Capacity to Perform
In order to assess the principal’s “capacity to perform” the bonded undertaking, the agent can provide First Sealord Surety the following information:
Corporate Literature
Annual Reports, brochures, and marketing materials are all helpful to the underwriter in assessing the overall capability and organization of the contractor entity.
Resumes
In order to investigate the contractor and his employees’ educational and professional backgrounds, resumes are obtained for the contractor principals and key people in the organization. Resumes are especially critical for companies seeking bonds for the first time. A key individual may have years of practical experience performing or managing the bonded projects as an employee of a large, reputable firm. Resumes may also be required for key subcontractor principals on larger projects.
Trade References
Names and addresses of owners, architects, engineers, general contractors, lending institutions, subcontractors, and material suppliers with whom the contractor has worked are collected by the underwriters. Letters of recommendation are also requested.
Business Plan
First Sealord Surety must establish that a bonded contractor can not only build, construct, or remediate, but can properly manage his/her company. The existence of a thorough business plan that clearly identifies goals, objectives and performance standards assists in the underwriting process.
Organizational Plan
A clear understanding of corporate ownership and structure is important to First Sealord Surety. Cross indemnification with parent companies, multiple affiliates and/or subsidiary entities is often required by the surety underwriter, prior to issuing the bond.
Job Rationale
First Sealord Surety must understand why a contractor, particularly in the case of a project larger or different than anything previously completed, believes he or she can profitably accomplish the task.
Business Continuity
It is important for First Sealord Surety to know what plans the contractor has made for the continuation of his/her business in the event of the death or disability of key personnel.
Financial Analysis
Because of the nature of surety, which is the guarantee of performance and payment, financial strength and experience are key components of surety underwriting. The underwriter must objectively determine that the contractor has the financial strength to pay employees, subcontractors, material suppliers and other service providers or professionals performing a task on a particular job. Assessing adequate financial strength depends largely on the contractor and the type of work being performed for a particular project. The key financial tools utilized by the surety underwriter are identified below:
Copy of Bank Line of Credit
First Sealord Surety must be aware of the terms relevant to contractor bank loans, and must consider the effects of secured notes on recoverable assets. Copies of the most recent and year-end bank statements are also secured for the purpose of monitoring cash debits and credits, and any timed withdrawals or deposits.
Credit References
References demonstrate how bills have been paid in the past to primary suppliers or service providers. Because a surety guarantees payment under the payment bond, payment history is a valuable check for the surety. Company credit reports are often reviewed for past and current credit facilities, and their history of extensions and repayments. Any low-scoring payment records are investigated and resolved prior to the extension of surety credit. Personal credit reports on majority stockholders of the contractor are also obtained. These reports assist in weighing strengths and weaknesses, from both character and liquidity standpoints.
Cost Records
A contractor should have a system in place in order to accurately account for the financial status of the bonded contract.
Buy/Sell Agreement
These agreements guarantee continuity for the contractor entity, in cases of death or the demise of key personnel.
Certificates of Insurance
The underwriters must establish that the proper insurance coverages and limits are in place with financially strong (rated) carriers. Insurance requirements are typically defined in the project plans and specifications. For environmental projects, it is critical that the proper environmental pollution liability insurance coverages are in place, and that all subcontractors are named on the insurance certificates.
Financial Statements
First Sealord Surety typically requires from the contractor fiscal year-end reports for the prior three years, and the most current financials as prepared by a reputable Certified Public Accountant. Financial statements could include:
CPA’s Cover/Report page, signed and dated Balance Sheet Profit and Loss Statement Statement of Cash Flows Work in Progress – including at a minimum, the original cost and revised contract amount, original and revised costs, billings, cost to complete and anticipated date of completion Schedule of Completed Work – including original and final contract amounts, original and final profit margins, date of completion General and Administrative Expenses Notes and Disclosures Concurrent Tax Return Affiliate or Subsidiary Financials
First Sealord Surety ’s underwriting requires the most recent year-end financial statements and tax returns for any affiliate or subsidiary.Credit Scores
Credit scores assist the underwriting staff in its decision making.Personal Financials
Personal financial statements and tax returns (most recent) are collected for all owners, shareholders, spouses, partners etc. These are required by the surety for purposes of personal indemnification, and they are held in confidence.Calculation of Working Capital
The calculation of working capital is necessary to determine the liquidity of a contractor. Contractor liquidity or working capital defines his or her ability to pay subcontractors, suppliers and employees. It is also a measure of whether or not the contractor is in a position to finance a project that he or she is preparing to bid. If the working capital is too thin and a problem occurs, the contractor’s ability to continue work on other projects and to continue day-to-day operations will be affected.Legal Actions
Current and past complaints/litigation are assessed as to their ability to materially impact a contractor’s financial condition, or the contractor’s ability to complete the contracted task.Prior Surety Check
Surety experience/track record is at times verified to determine performance and claims history. When warranted, other sureties are contacted by the Surety’s underwriters in order to confirm relevant facts.Corporate Indemnification
As a common practice, First Sealord Surety requires full corporate/business indemnification for all bonds issued. This indemnification, received through an executed General Indemnity Agreement, provides the surety with first right on all construction or project funds, and supersedes all other creditor rights (including those of lending institutions).Personal Indemnification
First Sealord Surety routinely requires personal indemnification from applicants.Irrevocable Letters of Credit (ILOC’s) and other forms of collateral
When required, ILOC’s from established banking facilities, certificates of deposit, and cash are forms of collateral accepted by First Sealord Surety.Pre-Qualification and Bond Line of Credit
As a result of the Company’s extensive financial and business investigation detailed above, First Sealord Surety will, for certain creditworthy customers, establish a line of bond credit for underwriting future surety needs. Although the customer will not have to go through the pre-qualification process each time he requests a surety bond, each bond requested will be assessed individually based on First Sealord Surety ’s engineering and technical review of the project specifications and performance required of the contractor. Establishing this bond line of credit will benefit the contractor, agent and First Sealord Surety. It will be easier and quicker for the contractor to obtain required bonds, and will allow the contractor to bid on projects more freely and confidently. First Sealord Surety, through this bond line of credit, will have established a close relationship with the contractor, and will be well positioned to efficiently service the contractor’s surety needs.Engineering and Construction Management Review
A key element in successfully underwriting surety is the application of engineering and construction management diligence throughout the surety underwriting process. HMS Victory’s staff possesses years of engineering and construction management experience. First Sealord Surety ’s unique ability to understand the principal’s performance obligation and methods to be employed is critical to assessing and ultimately minimizing the surety risk. This unique approach provides the principal with confidence in First Sealord Surety’s abilities, and serves to strengthen the relationship with the client. First Sealord Surety’s approach also entails giving advice to the principal, to the extent modifications in the principal’s business operations or performance under the contract can further minimize the underwritten risk or future risks. The use of First Sealord Surety ’s technical know-how not only benefits the principal, but also the Surety through stronger customer confidence and reduced surety risk. Elements of “engineering” the risks are detailed as follows:
Plans and Specifications
The Company’s technical staff may review the contract documents, in order to understand the full implication of the specific performance defined in the general conditions of the contract. Of particular interest to the surety is the project completion schedule and what constitutes completion.
Budget / Schedules
Project budgets may be reviewed by line item, in order to determine consistency with industry cost. Schedules are subject to review, in order to assess critical path organization and project flow.
Subcontract Agreements
Subcontract and supplier agreements may be collected and reviewed. At times, lien waivers are required prior to any payment to subcontractors or suppliers. Insurance certificates and subcontract agreements from all subcontractors are often reviewed. Subcontract bonds are at times required of subcontractors, depending on the size and nature of their subcontract.
Contractor Evaluation
The contractor evaluation provides the underwriter with a real-time, on-site analysis of the contractor and his or her experience, processes, and capabilities. The contractor must have the appropriate training, licenses and/or certifications to perform a given task. First Sealord Surety and HMS Victory personnel review:
- Personnel Resumes
- Job History/Performance
- Licenses/Certifications
- Insurance/Bond History
- Subcontractor Pre-qualification Process
- Bid Process
- Systems
- Owner Recommendations
- Regulatory Compliance Records
- Legal Actions
- “Environmental” Licensing
- References
- Other
Project Evaluations
On certain projects, engineers review specific project contract documents, evaluate and verify project estimates, review critical path schedules and access overall project risk on behalf of the surety.
Performance Verifications
First Sealord Surety monitors phases of the contractor’s performance after a bond has been issued. When necessary or desired, HMS Victory engineers attend job meetings, interface with project design and construction management personnel, personally assist with contractor-owner interface, and attempt to make sure that bonded jobs are completed on time and on budget.Adhering to the above procedures may allow First Sealord Surety and HMS Victory to provide money-saving and liability-reducing suggestions to the contractor, thus strengthening the contractor’s relationship with the Surety.
Take Over and Completion
