Surety executives reveal how contractors can make the most of the surety relationship. They also speak out on the need for diversity in the industry and why a contractor should share its safety program and results with the surety.
What are the bonding implications as the government promotes joint ventures as a way for small businesses to participate on federal projects?
In a standard joint venture, two or more firms collaborate by sharing risk and pooling resources. The members of the joint venture are jointly and severally obligated to the owner, as are the sureties for the various members. The profits are shared in exchange for the mitigation of each member’s risk. This type of joint venture is a partnership of equals.
The 8(a) mentor-protégé program is a federal initiative that pairs smaller, less experienced firms with larger, more experienced organizations. As with a conventional joint venture, the contractual obligations are guaranteed jointly and severally by the mentor and the protégé. The participation of the mentor provides the financial strength that makes surety credit readily available, while the participation of the protégé enables the mentor to access work for which it might not otherwise be able to compete, while sharing expertise and experience with its partner. While this sort of joint venture is not a partnership of equals, the structure provides a vehicle for both parties to earn profits.
Senior Vice President, Surety
Philadelphia Insurance Companies
Small businesses form the backbone of our great country. Generally, small contractors are led and managed by individuals who know how to build but, due to relatively limited resources, would surely welcome ideas to create and continually manage their ever-changing business plan.
The surety community is in a unique position to share its experiences with business plan components such as plan of organization; revenue, job cost, overhead and cash flow management; project selection; contract and bond form review; financial and operational systems; and appropriately forming relationships with joint venture partners that have alignment of values with small contractors, including a defined and successful mentoring program.
Surety is a relationship business—small contractors could grow with their surety partners, appreciate their input and remain long-term clients. Not only would the small contractor benefit from a financial perspective, but the surety community would receive the intangible benefit of helping small businesses succeed.
Vice President – Surety
Minard-Ames Insurance Services / INSURICA
Now that the bonding industry understands how the various programs for disadvantaged businesses work, it continues to focus on full disclosure to the contracting officers about the arrangements for bonding via a letter from the bonding company. The sureties’ concerns about full disclosure are valid given all the fraud cases we’ve read about concerning contractor teams that violated the disadvantaged business programs’ rules and regulations. Underwriters and sureties want to avoid fines and jail time that have been levied against contractors for improper teaming practices.
The disadvantaged business programs have created opportunities for small contractors and their much larger partners that are required, in many cases, to perform the majority of the work and qualify for all of the bonding. One has to wonder if all parties involved would be better off if the government directed more smaller contracts (ones that disadvantaged contractors can perform and bond on their own) to the small contractors and set aside the big work for medium, large and mega-contractors?
What efforts are being made to increase diversity in the industry?
Chief Operating Officer
Diversity has become a top priority to a surety industry hungry for talent and seeking to look more like its customer base. Since May 2013, when The Surety & Fidelity Association of America (SFAA) hosted its first Diversity Summit, this topic has moved from a human resources issue to a business priority and part of a larger talent strategy.
Our customers expect and deserve smart and agile underwriters, people who can quickly size up situations, identify challenges and opportunities, offer solutions and deliver results. These talents are found in people with an array of backgrounds. Broadening our hiring pool was a critical first step to achieving a more diverse workforce.
Successful underwriting comes from making good decisions, and good decisions require diverse perspectives. We have focused on developing individuals and sponsoring organizations to inject more diversity into our succession pipeline and among our leadership ranks.
In an otherwise competitive industry, diversity may be that single area where cooperation creates better outcomes.
Division President, Surety & CUO, Global Surety
Chair, Board of Directors
The Surety & Fidelity Association of America
Sureties are diligently partnering with agents and brokers on small emerging contractor mentor programs. The sureties, agents and brokers work closely with government agencies to sponsor and approve these qualified mentor contractors for surety credit risk.
The ultimate goal of the mentor programs is to provide these contractors with increased experience operating their businesses, provide leadership and ensure confidence in their ability to successfully complete projects of their job trade.
Like never before, there is greater awareness of the benefits of diversity. With the influence of varied backgrounds and experiences, a diverse workforce can promote innovation and impart a greater appreciation of the customer’s needs.
The concerted effort we’re seeing today underscores the surety industry’s commitment to bring this higher level of expertise to the market.
Managing General Agent, Chief Underwriter
Surety One, Inc.
Recruiting from a diverse pool of job candidates ensures a more qualified team. A diverse team is more effective at marketing to consumers from different cultural and racial backgrounds. It also increases our business’s premium volume, especially where we encounter an underserved population.
All responsible businesses have likely implemented the Equal Employment Opportunity Commission’s most basic anti-discrimination guidelines. This is a good first step to ensuring that diversity is institutionally tolerated. However, a truly diversified workplace requires more proactive measures and a company’s dedication to implementing, following through with and monitoring those practices.
It is shortsighted for an insurance organization not to retain a team that can communicate and create meaningful relationships with varied members of society. The imperative must come from the top down. Insurance organizations must not allow outdated preconceptions and prejudices to throw cold water on efforts to create and maintain a truly diverse workplace.
Partner, Construction Industry Practice Leader
With all the best intentions, federal, state and local agencies continue to set high minority participation goals. However, the reality across the country is that there is a shortage of minority contractors with the financial and technical experience required for many of the larger and more complex projects.
Bond readiness programs have been established for minority contractors, but much more has to be done. A contractor can no longer rely on an agency’s prequalification process; they must independently assess the qualifications and the capabilities of the minority contractor.
All contractors must be extremely vigilant in their contractor selection and oversight process. The prime contractor must assure the minority contractor is meeting “commercially useful function” requirements. Any efforts on the part of the prime contractor to “help” the subcontractor have to be viewed in light of how these actions will be perceived by the enforcement arm of the agency for which the contractor is working.
Vice President – Surety
Freedom Specialty Insurance Company, a Nationwide Insurance® Company
The more diverse we are, the better view we have of the markets we serve. The insights we gain from our associates and various community groups allow us to look at new approaches and offer different services to our customers.
Within the industry, the SFAA has been working with INROADS to recruit a diverse cross-section of students from various colleges, bring them into the organization and provide them with professional development, including training, coaching, résumé writing and interview skills. This brings a spectrum of students into the industry early in their college years and exposes them to the insurance industry as a potential career.
Freedom Specialty is fairly new to the surety market, and diversity in our workplace has set the tone for our operation as it grows. It is important to build a varied associate community to support our ever-changing marketplace. This past summer, we worked with INROADS to hire an intern for our New York office, and we plan to continue to do so in the future.
President & COO
The Guarantee Company of North America USA
We must do a better job of attracting developing and retaining top professional talent who might not be considering surety or insurance as a viable career path. During the last 20 years, the industry has stopped formally training future talent, which was how many of us started in the business.
The failure to bring new talent into the surety business on a widespread basis has resulted in a lack of diversity in the industry. It is encouraging to see the commitment to promoting diversity by SFAA, the National Association of Surety Bond Producers and their member companies. In 2013, SFAA held its first Diversity Summit to reaffirm the industry’s commitment to diversity, and to get participants’ input on a long-range industry diversity plan. SFAA has put together a Diversity & Inclusion Strategy Toolkit for member companies and is planning the second Diversity Summit for May 2015.
It will take time for noticeable change to appear; however, the initial steps are being taken at the individual company level.
How does safety impact bonding?
Chief Underwriting Officer
Liberty Mutual Surety
While surety underwriters may not typically delve into a contractor’s safety program and record in depth, an underwriter is concerned with and does evaluate the overall abilities, results and professionalism of a contractor client. In that sense, safety is important. From a performance perspective, a good safety program means more secure, productive employees and minimal impact to project scheduling.
Financially, there is a lower threat of adverse consequences from the economic impacts of a bodily injury or property damage accident, including potential litigation. Perhaps even more important, a well-planned and executed safety program with a good track record is a reflection of a well-run organization. The implication is that the contractor may be just as methodical and professional in other areas critical to success and of interest to surety underwriters, such as project selection, risk analysis, estimating, subcontractor prequalification, cost accounting and internal controls. A contractor should be proud to share its safety record with the surety.
Chief Underwriting Officer
Employee safety is fundamental to the long-term success of any business, but particularly important to a construction business where jobsite conditions and practices, left unmanaged, can present high risk of injury to employees.
The employee base of a construction company can represent a significant investment by the owner. These employees are an essential asset and generally are critical to the success of the business.
Investing in programs and practices that build a safety culture protects the employees and promotes greater jobsite productivity and job performance. Strong job performance leads to strong overall company performance.
In its evaluation of surety support for a construction company, a surety company considers a number of business factors in its underwriting process. Of all the factors considered, company performance is one of the most important in determining surety support levels.
In what ways do surety professionals provide market intelligence to their contractor and subcontractor clients?
Chief Underwriting Officer Western Region, Construction Services
Surety underwriters can provide actionable market intelligence to their clients in a variety of ways. The ability to do so is enhanced by the metrics the surety can draw upon from its existing client base, which can be used to spot trends over a broad spectrum of contractor sizes and types, as well as diverse geographic areas. This data also can be utilized to benchmark clients against an anonymous sample of other firms doing the same size and type of work, and to provide feedback as to where the contractor may be under- or over-performing.
Surety professionals also can share failures in certain classes of business and ways to mitigate exposure to them, as well as structural shifts in owner relations. Ideally this is combined with having surety personnel in “local” markets who are experienced and knowledgeable about local owners, contractors and economic conditions and can meet regularly with their clients. Additionally, the surety professional should share knowledge based on construction industry topics and issues with techniques and support to mitigate or remove those risks.
Head of Surety
Zurich North America
Well-managed contractors have long realized that working with a strong surety offers strategic advantages in the marketplace. Surety professionals deal with many customers, support projects of all sizes, and can offer their clients insights that often make the difference between success or failure.
Surety professionals can help contractors find work to help fill their backlog. For example, through an existing customer network or professional association, the surety can recommend a strong trade contractor to a general contractor. These recommendations are often a “win-win,” as the general contractor is looking for reputable subcontractors that can complete work successfully. The trade contractor then establishes a working relationship with a strong general contractor that may need its help on other jobs.
Another important area is localized construction industry knowledge. Each jurisdiction presents contractors with challenges in areas such as contract language, demanding owners and onerous bond forms. Surety professionals work with these issues on a daily basis and help their clients avoid unnecessary risk.
Typically, contractors are not experts in surety bonds or insurance coverage, so they turn to their local independent agent to help them find the right surety provider for their business.
Agents who specialize in surety spend a significant amount of time staying on top of key trends, understanding the implications of risks to contractors and their bonding needs, working with their surety carrier partners, and then offering advice to their contractor customers. These agents provide value through their expertise and professional business relationships with their contractor customers.
The best surety carriers offer separate risk mitigation units that work hand in hand with contractors’ agents and even their CPAs to ensure any surety risks are addressed before claims are made. Strong agents and carriers also can work together to help contractors through government and legal affairs.
Together, agents and carriers offer experience and market insight that is critical for helping contractors manage and grow their businesses.
Vice President, Contract Underwriting
Merchants Bonding Company
Construction is simply a risky business. Properly managing the risk on a construction project is critical for the project to be completed successfully. Surety underwriters are trained to evaluate the risks associated with various contractors. Surety underwriters also will determine the appropriate levels of projects and programs that a contractor should undertake.
Surety companies have portfolios of contractor clients that typically range from general contractors to specialty trade subcontractors. The size of these companies also can range from small to large. Surety companies have a tremendous amount of historical data and can use analytics to provide benchmarking for their contractor clients.
Surety underwriters also are trained to review contracts and can help negotiate unfavorable terms and conditions. Surety companies will be able to assist in other ways such as referrals for a certified public accountant or a banker. Contractors will experience a much higher likelihood of success by teaming up with a professional underwriter and surety agent.
President & COO
Old Republic Surety Company
Surety professionals, both agents and company representatives, must keep abreast of the changes in the construction environment in their locality. Oftentimes the surety professional knows as much or more than the contractor does about the local marketplace in terms of projects that will be bid, new public works programs, and new entrants or financially challenged contractors.
Because the agents are closer to the contractors, they are in the best position to communicate market intelligence to the construction community. As company representatives, we have to get out and meet with our contractors and let them know what we are seeing on a local and national basis. Due to the diverse sources of information that we are provided with, our focus is broader and we are in a better position to provide contractors with big picture information that impacts their local businesses. This can be done through newsletters, emails or other written communication; however, the best and most effective method is a face-to-face meeting.
ACSTAR Insurance Company
Sureties are in a good position to provide market intelligence to their contractor clients. For example, if a nationally operating obligee has a penchant for regularly waging inflated delay claims or liquidated damages against contractors completing the obligee’s construction contracts, a surety might warn a contractor of the potential risk. The contractor would then have the benefit of the information when considering entering into a contract with the obligee in its geographic area.
Additionally, a contractor first entering into a new operating area might benefit from a no-cost debriefing from its surety about the peculiarities in the law of the new jurisdiction, which might differ from most other jurisdictions. For example, nothing will be considered outside the four corners of the contract document in one jurisdiction, but others may accept extrinsic evidence to establish the intention of the contracting parties, which might significantly change the ruling in a dispute.
The experience of a surety in such matters could be a valuable resource.
Senior Vice President – Surety
Hudson Insurance Group
When the relationship with the surety professional is built on trust and respect, it gives the contractor an opportunity to flourish when times are good and to survive when times get tough.
Surety professionals have access to data that provides insight into regional and national trends in construction activity, which can be useful for contractors in projecting manpower needs and anticipating adjustments to equipment purchases.
Mitigating risks is another key to a contractor’s survival. Several areas where a surety professional can help a contractor reduce risks are: identifying and modifying onerous contract terms such as unreasonable indemnity clauses, excessive warranty periods or high liquidated damages; identifying owners that may be more difficult to work for due to stringent demands and slow cash flow; and providing local market knowledge and identifying risks in new territories that a contractor may be interested in expanding into.
Successful contractors incorporate the knowledge and expertise of their surety professionals in the development and execution of their strategic plans.
Senior Vice President
HUB International Insurance Services of Albuquerque, NM
National Association of Surety Bond Producers
Professional bond producers are in the unique position of having a wide variety of market intelligence that is specific to their own geographic area. Knowledge of owners, competition, local conditions and many other variables that come into play on each job is extremely valuable. Their prior experiences with many contractors and various projects give them a unique perspective and enable good producers to be valuable advisors to contractors.
The relationships that professional bond producers enjoy with banking, accounting and legal professionals are an added benefit to clients. Equally important are the relationships that only true bond producers have with the underwriting community and their ability to match clients with the best surety partners to help them succeed.
No other professional has the wide range of experience that is specific to the local area while understanding the broader picture necessary to advise a contractor wisely.
The Graham Company
In the surety industry, we are privy to classified financial information—often for competing contractors and subcontractors—that we cannot divulge. However, surety professionals can still speak in generalities about the financial state of the subcontractor pool and surety marketplace, which can prove helpful to many contractors.
Surety professionals can, and should, provide information on:
- financial benchmarking in comparison to other similar contractors;
- the state of the surety marketplace (e.g., which sureties are aggressive and which sureties might have loss activity that is making them extra conservative);
- the building sectors that currently offer the greatest opportunity;
- insurance trends, such as the rise of contractor controlled insurance programs and the development of billing rates for personnel that are considered reimbursable;
- joint venture strategies; and
- potentially troubled owners that may be unreasonable or unscrupulous and could harm the financial welfare of a client.
American Global, LLC
Surety professionals are often looked at by their clients as business advisors. Contractors today operate in a business environment with increased competition, increased complexity and compressed margins. While it is critical to maintain the confidentiality of proprietary client information, surety professionals have benchmarking information and perspective on macro industry trends that can be very helpful to their clients.
Strong market intelligence on critical topics such as changes in procurement models, general contractor and subcontractor profitability trends, as well as positive and negative owner trends, can add significant value to their clients. This guidance can influence how contractors penetrate new markets or evolve their operational strategies.
In today’s increasingly competitive business environment, contractors should expect their surety professionals to possess market intelligence that can be meaningful to how they run their business.