Surety Bonds are Mandated By Law on Public Works Projects Federal “Heard Act” (1894) & “Miller...

The Basics of Bonding &The Bond Assistance Program

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)

OWNER(Obligee) 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?

Three Party AgreementProtects another partyYou cannot buy it like Insurance

You must qualify for itUnlike Insurance, no losses are expected

What is Surety Bonding?

Surety bonds in construction are referred to as “Contract” surety bonds.

Components of Contract Surety Bonds:

Bid BondGuarantees 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

What Surety Professionals Analyze

The Three C’s

CREDIT

Financial Strength

CAPACITY

Ability to Perform

CHARACTER

Reputation With:

Annual & interim financial statements

Investment strategies

Cost control mechanisms

Work in progress

Cash flow

Net worth

Working capital

Bank & other credit relationships

Prior experience on similar projects

Equipment

Personnel

Past, current, and future workload (bonded & non-bonded)

Continuity plan

Organization

Management plan

Project Owners

Subcontractors

Vendors

Suppliers

Lenders

The Process of Obtaining Bonds

Obtain A

Broker

Gather Require

d Documentation

Broker Sends

Submission to Bond Markets

(Underwriting)

Obtain Letter

of Bondabil

ity

Identify Bidding Opportu

nity

Request a Bid-Bond from

Broker

Submit Bid-Bond

along with Bid Estimate

to Owner

Bid Results Receive

d

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 Bond No charge

Performance Bond ½ - 3% of contract price

Payment Bond Price included with performance bond

Why is it Difficult for Small 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

Track Record

of Bonded Work

Net Worth / Financial Strenght

Demonstrable

Capacity

Access to Surety

Credit

The Vicious Cycle

How Does A Bond Assistance Program Help Small Contractors?

Mitigate Exposure to the Surety/Finance Company Bond & Loan Guarantees Third Party Funds Administration Contract Monitoring Pre-Claim / Default Problem Resolution

Better Prepare Contractor for Bond/Loan Underwriting Consultative Services Contractor Assessments (Pre-Qualify) Referrals to qualified resources, broker, bank, CPA Assistance/Subsidy towards CPA Prepared Financial Statements Facilitate Collateral Support and/or Funds Administration as

Needed

Contractor Bonding, Financing & Technical Assistance Programs

Contractor Benefits

Establish their first bond or increase current capacity

Enhance their ability to bid other public works projects

Establish a track record of bonded work Larger prime contractors can reduce their risk

by having small contractors “bond back”

The Challenge: ABC Construction Co. has $250,000 in

bond capacity currently available to their company.

However, they have recently come across an opportunity for which their bid estimate is approximately $350,000.

Being that their bond capacity is limited to $250k, they are having a difficult time in obtaining a bond for $350k to support this contract.


The Solution:

A Bond Assistance Program can potentially negotiate with the Contractor's Surety Company to post a collateral guarantee to them on behalf of the contractor (up to the maximum limits afforded by the program) so that the Surety Company may increase the Contractor’s bond capacity to $350,000 thereby allowing the Contractor to obtain the bonding required for this contract.


These programs are seen as a compliment to entities who strive for greater distribution of contracting dollars into

the communities they serve and have a multiplicative impact on creating more local resident hiring particularly

from diverse communities.

Program Services Contractor Outreach Contractor Consultation / Technical Assistance Bond / Contract Financing Guarantee Underwriting Third Party Funds Administration Post Award Contract Monitoring and Support Workshops / Seminars

Program has received recognition and awards from: “Med Week” – Award for Finance Programs – 2006, 2007 National Association of Minority Contractors Advocate Award 2005 Business to Business “Service of the Year” – 2004 San Francisco Business Times – Women in Leadership Award 2000 City of Los Angeles Department of Public Works Commendation – 2008

Contractor Bonding & Technical Assistance Programs

Participating contractors have increased their

bonding/contracting capacity in some

cases 3-fold in just 3

years!

Current Bond Assistance 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 Training - individual counseling and group workshops on

bonding, financing and business management Program Events – Convene contractor program events in

Council Districts and participate in Proprietary Department events


Los Angeles Unified School District (LAUSD) Guarantees up to 40% of bond to a maximum of

$400,000 Loan Guarantees to banks up to 50% to a maximum of

$200,000 on contract specific lines of creditContractors may utilize a combination of bond and

finance guarantees up to a maximum value of $400,000

Funds Control fee paid


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 and business management Matchmaking, connecting awarded Primes to smaller

Subswww.mwissbccd.webs.com

Our Services

Property & Casualty Insurance Brokering Owner Controlled Insurance Programs (OCIP) Risk Management Consulting Contractor Bonding Programs & Technical Assistance

Serving Corporations, Public Entities, and Non-Profits in Unique WaysDedicated Construction Practice & Owner Controlled Insurance Programs

$660 Million in Bonding for Small/Minority ContractorsSpecialty Programs – SPARTA/Prompt Cover

Contact Us

City of Los Angeles Program (BAPLA)Malise Cross, Surety Specialist (213) 258-3088 [email protected] Chang, Surety Specialist (213) 258-3084 [email protected]

City of Los Angeles – LAWA Program Rosa Osorio, Surety Specialist (424) 646-7312 [email protected]

Los Angeles Unified School District Program (LAUSD)

Navid Barkhordar, Client Relations Manger (213) 258-3090 [email protected]

San Bernardino Community College District (SBCCD)

Shanette Anderson, Operations Manger (213) 258-3086 [email protected]

Merriwether & Williams Insurance Services, Inc.523 West 6th Street, Suite 650, Los Angeles, CA 90014

Tel. (213) 258-3000 Fax (213) 258-3099 www.imwis.com

Surety Bonds are Mandated By Law on Public Works Projects Federal “Heard Act” (1894) & “Miller...

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