COOPERATIVE INCLUSION PLAN (CIP) University Training

1. COOPERATIVE INCLUSION PLAN(CIP) University Training Bonding What you need to know to get a bond, and how to GET IT DONE!

2. Brady K. CoxPartner, Baldwin-Cox Agency, over 12 years agency experience.

3. What Would You Do? • Stranger comes up to you and says, “Hey, Man, I’ve got this great construction job for $2 million that I just landed. Would you mind telling the owner that if I don’t build it right, or finish it, and I don’t pay all the subs and suppliers that YOU’LL take care of it? And, tell you what, I’ll give you 2% if you’ll tell them all that in writing!”

4. What is a surety bond? • Bonds are NOT insurance. Losses NOT expected • Definition of a SURETYBOND: A debt instrument issued by a surety on behalf of an owner guaranteeing that the contractor will fulfill the contractual terms of their agreement. In the event the obligations are not met, the owner will recover their losses by defaulting the contractor and making a claim on the bond. • In other words, a performance and payment bond, simply means the bonding company is guaranteeing: • If you don’t do the job or if you don’t pay subs and suppliers, your owner will kick you off the job and they will call the bonding company to take care of the problems at the bonding company’s expense and then the bonding company will come to you to pay them back (indemnity).

5. Bonds: • Not all bond forms are alike. Some owners have their own forms and you always need to get a copy. Some of them are UNWRITABLE in their current form. • Bid bonds: Means you’re qualified to bid the job • Performance and Payment bonds: Bonding company guaranteeing performance & payment and 1st year of warranty • Maintenance bonds: Warranty period – 1 or 2 years • L&P and supply bonds

6. Three Parties to the Bond: ObligeeYOUR client:The Owner or General Contractor Principal(YOU) SuretyYOUR Bonding company

7. Bid Bond

8. Performance Bond

11. Labor & Material Payment Bond

13. Prequalification Capacity Financial Strength Company History Organization Continuation Plans References Work In progress

14. Underwriters look at what??? THE THREE “C’s” • CAPITAL: Do you have money? • Cash is King • Bonding capacity based on a multiplier (10X+) of the lower of your Working Capital or Net Worth • Not a lot of debt (D/E < 3 to 1) • MORE CASH

15. THE THREE “C’s” • CAPACITY: Can you do the job? • Experience • Equipment • People • Is the job right based on your company’s experience? • Geography – have you worked there before?

16. THE THREE “C’s” • CHARACTER: Your individual moral qualities. • Will check your and your spouse’s personal credit reports. • Will check references • Do you honor your commitments? • Will you fulfill your obligations in the General Indemnity Agreement?

17. Accounting and CONSTRUCTION CPA’s • Use CPA who specializes in working with BONDED CONTRACTORS • You don’t want a brain surgeon fixing your broken leg! • Find them in the TEXO directory, or your agent can refer you to specialists • Can help make decisions about taxes vs. bonding capacity • Need to understand the % complete method of accounting (financial reporting method and tax method can be DIFFERENT) • Have a construction friendly, accurate accounting system and USE it! • Join Construction Financial Management Association (CFMA)

18. Financial statement types • Compilation(simple) • Review(medium, most requested) • Audit(complicated, thorough and expensive) • Required by TxDOT

19. Parts of the Financial Statement • Accountant’s Opinion Page (w/ compliance) • Balance Sheet • Income Statement • Cash Flow Statement • Notes to Financial Statements • Work in Progress Schedule (Open & Closed) • Be Sure to Request ALL OF THE ABOVE

24. How to Calculate Working Capital • Current Assets minus Current Liabilities • Maybe for TxDOT or your banker • NOT according to your bonding company. They’ll take out: • Prepaids • Loans to shareholders • Loans to employees • Half of inventory – depending on how fast you turn it over, or whether it’s prior jobs JUNK in your yard

25. How to Calculate Working Capital… • Current Liabilities –they count them ALL • No deducts here! • Lines of credit included here even if they mature further out than 1 year. • If any other entity besides a C Corp, they will add in a tax provision for future taxes based on 30% of this year’s taxable income

26. Work In Progress (WIP) • A KEY report for bonding capacity – usually quarterly. • Where your jobs stand at that date • Are you making money? • Are your estimates holding? • Any profit fade or gain? • Estimated Cost to Complete – to see how much more work you can take on! • Overbillings ARE OK!

27. WIP Components • Contract Values for Each Project (Updated) • Estimated Total Costs for Each Project • Costs To Date for Each Project • Billings to Date for Each Project

28. WIP Schedule - OPEN

29. WIP Schedule - CLOSED

31. UNDERBILLINGS • Bonding companies watch them closely • Is the money collectible? • Is it a temporary billing situation, back to normal next month? • Is it a change order that will, or WON’T be approved? • Is it cost overruns that can’t be billed? • Underbillings can become losses – WILL get your bonding company’s attention! Especially once a job is over 80% complete.

32. Credit Score Programs • There are a few markets that will approve bonds on a case by case basis up to $250,000 single contracts and no more than $500,000 aggregate at one time based on you and your company’s credit score and a three page application… • If you need more bonding capacity you will need to provide more paperwork, very similar to applying for a bank loan. • You can’t write two small bid bonds and combine their values to equate to a bigger bid!

36. SBA Bond Guarantee Program ----In 1971 SBA launched the Surety Bond Guarantee Program to assist small, emerging and disadvantaged contractors obtain greater access to contract opportunities through bonded projects via an SBA guarantee

37. What exactly is it?????? • An agreement between a surety and SBA where SBA agrees to assume a percentage of loss in the event a contractor breaches the terms of their contract • SBA’s guarantee strengthens a small contractor’s ability to compete and secure bonded work

38. How Can SBA Help Small Contractors Obtain Bonding? • SBA guarantees bonds written by any surety approved to participate in the program and listed in U.S. Treasury Circular 570 • SBA provides a 70%, 80% or 90% guarantee through two separate programs • The Prior Approval Program, administered by two Area Offices, provides either an 80% or 90% guarantee based on the contractor’s demographic information. The Preferred Surety Bond Program, administered by SBA HQ in Washington, DC, provides a 70% guarantee.

39. What are the Eligibility Requirements? • The applicant must be a small business • Average annual revenues for the past 3 years (or number of employees for manufacturing firms) cannot exceed the small business size standard established for their primary NAICS code as outlined in 13 CFR 121.201 • The contract must require bonds • The contract cannot exceed $6.5 million in size (Use to be only 2 million, can go up to $10mm on federal projects that are approved by contracting officer)

40. How Are Applications Processed? • The agent reviews the contractor’s application package and recommends it to a surety for approval • The agent forwards an electronic application and complete application package to an OSG Area Office if the surety agrees to bond the project with SBA’s guarantee • SBA issues a guarantee to the surety when an application is determined to be qualified • The agent executes the bond

41. How Long Does the SBA Bond Process Take? • Agent and Surety require time to evaluate the contractor’s information prior to submission to SBA • SBA Office of Surety Guarantees has established a goal for processing applications within an average of four (4) Federal working days

42. SO WHAT MAKES IT SO GREAT????? • Working Capital Calculation = OH MY GOODNESS • Bank Line of Credit…. Used as Working Capital • Can be helpful if you are in a Joint Venture • BUT……Surety company still underwrites the account

43. What Costs Are Involved? Surety Charges • The surety charges the contractor a premium for performance, payment and ancillary bonds based on the rates approved in the state where the job is located, usually between 1.5% and 3% of the contract amount • SBA Charges a Contractor’s fee of .729% of the contract amount for each final bond guarantee • SBA does not charge a fee for a bid bond guarantee

44. Banking • Get to know a banker who understands bonded contractors. Watch out for COVENANTS AND COLLATERAL COMPLIANCE! • Should be a local bank – so you know each other • GET a line of credit BEFORE you need it! Someday, you might have a client not pay you – and you can’t get a line then! • Line good for job start cash flow, too.

45. Paperwork You’ll Need • Contractor Questionnaire – fill it in COMPLETELY! • Resumes • Financial Information • Three years of fiscal year end financial statements • Current interim if over three months since year end • Personal Financial Statement • Current Work In Progress Report • Accounts Receivable Aging, with retainage listed separately • Certificate of Insurance • Bank reference information • Copy of Bank Line of Credit • Subcontract Agreement, if you’re a GC • Continuity Plan • Company brochure, or any other information to help tell the bonding company about your organization and its successes.