PIDC’s Small Contractor Workshop Series Tips

With more construction opportunities becoming available in the public and private sectors in the City of Philadelphia, PIDC hosted a 4-part Construction Workshop series to provide small contractors with the necessary tools for lasting success. Part 3 of the series was titled Understanding Contract Surety Bonding: An Orientation for Small Contractors led by strategic partner Ellen Neylan, President of Surety Bond Associates. This workshop covered the fundamentals of qualifying for construction bonding, determining costs, positioning your company for increases in bonding lines, and avoiding defaults.  It also covered how to choose the right bonding company for your growing needs.

PIDC offers a specific financing product for small contractors. The Contract Line of Credit Loan provides support to small, minority, women, veteran and disabled-owned businesses that need a line of credit to fund contract-related working capital.

To learn more: PIDC Small Contractor Workshop Series

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NEW City of Philadelphia Demolition Contractor License Bond

In June 2013, a Philadelphia building undergoing demolition collapsed onto a neighboring building, killing six people and injuring 14. Philadelphia’s construction and demolition regulations were closely scrutinized in the wake of the collapse. In response, the Philadelphia City Council passed five bills in February 2014, imposing additional permitting, inspection, construction and licensing requirements for building and demolition projects within Philadelphia. Four of these bills were signed into law by Mayor Michael Nutter on February 20, 2014. The fifth bill, requiring licensure of demolition contractors, was not signed into law until August 6, 2015.

This new City of Philadelphia Demolition Contractor License law takes effect on November 1, 2015.  In addition to obtaining a license, all demolition contractors in the City of Philadelphia will be required to comply with the following regulations:

  • Identify at least one demolition supervisor with proof of successful completion of the Demolition Exam
  • Identification of at least one site safety manager with proof of completion of OSHA 30 training
  • License Bond
  • A certificate of insurance complying with the City’s insurance requirements

There will be two license categories:

  • Class A: Demolition of major buildings – Requires a $25,000 License Bond
  • Class B: Demolition of smaller buildings – Requires a $10,000 License Bond

Contact us to learn more about the Demolition Contractor License Bond, or Apply Online to receive a quote.

 

 

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Bonds: An Important Weapon In Any Contractor’s Arsenal

It is vital that construction contractors, regardless of tier or trade, understand the basic principles of contract surety bonds. An understanding of how bonds are used in construction; and, importantly, how the surety company prequalifies the contractor is critical. Surety Bonds are mandated by various federal, state and local laws, but may also be required by the private sector as well. Recently, as part of WIPP’s Give Me 5 webinar series, bonding specialist Ellen Neylan owner of Surety Bond Associates, along with construction counsel, Jennifer M. Horn and Maria Panichelli of Cohen SegliasPallas Greenhall & Furman PC, discussed these issues in detail. Below are some highlights of the discussion.

The Performance Bond secures the contractor’s promise to perform the contract in accordance with its terms and conditions, at the agreed upon price, and within the time allowed. The Payment Bond protects certain laborers, material suppliers and subcontractors against nonpayment. Since mechanic’s liens cannot be placed against public property, the payment bond may be the only protection these claimants have if they are not paid for the goods and services they provide to the project.

In order to obtain a bond, the contractor must be prequalified. Sureties should not bond a contractor that does not meet their prequalification standards. The surety company’s pre-qualification process carefully analyzes the contractor’s entire business operation, much like a bank, because the surety is backing the promise that the contractor will perform the contract. The surety determines the contractor’s ability to meet current and future contract and financial obligations.

The parameters of bonding on a project are often dictated by the law. For example, the Federal Miller Act requires surety bonds for the “construction, alteration, or repair of any public building or public work of the United States for an amount greater than $100,000.” When filing surety claims against Miller Act bonds, subcontractors should be aware that timing is critical. Even though no notice is required, first tier subcontractors must wait 90 days from non-payment to give the bond principal a chance to make payments. In addition, all suits must be filed within one year of last work performed or materials supplied. It’s very important that the claim notice clearly state the amount being claimed, the name of the party to whom labor or supplies were provided, and that the subcontractor is making a formal claim against the bond principal.

The Surety will not pay claims without regard to their merits, but it should be expected to respond to claims promptly and, if denying a claim, offer an explanation. Finally, the Surety, with the aid of legal counsel, can assert all defenses of its bond principal, unless precluded by bond or contract language. Examples of defenses might include: breach of contract; recoupment/setoff; and failure to mitigate damages.

For more detailed information about this important topic, tune in to the recent webinar:

Construction – Bonding and Liens

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Surety Bond Associates Welcomes Commonwealth Insurance Company Customers

Surety Bond Associates is pleased to announce their commitment to former customers of Commonwealth Insurance Company by replacing their cancelled surety bonds.

Surety Bond Associates, also located in Bala Cynwyd PA, is a full service surety bond agency providing specialty surety bond services to small and mid-sized contractors, including dedicated programs and services for minority, women and veteran owned contractors.

“We are thrilled to welcome former customers of Commonwealth Insurance Company to the Surety Bond Associates family”, said Ellen Neylan, President of Surety Bond Associates. “As a veteran of the surety business for over 25 years, I understand how frustrating it must be for these businesses to navigate through the process of finding a surety partner willing to help them pick up the pieces and quickly replace their surety bonds. We represent numerous surety companies and are prepared to begin servicing the bond needs of former Commonwealth Insurance customers immediately.”

Contact Surety Bond Associates

For more information, contact Ellen Neylan at 610-617-1052 or ellen.neylan@suretybondassociates.com.

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Commonwealth Insurance Company of Bala Cynwyd PA in Liquidation

The Pennsylvania Insurance Department issued an order on March 19, 2014 to liquidate the Commonwealth Insurance Company of Bala Cynwyd PA.  The order was unanimously approved by Commonwealth Insurance’s board of directors and sole shareholder.

The failure cancelled surety bonds of many construction contractors and other businesses effective April 19, 2014, possibly leaving taxpayers liable to cover some of the firm’s losses.

Surety Bond Associates, also located in Bala Cynwyd PA, is a full service surety bond agency providing specialty surety bond services to small and mid sized contractors with a particular focus on minority, women and veteran owned contractors.  Surety Bond Associates is prepared to service the bond needs of former Commonwealth Insurance customers.

Contact us today to expedite replacement of your bond program.

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Understanding Special Needs Trust Bonds

The essential purpose of a Special Needs Trust is usually to improve the quality of an individual’s life without disqualifying him or her from eligibility for public benefits, such as Medicaid, Social Security, or Mental Health or Mental Retardation benefits. The beneficiary of a special needs trust must be under the age of 65 and will usually (but not always) be disabled.

Special Needs Trusts are set up so that the incapacitated person can continue to qualify for medical assistance, and the trust assets are basically used to meet the special needs of the beneficiary during their lifetime, such as:

  • Customized vehicles for transportation
  • Sophisticated therapy equipment in the home
  • Extended therapy in the hospital
  • Occupational therapy
  • Education
  • Special housing needs.

Any expenditure must have a reasonable relationship to the needs of the beneficiary.

Self-funded trusts are one type of Special Needs Trust and are typically funded by the disabled person’s (beneficiary) assets, which could stem from an injury settlement or inheritance. A self-funded trust must state that any money left in the trust at the time of the beneficiary’s death be made available to repay the Department of Welfare for any Medical Assistance benefits paid on behalf of the beneficiary over their lifetime.

The trustee is required to properly account for all expenditures made.  The trustee is also obligated to invest trust assets prudently. Legal counsel and professional investment, tax and accounting assistance will be required in administration of almost every special needs trust.

The Department of Welfare sends the trustee an annual statement of claim to show the current amount due, which is a running total of all medical bills paid on behalf of the beneficiary since the execution of the Special Needs Trust.  The idea is to spend down the trust assets on allowable expenditures to avoid having to reimburse the Department of Welfare for benefits paid out over the beneficiary’s lifetime.

Special Needs Trusts generally require both Orphan’s Court and the Department of Welfare’s approval.  A Special Needs Trustee Bond is usually required of individual trustees in an amount determined to be adequate by the Orphan’s Court and Department of Welfare. The bond guarantees that the trustee manages the trust and carries out his or her fiduciary duties correctly.  Corporate Trustees (usually banks or trust companies) do not need to post a bond because they already have adequate fidelity and fiduciary liability coverage in place.

Surety Bond Associates is a leading provider of Special Needs Trustee Bonds.  Contact us today to learn more or to apply for a Special Needs Trustee Bond.

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New $75,000 Freight Broker Bond (formerly $10,000 ICC Broker Bond)

When Congress recently passed the “Moving Ahead for Progress in the 21st Century, this sweeping legislation included extensive changes regulating the activities of Freight Brokers by the Federal Motor Carrier Safety Administration (FMSCA), including replacement of the former $10,000 ICC Broker Bond (BMC-84) with a new $75,000 Freight Broker Bond. In addition, Freight Forwarders, who were never subject to this requirement, must now also fulfill this $75,000 requirement.

The implementation date of October 1, 2013 is approaching fast, however, FMSCA will provide Freight Brokers and Freight Forwarders until October 31, 2013 to file the new bonds. On November 1, 2013, FMSCA will review its system to determine which Freight Brokers and Freight Forwarders have not yet filed the new bonds. FMSCA then will send letters to these entities, which will have 30 days from the date of the letter to file the new bond.

The new requirement will be effected by filing a new bond form (BMC-84) to replace the existing form. FMSCA is revising the form to reflect the new amount and to include Freight Forwarders. The new form will be posted to FMSCA’s website by October 1, 2013. A Freight Broker or Freight Forwarder that operates without registering could be fined as much as $10,000.

The new $75,000 Freight Broker / Freight Forwarder Bond will ensure compliance with the rules of the FMCSA, including timely payment. The law provides that the surety bond “shall be available” to pay any claims against a Freight Broker (or Freight Forwarder) for failure to pay freight charges if: 1) the broker consents; 2) the broker does not respond and the surety determines that the claim is valid; or 3) the claim is not resolved in a reasonable period of time and it is reduced to judgment against the broker.

Surety Bond Associates is a market for the new $75,000 Freight Broker / Freight Forwarder Bond. Apply now to avoid the $10,000 fine.

To receive a Quote, complete our Online Application today.

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Financial Planning Guide For Small Contractors To Maximize Bonding Capacity

A contractor’s aggregate bond limit is largely determined by their firm’s working capital, net worth and leverage positions as reflected in their fiscal year end financial statements. The year end statement is a tool primarily used to establish the following year’s bonding program with an interim statement, typically six months from the year end, used to support the same or possibly an increased capacity.

Proper planning is critical. As the end of the year nears, we recommend planning in advance  with your CPA to be sure that the numbers and ratios are strong enough to support the credit that you need.  Keep in mind that your fiscal year end statement will be the basis for your bonding credit for the entire year.  Also, results reflected on this financial statement will follow you for three to five years since banks and bonding companies typically look for three to five years of financial history prior to making a credit decision.  

The aggregate limit is the dollar value of the total work program that a surety feels comfortable supporting a contractor.  This generally includes both bonded and unbonded work.  It is not the accumulation of the contract prices, but rather the evaluation of the costs that need to be incurred from the current date to complete the contracts in progress.  Since the aggregate level is largely determined by a firm’s financial statement, it is critical that these financial statements be as strong as possible.  Generally speaking, surety companies are looking for a balance sheet working capital position (i.e. Current Assets minus Current Liabilities) equal to at least 10% of a contractor’s aggregate limit.

We recommend making that first impression of the financial statement to be a favorable, long lasting one.  Of course, there are a number of issues that need to be addressed in this process:

1) First, tax-planning.

2) Second, the firm’s true financial position.  It is easier to make your firm look good when your firm is truly enjoying a good financial position.  If the firm is on the brink of bankruptcy, very little window dressing will hide this. 

3) Third, full disclosure CPA prepared financial statements including footnotes and supporting schedules are essential.  The percentage of completion method of accounting is always preferred by the surety.   CPA reviews are required for most bond programs over a $500,000 aggregate.

The balance sheet is simply a snapshot of a firm’s financial position at a particular point in time.  Cash could be zero on December 31st and $1,000,000 on January 2nd.  The firm has not changed except that a $1,000,000 account receivable came in.  Still, aesthetically it looks better to have $1,000,000 in cash versus zero.  Of course, if your firm recognizes revenue on the cash basis for tax purposes, tax planning may dictate bringing the cash balance as low as possible.

As long as it is not contrary to tax planning:

  • Cash should be maximized. Cash is king, no doubt about it. Nothing is more important to a bonding company than liquidity. Yes, it is true that when you do this at the end of the year your accounts payable will be higher than if you used your cash to pay them. The working capital number does not change, but cosmetically, its looks better to have more cash.
  • Receivables, especially those over 90 days, should be collected.  Work very hard in the last month or so to collect as much money as possible.
  • Projects should be billed as much as possible.  It is preferable to be overbilled on each project rather than underbilling, especially if your cash balances are very strong. Underbillings often raise concerns about a project’s profitability.
  • Inter-company transactions should be eliminated as of the date of the Financial Statement.  Again, the goal is to keep the balance sheet of the construction company as clean as possible.
  • Loans to shareholders and employees should be cleaned up by the end of the year. The bonding company will not consider these amounts in their analysis.  This could have a serious impact on the credit granted.
  • Bank debt should be reduced as low as possible, preferably to zero.  This implies that you are not too dependant on the bank.
  • Defer ‘all cash’ equipment purchases or purchases that require significant down payments.  Equipment is a “long-term” asset which does not contribute to your working capital calculation.  What is actually reflected on the financial statement is a replacement of a current asset, cash, with a long-term asset, negatively affecting working capital.  Also, whenever possible, consider using long-term financing.
  • Try to keep stockholder distributions to a minimum.  If you are an “S” Corp., try to take distributions only in an amount sufficient enough to cover any tax obligations.  It is your money, but it is important to keep enough in the company to support the credit you need to operate and grow your business.

These ideas are designed to present your company in as favorable a light as possible.  If your goal is to increase your firm’s bonding capacity, then you will probably pay slightly more in income taxes.  Sometimes it comes down to:  Do you want to increase bonding capacity or not pay taxes?  Ultimately it is a business decision that only you can make.  If you are interested in maximizing your bonding program, please give us a call at 610.617.1052 or email us at ellen.neylan@suretybondassociates.com to discuss further.

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Maryland Church Fights Unlicensed Individual Surety Over Bond on Failed Project

The Korean Seventh-day Adventist Church was supposed to be in business in Columbia by now.

The church’s 150 members signed a deal, put money down and watched bulldozers roll. But construction stopped in late 2008 and the congregation never recouped its investment. Thanks in part, church officials say, because a bond that was supposed to insure the project didn’t pay off. The worshippers now borrow a building from a sister church, meeting in the afternoon after the other congregation worships in the morning.

Where prayer fails, sometimes regulation succeeds. The church’s problems are being held out as evidence that the state needs to increase oversight of wealthy individuals guaranteeing small contractors who can’t get backing from licensed corporate surety companies.

These “individual sureties” and their brokers are pushing back, seeking legislation that would allow them to continue to back construction without regulation by the Maryland Insurance Administration.

For more information, click here

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Higher Surety Bond Guarantees will Help Small Businesses Secure Larger Contracts

The U.S. Small Business Administration has made regulatory changes to its Surety Bond Guarantee Program, including higher surety bond guarantee limits up to $10 million that will help construction and service sector firms secure larger contracts for work in areas impacted by disasters.

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