Name of Group
Date
Surety Bonds For Trade
Contractors and Suppliers
Agenda
I
Construction Risk 2015
II
Bonds; A Brief Introduction
III
Getting a Bond: The Care & Feeding of
Sureties
IV
Making a Claim Under a Payment Bond
IV
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
Why Contractors Fail
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
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
 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.
Standard Construction Bonds
Prequalification
Prequalification Letter
Letter to owner confirming “bondability”; non-binding
Bid Bond
 Protection should low bidder refuse to enter into
contract. Pays Difference between the low bid and
2nd bidder
Consent of Surety
Letter to owner where surety agrees to provide the
required bonds; this one is binding.
Standard Construction Bonds
Security
Performance Bond
Guarantees Contractor will perform Contract in
accordance with terms and conditions.
Contractor must be in default
Provides owner with completed job; not just cash
Labour & Material Payment Bond
Guarantees that trades and suppliers will be paid for
goods and services provided.
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
Claimant can claim directly against the surety (don’t
need to go through owner).
Labour &Material Payment Bonds
Claim must be filed within 120 days of the last day
worked or the date material shipped
Existence and quantum of claim must be fully
documented
Bond works in tandem with protection under the CLA
Does NOT require General Contractor to be in
default
ONLY form of security that is exclusively for the
benefit of trades and suppliers
One year to file suit
III – Getting a Bond
The Care & Feeding of Sureties
Myth: Barrier to Small Firms?
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
Visit the SAC website: www.suretycanada.com
Benefits to Trade 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
Who Obtains the Bond?
Neither the Project Owner nor the general
contractor are responsible for obtaining the
required bonding or other contract security.
Owner or general contractor only need to
include bonding requirement in tender
documents or contract specifications
The trade contractor obtains the bonding
Selects a professional surety bond broker or
agent who assists in submitting case to a surety
underwriting company
How to Obtain a Bond
Submit Financial Statements and other
background information to Surety
Participate in prequalification process:
an in-depth look at contractor’s
background, business operations and
financial structure.
Surety 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?
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?
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
Care & Feeding of Sureties
1.
2.
3.
4.
5.
(Five Tips)
Establish a relationship with a
professional broker.
If you’re declined, FIND OUT WHY!!
Many problems can be solved.
Work With The Bonding Company; it is
truly a relationship
There IS competition among sureties.
Check our our website
IV – Surety Bonds
Making a Claim Under
a Payment Bond
Claiming Under a Payment Bond
Protect Your Rights.
Read the Bond form and comply with its
terms:
 Notice Periods
Suit Period
Materials Supplied to Bonded Job
Direct Contract with the Bonded Contractor
Provide Sufficient Documentation.
Claiming Under a Payment Bond
What you Need:
 A complete copy of the contract with the Principal.
 Copies of all change orders to the contract.
 Copies of all invoices submitted to the Principal.
 Copies of all statements of accounts rendered to the
Principal.
 Summary of payments made including date and
amount.
 A Statutory Declaration with respect to your own
subcontractors.
Claiming Under a Payment Bond
What you Need (cont.):
 Evidence of the last date upon which labour and/or
material was supplied to the project (i.e. delivery
slips, time sheets, etc...)
 Evidence and documentation supporting other
amounts claimed which have not been agreed to or
authorized in writing.
 A copy of the Claim for Lien, if any.
 A workers’ Compensation Board clearance letter
(current).
V – A Few Points to Ponder
Subcontractor Default Insurance (SDI)
Introduced in 1996 to protect large general
contractors from subcontractor default.
Indemnity product – compensates for loss
incurred
Includes deductibles and co-payment
Insured should have in house construction
administration experience and strong cash flow.
Does a good job at providing the protection for
which it was designed; i.e. protecting large
G.C.’s against the risk of subtrade default.
Surety Bonds & SDI
Different products – Bonds protect owners
from default of G.C. SDI protects G.C’s
from subtrade default
Has been represented as a “substitute” for
surety bonds by some brokers and
contractors
Owners don’t fit the profile
No protection for trades
Bonds designed to protect owners; SDI
designed to protect G.C’s
Surety Bonds & SDI
Control – a two edged sword.
Policy pays 30 days following “Proof of Loss”
Are you the controller or the controlee?
Trades are vulnerable to wrongful declaration
of default. G.C. – becomes sole arbiter of
existence of default under the policy.
Trades forced to provide confidential
information to generals.
Some “best-in-class” trades have resisted
being forced into SDI program.
Surety Bonds & SDI
Surety Bonds and Subcontractor Default
Insurance can both provide effective
protection against the risk of contractor
failure. The two instruments are very
different in the manner in which they
provide this protection and in the markets
they were designed to serve.
The Scourge of “Pay-When-Paid”
Will a Payment Bond respond to a claimant
unpaid due to “Pay When Paid language”?
A bond will not provide an Obligee or Claimant
more than their contract would have
Courts have been inconsistent in their rulings:
Wm Clare Plumbing vs Timbro Devel. (Ont)
Arnoldin Construction vs Alta Surety (N.S.)
Pay-When-Paid vs Pay-if-Paid
If Language is clear and unambiguous;
clauses will likely be upheld.
Fair?
Prompt Payment Legislation
To require payments under construction
contracts within business cycle timeframe.
Canada lags behind U.S., U.K
Bill 69 – Ontario’s inaugural effort; flawed and
ill-timed. Ontario to review again as part of an
update of Construction Lien Act
Other provinces (Manitoba, B.C. Nova Scotia)
exploring Prompt Payment legislation.
Inherently fair.
Do it right! (consultation, responsive to current
needs of the construction industry)
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