Surety Basics
Phil Condra- Bonds Southeast, Inc.
2013 Construction
Opportunities Conference
Tennessee Small Business
Development Centers
February 26th, 2013
Oak Ridge, Tennessee
What is Surety Bonding?
Principal
Obligee
(Contractor)
(Owner)
Surety
Suretyship vs. Insurance
Bond = Three Party Agreement
Policy = Two Party Contract
Surety
Principal /
Insured
Obligee
Principal
Contract/Obligation
Page 3
Insurer
Insurance vs. Suretyship
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•
•
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• Insurance
Premium paid by Insured
(Principal) and the Insured
derives the benefit
Coverage drafted by Insurer
and filed in various states
Law of large numbers
Expect premiums to cover
losses
Non-payment of premium may
terminate policy
CHANCE/ PROBABILITY
• “Hope it’s covered”
Page 4
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–
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–
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• Suretyship
Premium paid by Principal and
the Obligee derives the benefit
Bond obligation dictated by law
or underlying agreement
Underwrite to zero loss ratio
Premium covers expenses not
losses
Non-payment of premium does
not negate coverage/bond still
in force
Similar to obtaining bank credit
Risk is NOT transferred from
Contractor / INDEMNITY
CERTAINTY
– “Hope it’s not covered”
Types of Surety Bonds
• Bid Bond
• Performance Bond
• Payment Bond
Types of Contract Bonds
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Bid Bonds
◦ Guarantees that the bidder will actually enter into the contract at
the proposed price and provide the required performance and
payment bonds.
Performance Bonds
◦ Indemnifies the owner for financial loss caused by the contractor's
failure to perform the contract in accordance with all the terms and
conditions of the contract.
Payment Bonds
◦ Guarantees that the surety will pay for certain labor, material, and
supply bills and subcontractors associated with the project if the
contractor fails to pay these costs.
Supply Bonds
◦ Guarantees that the supplier will provide a specified amount
materials in a specified time frame.
Page 6
Functions of Bonds

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Surety Bonds
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REQUIRED BY LAW
No liens
Smooth transition
from construction to
permanent financing
Provide support to
contractor
Project completion
Underwriting- (The YES or NO’s)
Capital
Capacity
Character
Financial
Statements
Indemnity
Working Capital
Work-in-Progress
Resumes
Experience/
Previous Project
Contingency Plan
Business Plan
Equipment
Reputation
Relationships
References
1 C = CAPITAL

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Working Capital
Net Worth
Debt : Equity
Bank- Line of Credit
Aging of Accounts Receivable
Opinion
Page
Balance
Sheet
Cash Flow
Statement
Contract
Schedules
Income
Statement
Background
Investigation
Financial
Statement
Account
Schedules
Explanatory
Notes
Page 10
2 Different Surety
Approaches

WORKING CAPITAL Underwriting
(Majority View)

Vs.

NET WORTH Underwriting
Surety Evaluation
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Good character
Experience
matching contract
requirements
Necessary
equipment
Financial strength
History of paying
subs and suppliers
on time
Bank relationship
Established line of
credit
SOURCES for Surety Bonds
•
Traditional sureties
Traditional Underwriting
OR
(Short form applications/ credit based) Smaller bond size
•
Specialized sureties
(Collateral based/ Funds Control)
•
SBA program
(Surety Company backed by government for majority of
any loss)
Underwriter’s Warning Signs
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Slow Accounts Receivable
Inability to Forecast Cash Flow
Past Due Bills
PROFIT FADE
Bank Lines of Credit Exhausted/ Non- renewed
Continued Operating Losses
Bid SPREADS
New (expanded) Geographic Territory / Scope of
Work
Advice for Today's Market
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Contractors
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Contract terms
Bond forms
Construction CPA
Adjust overhead
Bank line of credit
Conserve capital
Bond subcontractors
CPA, Surety, Legal
Advice for Today's Market
Contractors
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Know rights & responsibilities
Stay within capabilities
Show Me The Money
Manage growth & overhead
Learn why contractors fail
Communicate & Communicate
& Communicate
“DRIVE THE BOAT”
Prepare for the next “Boom”