+)

Construction Risk 2010-2015

Options to Protect Against

Construction Risk: Surety Bonds

Performance Bonds

Labour & Material Payment Bonds

Liquid Security

Irrevocable Letters of Credit

Cash/Negotiable instruments on Deposit

Subcontractor Default Insurance (SDI)

II – Surety Bonds What are They?

How do they Work?

Surety is not Insurance

Surety is not Insurance INSURANCE

Losses anticipated

2 party agreement;

Insured & Insurer

Premiums actuarially

determined

No recourse against

insured in the event of

loss

SURETY

No losses anticipated

3 party agreement;

Principal, Surety &

Obligee

Premiums only a service

charge

Recourse against the

Principal via indemnity

agreement

Surety Bonds: 3 Essential Services Prequalification:

Assurance that the bonded contractor is

qualified for the job for which they are

contracted.

Ongoing monitoring (and hidden services):

Sureties monitor bonded contractors

continuously and can provide assistance if

needed ($, technical support, accounting, etc.)

Security:

Financial Protection in the event that the

bonded contractor should default on its

obligation.

Prequalification

Intensive

Ongoing

Comprehensive

Value Added

Capital

Capacity

Character

Information a Surety Needs

Organization Structure

Key Employee Resumes

Business Plan

Backlog Report

Financial Statements References

Contractors Profile

Bank Information

(Underwriting Requirements)

Surety pre-

qualification

isn’t

superficial…

(Site visit)

03 March 2016

17

Standard Construction Bonds Prequalification

Prequalification Letter

Bid Bond

Consent of Surety

Security

Performance Bond

• Renewable Multi-Year Bonds

Labour & Material Payment Bond

Prequalification Letter Not a bond but a letter from a bonding company to

the project owner confirming “bondability”.

Used during the pre-tender phase; (i.e.) before

contract terms, scope or pricing details are known.

Non-binding – surety and principal reserve the

right to review the details before firm commitment.

Typically refer to the project at hand.

SAC standard form available on SAC website.

Bid Bonds protection from the “lowest irresponsible bidder”

provide assurance that contractor will:

enter into the 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 time frame set out in

tender documents

seven months to file suit

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

Typically, bonds must be required within 30 days

following award

No standard (CCDC) form in existence, many

variations in wording

Performance Bonds Guarantees Contractor will perform contract in

accordance with its terms & conditions.

Contractor must be in default and the default must

be declared

Owner must perform their obligations

In the event of default: Surety has4 options:

Remedy the default

Complete the Contract

Arrange for new contractor to complete

Tender Payment

Two years to file suit

Labour &Material Payment Bonds Guarantee that the contractor will pay all direct

subcontractors, suppliers for materials and services

provided to bonded project.

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

Make sure to ask

for the L&M

Payment Bond!

It’s better when

trades and

suppliers are paid –

especially on

publicly funded jobs

03 March 2016

24

III – Surety

Myths & Misconceptions

Myths & Misconceptions Myth #1: Sureties Don’t Pay Claims.

A surety bond will provide:

Professional prequalification to weed out

unqualified contractors.

True performance security; i.e. provides owners

with a completed project in the event of default.

Payment protection to subs and suppliers.

A surety bond will not provide:

Cash-on-demand. There MUST be a default.

Dispute resolution (that’s covered in the contract)

A “magic lamp” – don’t expect the impossible

Protection beyond the scope of the contract

Myth #1: Sureties Don’t Pay Claims.

Also….

Owner must have fulfilled its contract obligations

L & M Claimants must comply with the terms of the

bond and be prepared to document claim

SAC wants to hear about bad or problems claims:

Contact the Surety Association of Canada

Phone: 778-995-6585

email: [email protected]

Myths & Misconceptions

Myth #2: A 50% Bonds only provide 50% Protection

In fact: a 50 % bond gives you 100 % protection up to

the bond amount

Example:

Contract Price = $ 1 million

50 % Performance bond ($500,000)

Contract is 50% complete

Surety arranges completion for $ 700,000

Surety’s loss is ???

Myths & Misconceptions

Myth #3: Bonds are a “Barrier” (especially to small

contractors).

Barrier? Bonding companies need to write bonds.

Sometimes a time problem – for contractors without a

surety it takes time to establish a facility.

Some sureties will ONLY bond small contractors,

others have small contractor divisions

Small firms will be able to secure bonding for jobs

within their realm of expertise

Bonds are only a barrier to unqualified contractors

Myths & Misconceptions

Myth #4: Payment Bonds Don’t Help Owners

Ensures that subs working on your jobs will be paid.

Many are local rate payers.

Ease the Administrative burden in the event of default.

Reduces the Owner’s legal exposure.

More competitive prices from subs who are now

certain of being paid

Speedier resolution of a default; continuity of team.

Myths & Misconceptions

Myths & Misconceptions Myth #5: We don’t need a bond; our contractor is

huge. Excerpt from “Why Contractors Fail” by Hugh Rice and Arthur

Heimbach, FMI Corporation*, 2007

“Recent history has shown that construction firms are not too

big to fail even though they may have annual revenues

ranging from hundreds of millions to several billions of

dollars.”

“There are bonding safeguards to protect project owners and

others when a contractor fails.”

*Largest provider of management consulting and investment banking for

engineering & construction industry in the U.S.

IV – Surety Bonds

What Happens when a

Contractor Defaults?

Before a Default is Declared

Surety has extensive experience with contracts

and solving construction problems.

Surety has intimate knowledge of contractor and

its operation

Can provide informal assistance to solve problems

that can lead to a default

Will convene meeting or teleconference among

the parties to address problems.

Can assist in formalizing solutions.

Keep the

Surety

informed!

03 March 2016

34

Claims When A Contractor Defaults:

Surety will promptly acknowledge notice of default

and being to gather information.

Surety will begin an investigation as soon as

possible.

Surety will conclude the investigation as soon as

possible.

If requested by the owner, surety will provide

periodic written updates on investigation status and

best estimates as to completion date.

During and After the Investigation:

Surety will cooperate with the owner to protect

work from damage or deterioration.

Surety will work with the owner to:

Identify and implement a solution.

Minimize delays, keep the job going and

protect the rights of all parties.

Pay valid labour and material payment

bond claims as promptly as possible to

ensure continuity of subs and suppliers.

Claims

How the Project Owner can help

Comply with bond & contract terms! (e.g.

proper notifications, payments and

certifications)

Communicate: keep surety appraised of

problems and provide default notice promptly.

Cooperate: Ensure surety has access to

knowledgeable staff and relevant documents.

Keep expectations realistic.

V – Surety Bonds Unseen Services to

Owners & Lenders (and

Contractors)

Unseen Services of Surety Bonds A surety can provide assistance and default prevention

services by:

Facilitating the resolution of construction

performance issues that could lead to default

Providing management and business assistance

to assist contractors with administrative issues.

Providing financial assistance to financially

distressed contractors

Providing technical/engineering expertise if

required

VI - Other Forms of

Contract Security

Liquid Security (LoC’s)

Yield cash; not performance

Provide no prequalification assurance

Available in smaller; perhaps insufficient amounts

(5% to 10%)

Typical default: 43% not unusual

Deplete a contractor’s borrowing power and can bring

on the very problem they seek to avoid

Provide no dedicated protection for subs or suppliers

You ‘own the problem’ upon default – no support from

the surety to complete the contract

Subcontractor Default Insurance

Introduced in the U.S., in 1996, to protect very large

general contractors from subcontractor default.

Indemnity product – compensates for loss incurred

Significant deductibles and co-payment

Only the largest GCs (‘insured’) can get it requires in-house construction administration experience

and strong cash flow; even they are new to underwriting

Designed to protect large G.C.’s against sub-

contractor default.

NOT designed to protect owners from risks

associated with default of prime contractor

Waiving Final Bonds Call for bid bond – so get the benefit of surety

prequalification (only qualified bidders can bid)

Then, save the bond premium by waiving

requirements for final bonds.

Smart, eh? NOT! This can risk millions to save a few dollars.

Contractor failures on the rise as the economy

continues to struggle.

History shows that NO contractor, large or small, is

immune to financial and economic forces and the

risk of default

VII – e-Bonding

Did someone mention “paperless” ??!!!

Issues and Challenges

Commercial

Legal

Technological

SAC’s Efforts to Address the Issues &

Challenges

Electronic Delivery of Bonds

SAC & e-Bonding Publications on SAC website:

Designing Electronic Pathways Together.

Vendors Guideline.

Criteria checklist.

Position Paper: Surety Bonds in a Digital

World.

Working with owners and vendors:

Mock Tender – big owners incl. DCC, AI

Development of template language for

inclusion in tender documents.

VIII – New & Improved… What’s the Latest in the World

of Surety Bonds?

New

bond

wordings;

new forms

of contracts

are now

bondable

03 March 2016

51

Here are some of SAC’s

New Bond Forms

SAC Enhanced Process Performance Bond

More responsive; more control for owners

P3 Bond forms

Broad and flexible protection packages

Tailored to the P3 project at hand

Renewable Multi-Year Bonds

Performance

Labour & Material Payment

‘Headstart Bond’ – not ready to go yet, but will be soon

If you’d like to learn more about where the surety industry is

going, and about our new bond forms, make sure to come to this

afternoon’s breakout session

SURETY ONLINE LEARNING CENTRE The Surety Online Learning Centre accessible from

SAC website; www.suretycanada.com.

Five learning modules that introduce the basics of surety bonds and the suretyship process

Learn at your own pace.

Ideal for review or for colleagues who can’t attend a “live” information session.

It’s FREE

Contact Us

Bob Sloat, Director Business Development –

Western Canada

Phone: 403-612-4070 or 778-995-6585

email: [email protected]

or visit our www.suretycanada.com

website: