The Basics of Bonding & The Contractor Development Program

Transcription

1 The Basics of Bonding & The Contractor Development Program Los Angeles Unified School District (LAUSD) Small Business Boot Camp - Bonding Workshop March 8 th S. Hope Street, Suite 1835 Los Angeles, CA (213) License No. 0C

2 TOPICS COVERED I. Basics of Bonding The Why, The What & The How? II. Challenges Experienced by Small & Emerging Contractors When Attempting to Obtain a Bond III. Resources Available to Assist Small & Emerging Contractors 2

3 ABOUT US Full-Service Property & Casualty Insurance Brokerage Firm Dedicated Construction/OCIP Practice Specialty Programs SPARTA / Prompt Cover Contractor Bonding & Technical Assistance Programs Offices: San Francisco, Los Angeles, Oakland Small, Woman, Minority Owned Firm 3

4 The Basics of Bonding Why Do I Need a Surety Bond? Surety Bonds are Mandated By Law on Public Works Projects 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. 4

5 The Basics of Bonding Why Do I Need a Surety Bond? Ensures Owner will receive finished product at negotiated price according to the project plans, specs, and contract requirements Ensures the Owner that all the project subcontractors, suppliers, and vendors are paid for the services and materials provided on the project (Lien Free) The bond acts as a Prequalification instrument of the contractor s ability for the owner. Sureties engage in due diligence to determine the competency and capability of the contractor. 5

6 The Basics of Bonding What is a Surety Bond? A Three (3) Party Agreement that Guarantees a Contract: CONTRACTOR (Principal) SURETY OWNER (Obligee) 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. 6

7 The Basics of Bonding What is a Surety Bond? Three Party Agreement Protects another party You cannot simply buy it like Insurance You must qualify for it Unlike Insurance, no losses are expected Indemnification A Surety Bonding company is an UNSECURED CREDITOR The extension of surety credit (aka. bonding capacity) is sometimes riskier than a traditional extension of credit (like a loan from a bank) 7

8 The Basics of Bonding Surety bonds in construction are referred to as surety bonds 8

9 The Basics of Bonding What Surety Professionals Analyze The Three C s of Surety CREDIT CAPACITY CHARACTER Financial Strength Ability to Perform 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 & nonbonded) Continuity plan Organization Management plan Project Owners Subcontractors Vendors Suppliers Lenders 9

10 The Basics of Bonding How Do Bonds Work? Step 1: Apply for Bonding Capacity Obtain A Broker Gather Required Documentation Broker Sends Submission to Bond Markets (Underwriting) Obtain Letter of Bondability Step 2: Bid on a Public Works Project Identify Bidding Opportunity Request a Bid-Bond from Broker Submit Bid-Bond along with Bid Estimate to Owner Bid Results Received Step 3: Submit Final Bonds to Start Job 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! 10

11 The Basics of Bonding The Process of Obtaining Bonds Organization Information References Review of current work Past jobs Current backlog Financial Statements Banking relationship Surety Agent/Broker Underwriting Review of current & historical work in process schedules Detailed review of scope of project compared to historical jobs Review of contract language Confirmation of banking relationships Review of financial statements for last three (3) years Cash flow projections of project Organizational Chart Resumes Business Plan Work in process schedules Continuity or Completion plan Letters of Recommendations Financial Statements Current Line of Credit Prequalification 11

12 The Basics of Bonding Cost of Surety Bonds Bid Bond No Charge Performance Bond ½ - 3% of Contract Price Payment Bond Price included with Performance bond 12

13 Bonding Challenges for Small & Emerging Contractors Why is it Difficult for Small and Emerging 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 START 13

14 CONTRACTOR DEVELOPMENT PROGRAM How Does The Contractor Development Program Help Small & Emerging Contractors? 14

15 CONTRACTOR DEVELOPMENT PROGRAM Recognizing that a Contractor s ability to obtain a bond is actually determined by a host of business factors, the Program seek to enhance and support Contractors in each of these critical areas so that they can obtain bonds or otherwise qualify to maximize their overall contracting potential. 15

16 CONTRACTOR DEVELOPMENT PROGRAM The Four Pillars of Contractor Development Pillar 1: Assessment Enrollment Personal Account Manager Customized Work Plan Contractor Profile Facilitated Referrals 16

17 CONTRACTOR DEVELOPMENT PROGRAM The Four Pillars of Contractor Development 17

18 CONTRACTOR DEVELOPMENT PROGRAM The Four Pillars of Contractor Development Pillar 2: Bonding Assistance & Technical Support Assistance with obtaining or increasing bonding capacity Access to City of L.A. collateral support for bid, performance and payment bonds for qualified contractors Contract review, project assessment, and field support for program bonded contracts Assistance with project risk identification and mitigation Third party funds administration Accounting cost subsidy for CPA prepared financial statements Access to contract specific financing Project opportunities and industry events sent weekly via the "Blitz of the Week" 18

19 CONTRACTOR DEVELOPMENT PROGRAM Example of How Collateral Support Enhances The Contractor s Bonding Capacity Contractor currently has $250,000 in available bond capacity A job opportunity arises and the contractor s bid estimate is valued at $350,000 Contractor is not able to pursue this opportunity due to lack of adequate bonding capacity The Program work s with the Contractor s bonding company to enhance the Contractor s available bonding capacity The program posts a collateral guarantee on behalf of the contractor to increase their bonding capacity from $250k to $350k Contractor now has the adequate bonding capacity to obtain the bonds for this project and pursue this opportunity! Example: 40% of $350K = $140k Program will provide this amount to contractors bonding company 19

20 CONTRACTOR DEVELOPMENT PROGRAM 20

21 CONTRACTOR DEVELOPMENT PROGRAM The Four Pillars of Contractor Development Pillar 3: Education, Training & Contractor Support Group Classes on public construction best practices led by industry experts. Monthly Workshops on Different Topics Semi-Annual Construction Training Academy Bidding & Estimating Contract Award Management 12-Hour Immersion Program 21

22 CONTRACTOR DEVELOPMENT PROGRAM The Four Pillars of Contractor Development Pillar 4: Prime Partnership Program Strategic alliances with Program Prime contractors including matchmaking and referrals. Networking with public agency staff and peer contractors. 22

23 CONTRACTOR DEVELOPMENT PROGRAM The Four Pillars of Contractor Development Which type of Contractors can the Program assist? Aspiring Contractors Entry Level Contractors Experienced Contractors Contractors Transitioning from Private Sector to the Public Sector Prime Contractors and Subcontractors 23

24 CONTRACTOR DEVELOPMENT PROGRAM The Four Pillars of Contractor Development 24

25 CONTRACTOR DEVELOPMENT PROGRAM Program Results In Southern California, the Program is supported by the following Public Agencies: 25

26 CONTRACTOR DEVELOPMENT PROGRAM CONTACT US Merriwether & Williams Insurance Services, Inc. 550 South Hope Street, Suite 1835 Los Angeles, CA Tel. (213) Fax (213)