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The Mystery of Non-Construction Contract Surety Bonds

Posted by peichten on February 9, 2017

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By: Steven Swartz, President/CEO South Coast Surety


Since 1893, the federal government has required contractors to obtain bonds for federal public works projects to assure performance of the contract and payment to certain laborers and materials suppliers. The federal law mandating surety bonds is the Miller Act of 1935. Most states and local jurisdictions have similar legislation, commonly referred to as “Little Miller Acts,” which vary greatly from jurisdiction to jurisdiction. The surety bond concept is a risk transfer mechanism where the surety company assures the Obligee, “the government entity issuing the contract”, that the principal, the entity hired to fulfill the work (vendor), will perform the contract.


The surety industry that grew out of this government legislation of more than a century ago has protected the funds spent for performance on contracts for construction projects of all kinds, protecting thousands of billions of dollars in taxpayer money. In underwriting public works’ contractors, surety companies extensively prequalify those businesses to confirm that they have the capital, capacity, experience and character to perform the specific contract. But, public funds are spent on a lot of other products and services beyond construction. Private Industry has always provided goods and services to our government entities. Supply and Service Contract awards make up a significant portion of governmental budgets across the country.


Supply type accounts can include: Office/School Supplies, Flooring/Counters, Fencing, Modular Buildings, Work Trailers, Landscape, Portable Restrooms, Cabinets, Printers, Computer/Electronic Equipment, Irrigation Equipment, Boiler/Generators, Low Voltage Wiring, Software, Wireless Installations, Specialized Vehicles, Concrete Piping and many more.


Service type work can include: Guard / Security, Transportation/Bus, Janitorial, Entertainment, Landscape, Photography, Window Washing, Pest Control, Food Service, Wireless Networking, Street Sweeping, Boiler/Generator Retrofit, Tower Maintenance, IT Support Medicaid Management, Social Services, Educational Testing, Waste Hauling, Debt Collecting and much more.

Recognizing that Non-Construction Contracts were quite different from the Construction Contracts that created the Corporate Surety world, the surety industry gave Supply and Service Contract Bonds their own class code (Class Code 500) in 2004. Many contracts that could fall into this class are possibly still being reported as construction type contracts. Even with that said, the growth in the reported direct written premium over the years on record is very impressive. Starting with $15,077,697 reported in 2005 to the $104,999,990 reported in 2015.

Although with this large growth trend, class code 500’s $105 million in 2015 is still minuscule when compared to the $3 billion of written premium for construction surety bonds and the $5 billion of written premium for all surety bonds written in 2015. The cause for this relatively low reported number could be attributable to the continuing misclassification on some supply and service contracts as a construction type exposure and the circumstance that many public entities don’t follow the spirit of the law and continue to not require surety bonds on non-construction contracts.

That being said, the trend of a 66% average annual growth in written premium is not bad; but, it can be better. Over the last decade many surety companies have recognized that analyzing and underwriting this sector of contract surety is very different than the parameters used in processing sticks and bricks construction surety. A number of Surety’s have expanded their commercial bond departments to include underwriters that understand and seek non-construction contract business. You will find within these departments that they have developed underwriting factors that look a lot closer at the actual risk related to the various types of contracts supported, correlated to the financials presented. Old school “If it makes sense underwriting” is very much alive in non-stick & brick contract surety.

In today’s economy many public entities are also looking to private industry as a method to reduce their internal costs and budgets by outsourcing many services and duties. It is important for all publicly funded organizations to understand that surety is a risk transfer tool that has been used extensively and successfully to bond all types of commercial contractual arrangements. The use of a bond ensures that it is a qualified vendor that bids on outsourced public work, and that public entities and taxpayer dollars are protected in the event that the outsourcing provider (or principal) is unable to perform (or fulfill) its obligations under the contract and that there is not an interruption in the delivery of vital public projects, services, and resources. Additionally, surety bonds provide assurance that the outsourcing provider’s subcontractors and employees will be paid in a timely fashion, alleviating potential risk and burden to suppliers down the chain.

The lower risk associated with many service type contracts has allowed many government agencies to only bond a portion of the entire gross contract amount. They determine what the perceived monetary exposure and costs would be at any one time to replace a contractor/vendor during the contractual period. Often that number comes in at one to two months of the monthly billing rate as compared to the full gross contract billings. The surety industry has recognized and agreed that there is a lesser risk and has determined that, unlike construction contracts surety bonds that are always charged based upon the full contract value no matter the size of the bond, class code 500 surety bonds charge on the size of the actual bond liability.

Also, many service contracts are multi-year agreements. The government organizations do this to reduce the inherent costs associated with putting the service agreement out to bid each year. Historically sureties have great difficulty in providing surety bond guarantees that go out much more than a year. This is due to the nature of the risk and the need to verify that the contractor/vendor still meets the required qualifications. The surety industry has addressed this issue with the creation on an annually renewable surety bond document that allows for continuing coverage, time for review and adequate notice for the contractor/vendor to get another bond or the serviced entity to bring in another contractor/vendor.

The bottom line is that more and more public entities are realizing that having a surety partner taking all performance and payment risk on contractual services is a good thing. With an average cost factor of 1% to 3% of the bond amount, surety coverage is more than reasonable and cost effective.

Requiring our government agencies to use surety bond protection for all types and sizes of supply/install and service contracts not only protects taxpayer money, it also helps spur the local economy. Often, many of our government procurers are reluctant to contract out to smaller firms because of the lack of resources to verify their capability. Surety eliminates that concern.

The underwriting process, while extensive, does not exclude small and emerging companies from qualifying to perform work. In many ways, the process educates them and prepares them to be more successful business owners by introducing them to a comprehensive view of their companies. The surety industry has enacted a number of programs to be inclusive of small and emerging companies in their customer base. This puts a great number of local businesses in position to bid and win lucrative contracts with local government agencies, resulting in local communities growing and supporting their local small businesses.

The use of surety bonds guarantee that our governmental agencies will get the supplies and services that are contracted for. Surety bonds protect public dollars and promote the use of local businesses. The surety industry exists to make sure projects and services are properly managed, performed and completed. The use of surety bonding has proven over more than a century that it can be relied upon to be an inexpensive method for our government to get the best products and services for their money.

For more information on Service Contract Bonds or Supply Contract Bonds, call our team of surety bond experts at 800-361-1720
or email apps@southcoastsurety.com


*This article includes statistics and information sourced through the National Association of Surety Bond Producers and the Surety & Fidelity Association of America.


Steven Swartz has been a licensed surety agent for 27 years. He established South Coast Surety in 1995, as a bond only agency. He has been actively involved with the National Association of Surety Bond Producers, helping craft many of their educational programs on commercial and commercial contract surety. Today, South Coast Surety services thousands of insurance brokers and direct surety accounts across the country. They have established a number of surety programs with a strong niche in non-construction contract bonding. They also have in-house underwriting authority for commercial and contract bonds with a number of surety companies.


Merry Christmas 2016

Posted by scoast on December 23, 2016

Wishing all a very Merry Christmas. Our office will be closed for the holiday and reopen December 27, 2016....

 

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Happy Thanksgiving

Posted by scoast on November 23, 2016

 

Wishing you a very Happy Thanksgiving.

We will be closed November 24th and 25th

So our Staff,Friends and Families may enjoy the holiday

 

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How Can a Contractor Increase Their Bonding Capacity?

Posted by peichten on November 23, 2016

CONSTRUCTION EXECUTIVE: Executive Insights in Surety Bonding

How can a contractor take it's bonding capacity to the next level?

Steven Swartz
PRESIDENT/CEO
South Coast Surety

Construction Executive magazine featured Steve in their 14th annual 'Contractor's Guide to Surety Bonding' where he answers the question that many contractors have - how does a contractor grow their surety bonding capacity?

Steven Swartz: "Some might say it is easy to increase your surety capacity to the next level.... Not really. It takes planning and effort. Understanding what the surety underwriters are looking for in order to approve the leap into larger bonded work is the most important key factor.

Yes, you need to have shown the ability to successfully manage the bonded work in your current program with good profit margins that don’t fade. And yes, you need to have a good financial presentation prepared that reflects the profit stream from those jobs and also displays your continued efforts to retain and grow the company working capital and net worth.

But, it is your professional surety agent that can help guide your firm in reaching the larger work program goals. Your surety agent should be communicating regularly with your CPA who is experienced in generating construction accounting financial statements in a form and format preferred by the surety underwriters. Your experienced surety agent should be working hand in hand with you and your staff as you work through your current work and start to focus on the future jobs you intend to pursue.

The successful construction executive aligns with a strong independent advisory team of an experienced construction attorney, experienced construction accounting firm and an experienced professional surety agent. When added to your own professional staff, this team provides the insight and support to make that path to larger bonded contracts seem easy."

If you'd like to talk with Steve about your current bonding capacity and further details on how to increase it, give him a call at 800-361-1720 or email surety@southcoastsurety.com. 


Life of a Surety MGA

Posted by peichten on April 7, 2016

Walking the line of a surety producer/agent and surety underwriter on the surface sounds difficult. In practice, it is just that… Challenging.

Entering the world of surety over twenty-five years ago, after years in the finance/banking industry, was a fairly smooth transition. Having worked as a consumer and business bank loan officer for small local branches, it teaches you to be responsive to the needs of your customers, if you want to keep them and grow your office. First stepping out on your own to open your first lease/financing company with all the responsibilities of making rent, bills and payroll also schools you to think ahead, plan ahead, and be visible to your referring vendors and potential customers. It implants in you the value of your word and deeds in business and the true worth of building relationships.

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Having your own firm can also teach you that you cannot always predict what will happen. You should always plan for the best and be prepared for the worse. With collapsing economies comes collapsing businesses. To say that closing a business to jump into a new career can be character building is an understatement. It strengthens and challenges the inherent “lack of Fear of Failure” that all successful entrepreneurs must call on sometime in their business life.

Diving into the role of a surety agent with the prior learned lessons seemed to be as natural as walking down a street. Applying the learned knowledge of analyzing financial presentations with the experience of running a small business and valuing customer care, made the world of a surety agent feel like a perfect fit. Was everything just plain easy? ….No, not really.

More lessons are learned along the way. You find associations and relationships that work well and others that disappoint. Often, you might feel like you are weaving your way through a maze of obstacles and rewards. But, continually applying the early learned practices, while building on the acquired affirmative associations and connections, gives way to positive results. Naturally, being in the right place at the right time can never hurt.

Operating a small contract surety agency is enjoyable. One on one communications with your contractors and underwriters are done on almost a daily basis. You know every aspect of your contractors’ business, family and goals. You work hand in hand with them and their CPA’s to make sure the flow of surety support was not interrupted. You deal with problems as they come up and give advice and at times bad news, when needed.

In those years of running a contract only agency, there were many celebrations of success and a few gut wrenching disappointments. Claims were far and few between; but, there are one or two you take personally. As a Surety Agent, you have grown accustomed to relying on a high level of “Trust” within your relationships. Having that trust broken after years of working together stains the memories and makes the road to establishing a level of trust that much more difficult. It is the lesson of having that trust broken by a contractor that you had worked with for years that can give you the difficult balance you need when you become an underwriting agent with authority.

Growing a surety agency is always hard, but rewarding work. Twenty years ago, as with most small surety agencies, contract surety was what we produced. Any commercial surety needs were referred out to one of the larger firms that had the personnel to handle the stray license or miscellaneous bond request. For handling the volume of commercial bonds to be profitable would take quite a few more staff than it takes to handle the higher premium contract surety bonds.

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 The 2008 team of South Coast Surety

 About then, being in the “right place at the right time” stepped in. As a small contract surety shop with a full staff of 5, we were handed an opportunity by a friendly underwriter known for many years. The surety was eliminating their commercial surety business and along with the bonds, hundreds of insurance agents that placed the business. Our longtime associate knew us to be thorough and responsive and decided to refer all of their regional insurance agents to us for their commercial surety bond needs. We went from a basic contract surety shop that did an occasional license bond to a wholesale surety agency servicing the commercial surety needs for hundreds of insurance agents overnight.

What followed were many twelve hour days, as we developed systems to manage the incoming insurance brokers and expand our knowledge and capabilities in handling the very wide scope of commercial surety bonds. The industry was in the early stages of modernizing commercial bond processing and the days of triplicate NCR forms were in our rear view mirror. On line handling of the most numerous commercial bond classes reduced the staff size needed for a volume of transactions; but still additional staff support is needed.

While on a very basic level the review of financials and credit for contract surety and commercial surety are the same, the many classes, codes, exposure levels and bond language risks creates a wide underwriting gap between the two surety worlds. Contract surety at its base has changed little in a hundred years. Commercial surety seems to have new product and risks popping up every day. While never abandoning contract surety roots, it was necessary to plunge into this new surety environment in order to take advantage of what was handed to us. With the ever-changing commercial surety landscape, this new arena was never dull.

The more we learned and accomplished, the more avenues with commercial surety markets as well as contract surety markets opened up. We studied the very few surety wholesalers who existed at the beginning of our wholesaler journey and created our own operational model to follow. We developed relationships with a number of “Specialty” surety companies and then promoted our access and ability to write within the specialized as well as standard marketplace. We heavily promoted our “Bond Only” concept, positioning ourselves as the backroom surety processors for our producing insurance agencies.

In the first decade of being a direct and wholesaler surety agency we built our knowledge base, our surety market support and our level of staffing as the volume of referring insurance agents grew from the hundreds to the thousands. Our website, first built when our company was just starting, became more robust and active. With the long hours of work and volumes of surety cases, we became even more knowledgeable about commercial surety. We had a growing book of “Transactional Surety” at a time when most agencies and surety markets focused on building account relationships. We had a few underwriters that said that they had no interest in seeing any “transactional” business. Then we had some surety firms that stepped up and said, yes, they would like to build a volume of transactional business.

We also determined that successful growth was directly attributable to having the ability to provide fast, consistent and reliable service to our applicants and our brokers. With the volume level of transactional surety bonds growing, we knew we could either overwhelm a surety underwriting department or be adding days to the average turnaround time for each transaction. With these production challenges, it soon became apparent that to continue our growth, we needed to add a level of in-house underwriting authority. A number of the surety company executives and underwriters we dealt with agreed.

Many surety companies recognized that having a bond only agency such as ours could work as an “Aggregator” effectively booking the volume of transactional surety without adding to the department’s overhead that would be necessary by having additional underwriters to deal with the number of small “one off” and small volume insurance agents. Towards the end of our first decade, we added the underwriting authority, granted to us by our surety company partners, to our capabilities and became a true Managing General Surety Agency.

At first, much of the authority was bond specific with very strong guidelines. The underwriting decisions were fairly scripted with specific details on what would be allowed and at what rate. As the surety underwriters saw how we performed and as we built our book with little to no claim issues, our reputation in the industry grew, as did the amount and latitude of authority and offers from companies for more authority.

In the early part of our second decade, we had a startup surety company approach us to develop a commercial surety program that included sub-standard and non-standard credit profiles. They had developed filed rates that were on the line with the very few such programs then in existence. We helped design the program and promoted it heavily. We saw it catch on quickly and managed it until the surety decided to expand their direct agent base. The experience and knowledge gained by creating this program helped us develop similar programs with other surety partners.

Also, in the first half of our second decade, we had developed considerable experience in the Non-Construction contract surety sector. We had actually been involved in supporting supply install contractors as well as service contractors since our early beginnings. As out-sourcing became more prevalent, it was natural to promote the bonding of such contracts. With our knowledge base and understanding we helped another surety develop a small contract application program similar to the many construction type programs in existence. We built it up using the underwriting authority the surety granted us. Soon the surety opened up the program to all of their agents.

This is when other surety partner companies reached out and offered to give us authority for small contract in construction and commercial as well as a full slate of commercial surety authority. Our staffing had grown to four times the size of the early years, our insurance broker base was approaching 10,000 and we had the personnel and experience in place for growing such a successful program. With the authority, of course, came much more responsibility.

With decades of promoting surety business to attract new brokers and accounts, we now had considerable autonomy in underwriting and approving that business. And that is where it is learned that the freer your hand is, the more concerned you become about how you use it.

We began this by stating that a combined surety producer/agent and surety underwriter is a challenge. You find yourself with two completely different jobs and accountabilities. You are responsible to book as much surety as you can and then restrict that growth by maintaining tight underwriting standards. It is sort of a Jekyll and Hyde existence. But is one, when done right, which is very satisfying and rewarding. The life of a Surety MGA can be many things; but rarely is it boring.

If you have any questions and want to chat, I'm always available to talk shop. It's been 25 years yet I haven't grown tired of talking about surety. Call 1-800-361-1720 and ask for Steve.

california-surety-agency1.pngOur current office in San Clemente, CA. 

 


5 Top Reasons for Contractors to Seek Surety Bond Support

Posted by kaspecht on March 3, 2016

Learn Why Surety Bonding Support Is Important For Contractors, And How To Get It.

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Some contractors try to avoid bonded jobs, with the following methods:

  • Only bidding where bonding is not required.
  • Bidding under prime contractor's bond
  • Advocating for bond waivers
  • Advocating for alternative insurance/guarantee products

Unfortunately that makes it much harder to win large project bids and grow your business as quickly as with bonded jobs. With 25 years in the surety industry working with countless contractors across the nation to help expand their project capacity, I present the top five reasons contractors should find a knowledgeable surety agency to gain surety bonding support: 


1. Public Works budgets of future construction contracts. As the construction of roads and bridges continues from 2015, 2016 has a good chance at growth, generated by both environmental and pending multi-year transportation bills for public work projects in, through and beyond 2016. Future infrastructure investment is already in a number of budgets federally, in states and locally, across the country. Numerous states, counties, cities and school districts have sold or are selling investment bonds for building and improving much needed school campuses and infrastructure improvement. Population growth for states, cities and counties have pushed demand for improved and new park recreation sites. All this means more opportunity to bid work with surety support.


2. Balance out private work cycles. As we continue in the very slow economy growth cycle, private spending in the residential and business sector can be undependable. There are many pockets of strong movement, yet other areas are seeing projects delayed or taken off line. Looking for local public projects can help fill in those dips from private work.


3. Increased demand for surety bonds on private work. With slow economic growth, funding of private works has been cautious. Many lenders now require the private owners to have their contractors provide Performance Bonds and Payment Bonds. This trend carries up though most of Corporate America, where businesses are more frequently protecting their building fund accounts by requiring surety bonds from their contractors.


4. The more experience you establish with a surety the easier it gets to go after those large, profitable jobs that have less competition. It is not a cliché; having a track record with a surety on bidding, winning, working and completing smaller jobs successfully and profitably does make a difference when that perfect large jobs comes down the pipe. A surety is more willing to stretch their underwriting program for an account that they know and with whom they have built a history.


5. Establishing a relationship with a profession surety agent provides an outside consultant with seasoned knowledge on how to successfully build a construction business. Your experienced surety agent is a free source of knowledge for you to use. Take advantage of them. Your surety agent has seen and worked with many similar contract accounts and has a wealth of knowledge and experience in the good, the bad and the ugly. Your professional surety agent has on call a variety of resources on all facets of construction contracts. Your surety agent’s only goal is for your firm to be and continue to be successful.

 

Convinced yet? If you have any reservations, feel free to give me or my contract bonding team a call at 1-800-361-1720 so we can answer any other questions. We can provide you the tools and information needed to attain a surety bond line of credit. Or you can Google "(Your Location) Surety Agency" to find someone near you to start the conversation. They will talk with you about your business, your future goals, current projects, and then take you through the pre-approval process to establish a bonding line. 

We want you to succeed and grow your business year over year. Thanks for reading, keep checking in with our blog for more contractor business guides and information.

Best Regards,

Steve Swartz
President, CEO
South Coast Surety
800-361-1720


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