Florida Surety Bonds.pdf

Bonding Basics

Basic Bond 101

• What is a Surety Bond? “Co-signer for Hire”

• Parties to a Bond include:

• The “Principal”, the party required to provide the bond

• The “Obligee”, who the bond is in favor of (usually an Owner, GC or Govt Agency)

• The “Surety”, the company guaranteeing the obligation under the bond per the contract

• Types of Bonds:

Contract: Includes Bid, Performance and Payment, Maintenance and Supply Commercial Bonds: Non-Construction contract, license and permit, court, janitorial, healthcare and so many more!

• Benefits of having a bond include transfer of risk, guarantee of contract performance, 3rd party verification of Contractor capability, protects taxpayer dollars on government projects.

Understanding the Underwriting Process

The 3 Cs of Surety “Capital, Capability, Character”

Financial Strength

Experience in the scope of contracted obligation

Credit Rating of Indemnitors

History of Paying Suppliers and Subs

Established Bank Relationship and Line of Credit

Experience of Key People

Financial Statement Quality

Bond Limits Based on underwriting criteria such as:

Largest job completed

Available working capital

Surety Treasury Limits

Financial Statement Quality *based on current market trends

1. Internal statements ($2MM)

2. CPA Compiled Statement

($4MM)

3. CPA Reviewed Statement for bonds over $2MM (Most bonding programs are provided at this level)

4. CPA Audited Statements for bonds and programs that exceed $25 Million

Bond Costs Costs range depending on type of bond and underwriting criteria

Bid Bonds – No Charge (in standard bonding program)

Performance and Payment Bonds

– 1-5% of contract price*

Commercial and Misc. Bonds – generally 1-3% of bond penalty amount

Other factors that could influence overall cost is use of additional tools such as collateral, funds dispersal (fka Funds Control) and SBA Bonding Program. These apply to non-standard bonding programs

Where do I start?

Gather your “A” Team

Plan to Fail Get Sophisticated

• Banker

• Obtain CPA specializing in your industry that understands surety

• Retain Attorney specializing in your industry

• Insurance Agent

• Professional Bond Agent

• Consult CPA BEFORE fiscal year end and obtain “Percentage of Completion” basis statement either on “Review” or “Audited” (depending on your needs, keep in mind a “3- year tail”)

• Have your attorney review contracts PRIOR to signing

• Obtain your bank lines of credit when you DON’T need them for as high as you can qualify.

• Obtain an integrated accounting and job costing system

• Knowledgeable bookkeeper/CFO

• Maintain high quality, quarterly interims and job schedules

• Maintain a system for collecting receivables on a timely basis

10 Ways to Blow Up Your Bonding Program

Bid on jobs that are too big or too far outside your core expertise

Bid on jobs that are outside your normal geographic area of operations

Provide estimates with no profit margins, just to take on work

Buying/Maintaining a fleet of equipment that isn’t getting used and incurring depreciation and expense

Signing contracts with onerous language just to get work

Hiding problems when they occur

Work with clients who have burned you before

Rush to staff up and not consider overhead expense

After months of non-existent backlog, you get overbooked and undermanaged

Get so busy hustling for new jobs, receivables and payables stack up

Preventing contractor default is the key to the surety industry. Using the requirements of surety companies as best practices will help you work smart, stay profitable and avoid blowing your bonding.

Engineering News Record Insurance Risk Management November 2011

Key Items To Consider 8(a):

Prequalify your bonding program in advance of your application to 8(a)! Ideally you want to be established at least 2-3 years prior to entry into the program

Begin CPA Financial Statement History at least a year prior to application – “be mindful of the 3-year tail”

Bonds in excess of $2 MM require CPA “Review” financial statement. This correlates to 8(a) requirements for companies with revenue of $2M to $10M.

With 8(a) – if you exceed $10 MM a year in revenue, you are required to provide a CPA “Audit” within 120 days of the close of fiscal year end.

Reporting to SBA is similar to reporting to Surety (annual updates)

Key Items to Consider For Bonding JVs:

• Joint Ventures – Should be SBA approved as a standalone company; however, bonding can be handled individually depending on the JV agreement

• Be sure to be compliant with self performance requirements –(SBA Bond Guarantee Program requires self performance of 15% of the contract, management does not count)

• Mentor/Protégé and Teaming Agreements – Know who you are partnering up with!

SBA Surety Bond Guarantee Program News

• Source – Federalregister.gov – February 15, 2024 -SBA announced new guidelines for small business qualification. These go into effect on March 18, 2024.

• Previous guidelines for contractor size – No more than $15 Million in tangible net worth and not more than $5 Million in average net income over 5 years.

• New guidelines state – No more than $20 Million of tangible net worth and net income is $6.5 Million over 5 years.

• Bonds Limits – New single contract limits up to $9 Million and up to $14 Million for federal contracts that are certified by the contracting.

• Caveat – Surety is still first line of underwriting, SBA re-insures the Surety

Questions?

Emily Golecki Surety Specialist Emily@floridasuretybonds.com

(407) 786-6842 Direct

(813) 361-6347 Mobile

WWW.FloridaSuretyBonds.com mailto:Emily@floridasuretybonds.com http://www.floridasuretybonds.com/