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53 Cards in this Set
- Front
- Back
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describe the 3 c's of credit appraisals and outline factors considered for each |
character - this involves studying company's management performance capacity - this involves reviewing company's past job performance capital - this involves reviewing company's financial ability to finish work on hand as well as job for which bonding was requested |
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how are surety companies similar to banks |
sureties are similar to banks because they are being asked to lend credit |
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define the 3 parties of surety agreements |
surety - organization who undertakes to pay money or do any other act in the event his principal fails obligee - the party whom someone else is obligated to under contract principal - organization or person primary liable |
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what are 3 characteristics of the promise made by sureties |
- promise made to obligee not principal -secondary obligation occuring when principal defaults -obligation of surety to obligee happens as soon as principal defaults |
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explain the following characteristics of surety bonds : no losses expected |
surety companies based on fees on belief that they will not incur any losses when principal does default surety believes they have adequate back up positions to cover guarantee to obligee |
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explain the following characteristics of surety bonds : indeterminate length and non cancelable |
surety bonds cannot be cancelled y surety company once issued surety bonds stay in effect as long as principal has not completed their obligations |
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explain the following characteristics of surety bonds : bond limit or penalty |
this indicated amount of guarantee surety is providing to obligee |
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explain the following characteristics of surety bonds : bond premium |
this indicates amount surety charges principal for bonds issued on their behalf premium is not an accurate term for surety bonds because they do not expect losses |
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explain the following characteristics of surety bonds : written contract |
surety bonds must be written and signed, under seal by both surety and principal |
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what are 5 examples of differences between surety contracts and insurance contracts |
-surety contracts are 3 party agreements, insurance contracts are 2 party -sureties do not expect losses, insurers do expect losses -principals must pay sureties back when they default, insureds do not pay insurers back when claims are made -sureties charge fees. insurers charge premiums -surety contract must be written, insurance coverage may be provided orally |
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state 4 types of bonds common in the construction industry
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-bid bonds
-performance bonds -labour and material payment bonds -maintenance bonds |
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provide 3 examples of risks faced by owners of construction companies |
-low bidder does not sign construction contract -contract does not complete job at agreed price or fails during job -contract does not pay subcontractors or material suppliers |
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identify 4 considerations of general contractors when determining whether or not to request bonding from sub contractors |
-contract with project owner may require subcontractors to be bonded - contractor may be long term relationship or have no relationship with subcontractors -size of subcontract may influence contractor to request subcontractor to be bonded -large differences in low bidding subcontractor may worry contractor resulting in request to subcontractor to provide bonds |
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what are 3 methods of deposit available to contractors when bidding on a new job |
-bid bonds -certifies cheques -suretys consent |
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what 2 things owners are assured when deposits from contractors take the form of bid bonds |
-principal was investigated by surety and therefore pre-qualified -because of significant penalties of default, principal bid is in good faith |
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what are 2 guarantees owners receive when deposits take the form of bid bonds |
-principal will sign construction contract at agreed price -principal will be able to provide follow up surety bonds for projects |
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what is consent of surety |
this is a letter written by surety and signed under their seal indicating principal will be provided follow up bonding on project |
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what are 3 disadvantages of certified cheque |
-amounts equal to certified cheque are frozen thereby limiting contractors cash flow - when certified cheques are used it is assumed contractor cannot qualify for bid bonds, therefore unable to provide follow up bonding for project - bid bonds are only valid for 60 days after tendering deadline. this time limit does not apply to certified cheques |
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why would contractors default on bid bonds |
-error in judgement on project scope - mistake in arithmetic on project pricing |
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what are 2 expenses sureties may incur when contractors default on bid bonds |
-pay any re-tendering costs and delay costs to project owner -pay any difference in bi from subsequent contractor and defaulting contractors bid |
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what are 2 guarantees provided by performance bonds |
-principal will perform contract within conditions and terms of contract -principal will provide maintenance on work for 1 year after completion |
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what limit is usually requested on performance bonds |
50% of tendered price is usual limit on performance bonds |
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can changes to the bonded project be made, and if so to what extent |
changes are allowed to projects once underway. sureties will only extend guarantees to project increases up to 10% of tendered price increases above 10% must be approved by surety |
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what are 2 types of defaults under performance bonds |
-voluntary default -involuntary default |
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give 4 examples of involuntary default |
-bankruptcy -lack of technical ability to perform contract -lack of additional credit needed to maintain accounts payable -delays in construction |
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what are 2 examples of voluntary default |
-large errors made in project costs -lack of current assets to pay current liabilities |
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what 2 actions could sureties take when contractors default under a performance bond |
-finance defaulting contractor to allow completion of project -collect bids from other contractor for project completion and present to obligee |
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describe the guarantee provided by a labour and material payment bond |
surety guarantees that principal will pay all subtrades and material suppliers |
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what are 3 business benefits of labour and material payment bonds |
-construction costs are lower -access to labour and materials is faster -credit not needed for this project can be used in other projects |
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when could a maintenance bond be required |
obligees will request maintenance bonds when one year maintenance period provided by performance bond is inadequate |
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describe guarantees of maintenance bonds |
maintenance bonds guarantee that principal will come back and repair flaws in job for term of maintenance bond |
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what are 3 concerns of sureties that make issuing a maintenance bond difficult |
-when long maintenance periods are provided more flaws will become apparent -with long maintenance periods parties responsible for flaws becomes more difficult courts are demanding higher and higher standards from contractors |
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outline information sureties require in the following area: financial strength of owners |
personal financial statements of all shareholders will be requested |
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outline information sureties require in the following area: corporate structure |
corporation, individual or partnership of principal will be identified |
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outline information sureties require in the following area: key personnel resumes |
skills education and experience of senior employees should be described |
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outline information sureties require in the following area: banking information |
bank letter of reference will be required indicating size of line of credit, repayment history and overall banking experience |
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outline information sureties require in the following area: accounting information |
financial statements from past 3 - 5 years will be required |
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outline information sureties require in the following area: completed work record |
5 year history of previous projects including all contact information will be required |
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outline information sureties require in the following area: work in progress report |
financial status and list of work currently underway will be required |
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what are 3 items in financial statements important to surety underwritters |
-working capital -net worth -profitability |
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describe 3 factors which affect working capital |
-labour and material ratio will affect working capital. labour must be paid regularly however material suppliers often will wait or payment up to 30 or 60 days into future this means the higher the labour component of projects the poorer the working capital of principal -subcontractor work will affect working capital because subcontractors often will not be paid until general contractor is paid by project owner -customer paying habits will affect working capital because general contractors may have paid project expenses prior to payment from project owner |
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describe how net worth is calculated |
assets - liabilities |
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describe 2 methods used to report income on contractors financial statements and identify which is most desirable to surety underwriters |
-completed contract method reports income or loss on projects only when completed. this may distort year end financial statements because work underway will not be reflected -percentage of completion method reports income or loss on projects as a percentage of completion. this allows for a true reporting of financial condition of contractor at their financial year end |
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when issuing bond limits to contractors what 2 limits will be provided |
-per job limit -work in progress limit |
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describe 3 types of guarantees contractors provide sureties |
-indemnity agreements are when shareholders pledge personnel assets in event of default -third party indemnities are guarantees provided by individuals or other corporations on behalf of principal collateral security is cash or letters of credit |
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once bonding limits have been established surety underwriters will review each request for bonding what are 4 factors considered in this process |
-type of work involved in contract -location of project in relation to contractors usual work area -size of job and amount of bonding requested -contract completion date considered in conjunction with work in progress |
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describe an example of guarantees provided by license and permit bonds |
compliance guarantee bonds guarantee principal will abide by laws affecting their business |
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what is the guarantee provided by administration and executors bonds |
this bond guarantees that principal will perform responsibly in compliance with law of deceased persons estate |
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what are 3 responsibilities of administrators and executors |
-collecting assets and protecting them from loss -pay all debts incurred by deceased -provide court with all accounting record of necessary transactions |
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describe guardian |
this is someone who is charged in a will to look after affairs of minors and is approved by courts |
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what guarantee is provided by trustee in bankruptcy bonds |
this bond guarantees that trustee will execute duties in compliance with bankruptcy act |
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describe the guarantee provided by custom and excise bonds |
this bond guarantees that principal will pay taxes collected on behalf of government are paid to government
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describe why injunction bonds are needed and what they guarantee |
these bonds are needed to guarantee payment of court costs and delay expenses to land owner when injunctions affect their property |
