Name of Event
Organization
Date
Surety Bonds
&General Contractors
Agenda
I
Construction Risk
II
Bonds; A Brief Introduction
III
How to Establish and Maintain a Strong
Surety Relationship
IV
What’s New in Surety Bonds?
V
E-Bonding
VI
A Few Points to Ponder
I – Construction Risk
“Then You Shall be his Surety”
William Shakespeare
Merchant of Venice
Construction Risk 2015
Construction Risk = Risk of Contractor Failure.
The number and severity of contractor failures
increased in recent years.
Recent Challenges:
Reduction of available work; oversaturated
market = tighter margins
Onerous contract conditions. Downloading
of risk
Paradigm Shift: AFP’s, P3’s
Construction Risk 2015
 From 2010-14, the Surety industry paid out almost
$800 million in claims; more than all of the
previous decade.
 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 showed improvement with lower loss ratios
and premium growth … but….
 2015 ? Impact of Oil Prices in western Canada
and political and economic instability
Construction in Canada 2015
Canada the new construction “mecca”.
Ongoing commitment to infrastructure
Federal commitment $48B over 10 years.
By 2020 Canada to be world’s 5th largest
construction market (9th in 2010)
 Increased foreign investment from
depressed areas (e.g. Europe)
Larger and longer projects
Challenges to small and mid-sized contractors
Protect 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
II – Surety Bonds
What are They?
How do they Work?
Surety is not Insurance
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
Surety Bonds: 2 Essential Services
Prequalification:
Assurance that the bonded contractor is
qualified for the job for which they are
contracted.
Security:
Financial Protection in the event that the
bonded contractor should default on its
obligation.
Prequalification
Surety Company’s Standard Minimum Checklist:
 Good character
 Experience matching contract requirements
 Financial strength
 Excellent credit history
 Established banking relationship
 Line of credit
 Necessary equipment
Standard Construction Bonds
Prequalification
Prequalification Letter
Bid Bond
Consent of Surety
Security
Performance Bond
Labour & Material Payment Bond
Renewable Multi-Year Bonds (service contracts)
Prequalification Letter
Not a bond but a letter from 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 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
 4 options available to Surety:
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
III – Surety Bonds
How to Establish & Maintain
a Strong Surety Relationship
Who Obtains the Bond?
Project Owner is not responsible for obtaining
the required bonding or other contract
security.
Owner only has to include bonding
requirement in tender documents or contract
specifications
The contractor obtains the bonding
Selects a professional surety bond broker or
agent who assists in submitting case to a surety
underwriting company
How is a Bond Obtained?
Contractor Submits Financial
Statements and other background
information to Surety
Participates in prequalification process:
an in-depth look at contractor’s
business operations and financial
structure.
Surety’s Financial 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
 Accountant’s Opinion/Explanatory Notes
What Else does a Surety Need?
Complete details on Affiliated / Related
Companies; ownership, financial information,
etc.
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
What Else does a Surety Need?
Details of construction operations; areas of
expertise, list of key projects, key people, etc.
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 Care & Feeding of Sureties
(four tips)
1. Establish a relationship with a
professional broker (SAC can help).
2. If you’re declined, FIND OUT WHY!!
Many problems can be solved.
3. Work With The Bonding Company; it is
truly a relationship
4. There IS competition among sureties.
IV – New & Improved…
What’s the Latest in the World
of Surety Bonds?
SAC Performance Bond
SAC consultations with Owners & Contractors;
More “certainty” in the claims process.
More responsiveness to a claim
More frequent and effective communication
between sureties and owners.
New “enhanced” performance bond provides
construction buyers with more timely &responsive
claim service.
Has been used by owners across the country and will
be adopted by CCDC as the new standard.
Provides more responsive services to owners by…..
SAC Performance Bond
Pre-Demand Conference to allow surety and owner
to prevent problems from turning into a default.
Timelines for Surety’s Response:
5 days to acknowledge a response & request info.
21 days (from receipt of information) for surety to
respond to owner with their response.
Emergency Remedial Work: Allows Owner to
address urgent issues (e.g. safety) under the bond.
Post-Demand Conference: Mechanism to minimize
or eliminate work stoppages while surety investigates.
Contact Coordinates: Contact information for all
parties to facilitate notices and communication.
Surety Bonds & P3 Projects
Comprehensive performance & financial security
against construction default on mega-P3 projects.
Sufficient capacity for mega-projects.
Broad and flexible protection packages which include:
Professional surety prequalfication
Specialty P3 bonds designed by member sureties:
 Provide liquid / cash on demand protection.
 Built-in “fast-track” dispute resolution
 Early Response; surety involved pre-default.
Protection for trades & suppliers via the payment bond.
Called for on Infrastructure Ontario Build-Finance and
Design-Build-Finance projects.
Renewable Multi-Year Bonds
Only applicable to service contracts; e.g. Waste
Management, Snow Removal, etc.
Initial Term is open. Renewal Terms are typically
1 year periods can be extended to two.
Surety issues an annual Renewal Certificate.
Failure to renew the Bond is not a ‘default’ under
the Contract or the Bond
2-year suit limitation – runs from earlier of expiry
of latest bonded ‘Term’ or date default declared
Can be modified to address O&M components of
P3’s
Headstart Performance BondTM
Created by The Guarantee Co of N.A. to protect GCs
from sub default (competitive alternative to SDI)
Industry Solution: available for use by other sureties.
Flexibility: Obligee given two mitigation options:
o Traditional Option: Surety investigates and implements
solution (as in standard bond); or,
o Headstart Option: Obligee implements its own solution
upon surety’s acceptance of Obligee’s completion proposal.
Responsiveness:
o First dollar protection(no deductible or co-payment).
o Surety will respond in 3 days from receipt of Claims letter.
o Standard claims notice and mitigation agreement.
Electronic Delivery of Bonds
E-Commerce: the buzzword of the new
millennium; every aspect of commercial activity
Delivery of bonds via internet technology.
Advantages:
Accuracy / built-in safeguards
Ease & economy of transmission
Smaller “Carbon Footprint”
SAC can provide assistance to owners as they
move to automated tenders and bonds.
V – e-Bonding
Did someone mention
“paperless” ??!!!
Electronic Delivery of Bonds
Issues and Challenges
Commercial
Legal
Technological
SAC’s Efforts to Address the Issues &
Challenges
Commercial Issues & Challenges
SAC encourages and promotes electronic
delivery of surety bonds.
Don’t Act on your own. Will only work with
industry buy-in.
Flexibility; evaluate; establish criteria and
standards, leave it to others to find a way to
meet them..
Electronic equivalent of a courier.
Legal Issues & Challenges
PIPEDA passed by parliament in 2000.
Umbrella legislation
Each jurisdiction followed with its own
legislation over the next two years
Challenge: What about seals?
Deed vs Contract - “Deemed” sealed, overt
act of sealing will constitute seal equivalent.
Verbiage not sufficient.
Friedmann Equity vs Final Note – Supreme
Court of Canada
Technological Issues & Challenges
Technology is in place; systems have been
developed and marketed in Canada and
U.S.
All systems are NOT created equal;
different focus; different capabilities
 Criteria:
Integrity of content;
Secure access
Verifiable / enforceable
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 – Defense Construction
Development of template language for
inclusion in tender documents.
Six e-Tendering Tips for Owners
1) Consult Consult Consult: Without Buy-in
from other stakeholders, the advantages
can be squandered.
2) Don’t Reinvent the Wheel: Learn from
what’s been done. Are you in the software
development business?
3) Insist on Verifiability… whatever the
approach, know that the bond is valid and
enforceable.
Six e-Tendering Tips for Owners
4) … But be Flexible About Everything Else:
Allow vendors to find ways to meet the
criteria and standards you set.
5) It’s Up to You: Initiative has to come from
owners and end-users. SAC can provide
guidance but only you can start the journey
6) Take the Time to Get it Right: Pilot projects;
Phase-in implementation. Allow for time to
work out the kinks and for the industry time to
adjust. Mock Tenders.
VI – Surety Bonds
A few Points to Ponder
A few Points to Ponder
Point #1: Bonds: Benefits to General Contractors
Eliminate unqualified competition; critical in tough
times when too much capacity in the marketplace.
Non-intrusive; do not tie up liquidity or borrowing
power (in contrast to letters of credit)
Respond only upon actual default; protect contractors
from arbitrary action by project owner
Can provide assistance (technical or financial) should
contractor encounter difficulties on bonded project
A few Points to Ponder
Point #2: Bonds a “Barrier” to small contractors?
Barrier? Bonding companies need to write bonds.
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
A few Points to Ponder
Point #3: Advantages of bonding subcontractors
and suppliers
Provides unintrusive and complete first dollar
protection against subcontractor default
Surety Prequalification process ensures better quality
of subcontractor/supplier working on your project.
Can expand your own bonding capacity.
Nominal cost for total protection
Headstart alternative to SDI provides full first dollar
protection without deductibles or co-payment.
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
Phone:
905-677-1353
Fax:
905-677-3345
email:
surety@suretycanada.com
or visit our
website:
www.suretycanada.com