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Contractor Tools
San Francisco Edition
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Now that Spring has started, we anxiously anticipate many new opportunities to work with local contractors and assist them in gaining access to surety bonding. Our mission and dedication to facilitating this important facet of contracting with the City and County of San Francisco is but one component in building a strong, viable contracting community that is inclusive of local contractors from a wide spectrum of sophistication, disciplines and social backgrounds. We have enhanced our scope of work by adding
Contractor Development services. We are excited about a host of events, informative seminars, intensive one-on-one consultation and educational opportunities designed to broaden participating contractors' knowledge base and expand their access to available resources.
In This Issue...
In this issue, you will learn about Why Contractor Safety is good for business, an update of AJS Painting & Decorating, information about Accounting for Success, and the Basics and Benefits of Bonding. Finally, we were privileged to have the opportunity to interview Geoffrey W. Neumayr, SE Deputy Airport Director Design & Construction of San Francisco International Airport regarding Change Orders at the Airport.
We look forward to hearing from you and working with you in the future.
Kindly,
City & County of San Francisco Surety Bond & Finance Team
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Smart, Safe, Successful - Why Contractor Safety is Good for Business
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Spotlight: An Interview with Kent Smith, Senior Safety Manager, Merriwether & Williams Insurance Services, Inc.
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Kent Smith, Senior Safety Manager at Merriwether & Williams Insurance Services, Inc., has extensive knowledge about the importance of safety. Kent started his safety-related career as a paramedic in the 90's, moved into child and senior care safety, conducted health inspections in the military and then was asked to oversee large-scale construction safety for the military in Kuwait. Currently, Kent oversees project safety as consultant to the risk management department for the City and County of San Francisco, focusing on the San Francisco International Airport. As his schedule permits, he also facilitates OSHA certification workshops throughout the State to help contractors get certified in work-related safety procedures. Kent took some time to share with Contractor Tools why Contractor Safety is a vitally important but too often an overlooked aspect of operating a business.
Contractor Tools:
Kent, can you give a little more detail about what it is you do to oversee project safety - what does that involve?
Kent Smith: At the beginning of a project, I sit down with the project owners and the contractor(s) to determine what the potential on-site risks are, so that we can plan ahead. At the San Francisco International Airport, we're often talking about very large and complex projects. Right now, for example, we'll be starting a project that has over 1,000 people working on-site. I ask questions and look for documentation that the contractors involved have written procedures in place to address safety issues specific to each project. Then, once the project is under way, I visit the site regularly to make sure that those safety procedures are being followed. If I see something going on that looks like a potential hazard, I work with the contractors and project owners to resolve the issue immediately, so that we minimize the risk of anyone getting hurt.
CT: What should every contractor know about safety?
KS: Making safety a priority is good for business in many ways. Project owners and prime contractors notice when a job site is clean, work is being performed in a safe and professional manner and workers have been trained and are being supervised to follow standard safety procedures. For sub-contractors, this means a higher likelihood of getting repeat business and referrals for new business. Contractor safety also saves money in the long-run, because a better-than-average safety record will qualify your company for lower insurance rates and you'll also avoid the expense of lost time, work and other potential costs resulting from work injuries. Also, when workers feel that you genuinely care about their health and well-being, they tend to be more loyal and perform better, which results in lower turnover and higher quality work. Even if you're a one-person operation, you can start by taking free OSHA workshops to learn basic construction safety practices - getting OSHA certified in the types of construction work that you're currently doing and that you want to get into is the first step.
CT: What are the top causes of job site accidents and how can contractors avoid them?
KS: The top causes of job site accidents are not actually creating and implementing project-specific safety plans, but trying to cut corners, and not having someone who is trained in safety on-site to effectively supervise workers. Don't use a generic safety plan for every project - there are different types of hazards and procedures depending on the project, so make sure you have a plan that is site-specific and project-specific. Make sure that your project supervisors are properly trained in safety and are actively part of creating your safety plan. Don't take short cuts - keep your job sites organized and clean and make sure that your workers have complete instructions before starting a job. If a work site is disorganized and messy, there's a higher likelihood of someone getting hurt. If workers are not being instructed and supervised by someone who knows how the work should be done, that's also going to increase the potential for injuries. With a little planning, forward-thinking and clear communication, you can avoid job site accidents.
CT: How can contractors fulfill their obligations under OSHA or the rules of civil liability / tort law?
KS: Contractors that don't make the effort to do things right and don't treat their employees well are the ones that fail. Too often, contractors will say that they have safety plans but have put no effort into customizing their plans to address the specific hazards of the projects they are working on and in the long run, that is not going to fly. You can't just have an employee download generic safety procedures from the internet and think that's going to be good enough - there is no such thing as a "catch-all" safety plan.
From a company standpoint, safety has to become part of the culture by involving the employees in developing the safety standards specific to the work that they do. First, get OSHA certified for the types of work you do and make sure that your supervisors are trained as well. Second, if you are starting out with a generic safety template, before you start on any new project, sit down with your superintendent and some of the workers who will actually be on site to determine what the potential hazards are and how to address those - what tools and equipment are workers going to be using? Who should they call about utilities? When your team includes people who know the site layout and the work to be done, then it doesn't take a lot of time to customize a safety plan for each project.
Then, take the time to get to know and build rapport with your workers, so that they feel like valued members of your team. If they know that you care about them and want things done right to help protect them, they are more willing to cooperate with supervisors and follow procedures. If workers trust you, then they are also more likely to tell you if they almost got hurt doing something - learning about those "close calls" gives you a chance to address and minimize potential risks. If a worker does get injured, follow up with that worker. Care about your workers and treat them well.
CT: What steps do you recommend contractors take to improve their safety record?
KS: First, if you already have a bad safety record, don't try to hide it by changing the name of your company or changing the owner on record - that will not work because we have databases that track all of that information and you won't fool anyone. The only way to improve your safety record is to educate yourself on safety regulations, get help in learning how to comply with them, and then make safety management, compliance and enforcement a priority. As a business owner, this means that you and your on-site supervisors need to be OSHA trained. OSHA offers free guidance, resources, and construction safety workshops - so take advantage of all of these. Cal-OSHA also has a very helpful website and a knowledgeable construction safety consulting branch which offers free consulting, so I have often contacted them for advice. If you're not sure about how to do something safely on a project site, you can even call or email them anonymously and ask questions and they will help you. If you want them to, the OSHA Consulting Department - which is separate from enforcement - will come out to your construction site for free to consult with you on safety issues - their only requirement is that if they find something wrong, you agree to correct it, and they will help you out with that. Cal-OSHA's staff is extremely experienced and can help you develop and implement a good safety plan. They field questions on all sorts of construction safety issues, from how fast dirt-movers can legally drive when there are pedestrians around to how to safely secure various types of scaffolding - you name it, they will help you with it. Also, Municipalities often have programs to assist local small businesses and contractors, so contact them to see what resources they offer. I often get calls or texts from contractors asking for advice on job safety and I am always happy to help, so contact me.
CT: Is there any other important information for contractors to know about safety?
KS: The most successful contractors are those who make safety a priority. The businesses that think that they don't have to make safety a priority - or those that just go through the motions without really putting safety measures into every day practice - they don't last long.
For information on Merriwether & Williams Insurance Services' OSHA-related workshops contact Kent Smith at 415-986-3999.
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About the Contractor Assistance Center
San Francisco is poised to invest billions of dollars into the City's aging public infrastructure - water, sewer, roads, and transit systems. Local and small businesses will need tools and resources to adequately get access to, compete for, and perform on these contracting opportunities
In the Center,
professional service firms, construction companies, vendors, and suppliers now have a unique and free resource that supports the City's economic vitality and strengthens its neighborhoods, commercial corridors, and the San Francisco workforce.
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Free Workshop
Join Us at Our Monthly Bonding 101 Workshop
Each Month we hold a Bonding 101 Seminar on the 3rd Wednesday of every month!
Join us
April 20, 2016
10:00am - Noon
Location
Contract Monitoring Division
(CMD)
30 Van Ness Avenue, 2nd Floor, Suite 200, San Francisco, CA 94102
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The Surety Bond Program is looking forward to planning and offering seminars on the following topics:
- Accounting 101
- Estimating
- Safety
And with the Office of Labor Standard Enforcement:
- How to Read a Prevailing Wage Determination
- Determining the Correct Craft and Classification
- How to Use Elation - The City's Web-Based Reporting System
Please let us know of other seminars that you would like to see by contacting us directly at [email protected]
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Understanding Change Orders
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Spotlight: An Interview with Geoffrey W. Neumayr, SE Deputy Airport Director Design & Construction, San Francisco International Airport
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The San Francisco International Airport is a major contributor to Northern California's economy, providing direct and indirect work for thousands of contractors, vendors and suppliers of goods and services. With a constant need for maintenance, updating and expansion, airport projects are always under way and of course, sometimes these projects require some revision due to changes in scope or unforeseen circumstances. To learn more about working with the San Francisco International Airport and how contractors can best handle change orders to minimize any negative impact on project completion, Contractor Tools spoke with Deputy Airport Director Geoffrey Neumayr, who oversees the airport's design and construction projects.
Contractor Tools:
Geoff, please tell us about yourself and your work at the San Francisco International Airport.
Geoffrey W. Neumayr: I received my degree in Architectural Engineering from Cal Poly, San Luis Obispo in 1984. Out of school, I joined the Watry Design Group where I was a Project Manager until 1996. I then joined The Allen Group, LLC where I became the Vice President of Operations and got involved in many projects around the Bay Area, including the San Francisco International Airport. In 2011, I joined the San Francisco International Airport as an Associate Deputy Airport Director of Design & Construction, and in 2014, accepted the role as the Deputy Airport Director of Design & Construction. I am very fortunate to be able to work with a tremendous team here at the Airport.
CT:
How is your Department working with Local Business Enterprises (LBEs) at the San Francisco International Airport?
GN: It's always been a part of the San Francisco International Airport's culture to include and tap into the wisdom and talent of our local community. We believe that the airport belongs to everyone and that when we work inclusively, we can build and operate the airport in a manner that is good for the airport, for our community, and for the local economy. So, we have a long history of working with local small businesses and contractors, including them in our projects, and doing our best to consistently surpass our established inclusion requirements.
CT:
The San Francisco International Airport has a variety of programs listed on your website specifically encouraging the participation of a range of local, small businesses and contractors, so it's clear that you are very much engaged in collaborating with LBEs. Let's focus now on a topic that can be intimidating for contractors - can you tell us what a change order is and what types of change orders are proposed at the San Francisco International Airport?
GN: A change order is a formal request to make an addition or change to the work described in the approved project contract documents. Change orders can be required for a variety of reasons: sometimes, they result from unforeseen circumstances - such as discovering a condition that no one was aware of and which needs remediation before work can continue; sometimes they are due to other factors that are noticed by the contractor while performing the work; sometimes they result from additions or changes to the scope that are requested by the project owners; sometimes they are due to errors and omissions in the planning process or design. The San Francisco International Airport has taken great care to reduce changes that are the result of bad planning and faulty design. We have minimized these by involving all the stakeholders - including builders and contractors - from the beginning and creating a team approach to the planning process and to solving problems. We've also made it much easier for contractors to submit change orders.
CT:
How are change orders proposed at San Francisco International Airport?
GN: Change orders can be proposed by either the Airport or the contractor. If the Airport makes a scope change to the project, those types of changes are usually initiated by the Airport. In many cases, the contractor identifies an unforeseen condition, or initiates a response to a Request for Information that generates a change in the contract. In those cases, the contractor is requested to submit a Request for Change to the Airport to start the process. When a potential change to the contract is identified, it is important that the contractor or subcontractor bring it up immediately verbally and then as quickly as possible, submit the request in writing. This allows the change order process to be started, and might even allow the Airport to eliminate the need for implementation of the change, if modified directions can be provided.
CT:
What language in the contract should contractors review regarding the change order process?
GN: The Contract Modification Section of the contract will outline the requirements for presenting the proposed changes, so be sure to review that carefully. When a change order is submitted in the proper format, in a clear and organized manner which is easy to understand, then it much more likely to get reviewed and approved in a timely manner. We need a break down of changes to labor, materials, equipment, any special expenses, and the costs for each. There is even a "Partial Change" process that helps get initial pricing approved, up to an amount not to be exceeded, so that work on the project can continue or resume as quickly as possible. This also allows the contractor to be paid for completed change order work before the reconciliation of costs is finalized. Read the contract and clarify with us anything you don't understand, so you are already familiar and comfortable with the change order process. Then, if it becomes necessary to submit a change order, we can work together to make it go as smoothly as possible. The Airport staff is here to help. Submitting costs as outlined in the contract specification is extremely helpful because it is easily understood by all parties. The biggest challenge in reconciling the cost of a change is understanding what the costs represents relative to the scope.
CT:
What are the steps a contractor must take to initiate a proposed change order?
GN: First, immediately verbally inform the Prime Contractor. Follow up to make sure the Prime Contractor has notified the Airport of your request for change. Feel free to contact the Airport's Project Manager about any hiccups you encounter along the way. Again, we are here to assist in the process and want to help. If communication is clear and issues are brought up right when they are discovered, it's a lot easier to resolve them together. Second, as quickly as possible, submit your change order in writing, clearly outlining the reasons for and breaking down the costs for requested changes to labor, materials, equipment, and any special expenses.
CT:
What are the biggest hurdles contractors face when trying to get change orders approved?
GN: Nine times out of ten, hurdles are caused by a lack of timely communication or by not communicating clearly. Misunderstandings around the scope of the work result in delays. If a contractor doesn't inform us promptly when an issue is discovered or if a change order submission is disorganized and difficult to understand, then there will be delays as we try to gain clarity about what needs to be addressed, what changes are being proposed and the related costs. The faster we learn about a problem and the more clearly the requested changes are communicated to us, the more quickly we can get a change order approved.
CT:
What are some best practice for a contractor to expedite the change order process at the San Francisco International Airport?
GN: Speak up as soon as you notice something, then use the proper format to explain in writing what changes this will involve in terms of labor, materials, equipment, any special expenses, and what the cost break-down is for each of these. For example, let's say a contractor is starting to lay out flooring and discovers that there is a dimensional error in the architectural drawing that will create a problem installing the flooring - that is the time to bring it up. Don't keep quiet about it and don't try to figure it out all on your own - bring it up and we will work with you to resolve it. If you know something is going to have an additional cost, bring it up as soon as possible. Sometimes the contractor will have a great idea for how to address a problem and by working together, we can come up with a good solution, but we still have to get the changes approved. We have specifications in terms of how change orders need to be written and submitted so that - regardless of the type of project - the information is presented to us in a consistent format that is easy for us to review. If you use that format to help us understand what needs to be done, then we can get the change order approved more quickly.
CT:
Is there any other information important for contractors to know about change orders or working at the San Francisco International Airport?
GN: The San Francisco International Airport really cares about building relationships based on trust and fairness. Our approach is to do our best to understand what can get in the way of someone completing a project and to help resolve whatever issues come up in as efficient and timely a manner possible. We don't get offended when contractors bring up issues - when you communicate early and clearly with us, we can help ensure that the project continues with minimal interruption, the outcome works for all parties, and that everyone gets paid in a timely manner for work related to change orders.
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Contractor Profile Follow Up
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Spotlight: Alfonso Rhodes, Owner, AJS Painting & Decorating
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Alfonso Rhodes is the owner of AJS Painting & Decorating, which provides exterior and interior painting, custom interior decorating, design and remodeling services to both residential and commercial clients throughout the San Francisco Bay Area. Alfonso originally started out in 1985, getting into the trade as a painter on other contractors' projects, but he grew weary of the inconsistent work. Although he felt unsure of himself at times, he was determined to go into business for himself and he founded his painting company back in 2001.
With encouragement from program staff members, Alfonso eventually enrolled in the San Francisco Surety Bond Program. Contractors Tools first spoke with Alfonso back in August 2012, about five months after his company had received its first bond. We decided to follow up with Alfonso to see how his company has fared since, what he's learned along the way, and to have him share some business best practices based on his 30 plus years of experience in the industry.
Contractor Tools: Alfonso, what has changed for AJS Painting since 2012, when you received your first bond through the San Francisco Surety Bond Program and successfully completed that project?
Alfonso Rhodes: The company got another bond and has been taking on projects that we could not have gotten before, without the bonding. We have also qualified as a prime contractor, which means we can now hire subcontractors, when before we were the subcontractor. The company's good reputation has grown to the point that all the "big boys" - the other prime contractors - know and respect me.
CT: Are there any lessons you learned from successfully completing your first bonded project?
AR: Once you take the time to get your business organized and get things done right, it's just maintaining it after that, which is easier. The Surety Bond Program staff told me I could get bonded, encouraged me and helped me a lot. Once I got bonded, it really did open the door to more opportunities. By getting bonded and successfully completing that first project, I learned a lot about running a business that I didn't know before. I proved to myself and others that I could do a great job on a larger-scale project, which made me feel more confident. Now I know I can take on bigger jobs.
CT:In May 2014, AJS Painting received and is successfully completing the second bonded project. Is obtaining bonding easier with each project?
AR: Getting bonding gets easier each time. Once I sharpened my business skills and got my financials professionally organized, it's been easier to keep doing things the right way, so I am already prepared. I got disciplined and focused, learned how to budget and how to understand contracts, so I know a lot more about how to successfully run a business. Now, instead of having to put so much time and effort into just finding enough work, I can focus more on the business itself and quality control.
CT : Have you made any changes to the company due to AJS Painting obtaining bonding?
AR: We've taken on bigger projects and I have hired more people. When I started out, it was just me and maybe one other person. Now, I have 7 or more people working regularly for me. Because I am now a prime contractor myself, I am helping to mentor other contractors who are starting out where I used to be. I am now part of changing other people's lives in a positive way and helping other contractors learn how to provide quality. It feels really good.
CT : What recommendations would you make for contractors attempting to obtain their first bond?
AR: Be realistic about what you can handle. Get an evaluation and help from a bonding assistance program. Start small and take on jobs that you know you can do well, so that you build your reputation. When I started out, I didn't realize how important getting bonding would be, but it is. Going through the program really helped me a lot.
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Accounting for Success - How being Financially Organized can help you Succeed
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Spotlight: An Interview with Terry Chong, owner of Focus-Grow Bookkeeping.
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An Accounting graduate of Golden Gate University, Terry Chong spent 7 years with a small local C.P.A. firm before starting out on her own. She honed her skills working as a controller for a general contractor, where she learned about the unique and often complex accounting methods specific to the construction industry. Now, as the owner of Focus-Grow Bookkeeping, Terry specializes in construction-specific accounting and took the time to share with Contractor Tools some key reasons why becoming and staying financially organized can greatly contribute to a contractor's business success.
Contractor Tools: Terry, would you tell us what your company does?
Terry Chong: We are degreed accountants providing bookkeeping services to small business owners in the San Francisco area. Our niche is contractors and architects and we normally work on-site as our clients' in-house accountants. We help educate our clients about and all financial matters, including Accounts Receivable (creating invoices and billing clients for work done and products delivered, tracking past-due amounts, processing payments), Accounts Payable (paying vendors on time while managing cash flow), Payroll (issuing payments, making tax deposits and filing tax returns), Job Costing (capturing all income and expenses by job), Bank and Credit Card Reconciliation, and creating monthly financial reports that accurately show how the business is doing. We are specialists in construction-specific accounting.
CT: How does construction accounting differ from other methods of accounting?
TC: Construction accounting requires an in-depth understanding of project-specific accounts and accounting methods. For example, some construction projects can span multiple years and involve a variety of suppliers of materials and labor, in which case the percentage-of-completion accounting method can be most beneficial to use. An accountant who really understands construction accounting will look at each project and determine the best type of accounting method to use, so that your income most closely matches up with your expenses in your business financial reports. This is very important because government agencies, banks, creditors, and insurers are much happier to work with you and will often go out of their way to help you when your business financial reports are well-organized, accurate and easy to understand.
CT: Tell us more about construction-specific accounting. For example, what is a "chart of accounts," how do you set one up, and why is it important?
TC: A "chart of accounts" is basically a list of all the different types of accounts in use for your business. These can include checking and savings accounts, vendors and suppliers, employees and subcontractors, equipment, and so on. Typically, your accountant will set this up in a software program like QuickBooks, after a thorough review of all of your business financial documents - such as bank and credit card statements, receipts and invoices from suppliers, outgoing invoices to clients, payroll and tax expenses, and more. In general terms, these accounts will be divided into five major categories or types: assets, liabilities, equity, income and expenses. Once these are set up, your accountant or a trained employee can regularly enter and keep track of money coming in or going out of your business through these accounts and this is important because you must track that information in order to create a Balance Sheet and Profit and Loss Statement. A Balance Sheet and Profit and Loss Statement are required for everything from getting bonded and insured, to correctly filing your business and payroll taxes, to getting approved for a business line of credit. They are also crucial tools for you to know how well your business is doing - if you can't keep track of who owes you how much, what amounts you owe others, and how those balance out, you won't be able to make informed business decisions and you won't stay in business long.
CT: Are there specialized charts of accounts for construction?
TC: Yes, in construction, there are several specialized charts of accounts which we use to track and compare income and expenses from a few different angles. Some of these are:
"Costs & Profit in Excess of Billing," which we use to make sure that your costs are being covered through your billing, so that you are not spending more than you are bringing in.
"Billing in Excess of Costs & Profit," is used to make sure that you are not accidentally over-billing, which can look like a major liability on a Balance Sheet.
"Income - Percentage-of-Completion Adjustment," which we use to accurately show your business income on projects that are not yet fully completed or paid in full, which is helpful when creating a Profit and Loss Statement.
"Accounts Receivable Retainage," used to track amounts that are being retained by your clients to ensure project completion but that should not be showing as past due because they will be paid.
"Accounts Payable Retainage," which we use to track amounts that are being retained by you to ensure completion or receipt but that should not be considered overdue because they will be paid.
CT: Those are some very specialized ways of tracking income and expenses that are specific to construction projects. How is this kind of construction accounting important and what else is important when it comes to bookkeeping for contractors?
TC: Good accounting practices are crucial to generating accurate reports, so the key is that the more we can accurately label and track business-related income and expenses, the easier it is to drill down to gain insight on important business information, so that you can tell at a glance, for example, whether you are charging enough to cover all your costs. Contractors can always benefit from good job costing, and for that, you need to accurately keep track of how much your business spends on equipment and materials, insurance, labor, taxes, workers' comp and union benefits. The only efficient and effective way of having this information at your fingertips is to get professional assistance in setting up the software to regularly enter and track that information.
CT: Definitely, getting expert help to set up your business accounting systems and to create professional financial statements makes sense for any business owner, and for small businesses and contractors, many local programs offer referrals and even financial subsidies to help them get that level of individualized assistance. Are there also any industry best practices to keep your business accounting within compliance?
TC: To maintain compliance, it's best to hire a professional with experience in construction accounting. Hiring experienced accountants doesn't have to be expensive - for example, because we are small and work mainly at our clients' locations, our rates are very reasonable. However, if you have serious financial constraints, you can start with hiring an accounting student who is being supported and supervised by an experienced accounting professional. The main thing is to have your bookkeeping system set up properly from the start. Keep your personal and business expenses separate - you should have separate bank and credit card accounts for your business and only use them for business income and expenses. Once your bookkeeping system is set up, then make sure your records stay up-to-date - this means having your accountant or a trained employee process and enter new information on a weekly or bi-weekly basis (do payroll, pay bills, send out invoices, reconcile statements). Pay any liabilities, especially to the government, in a timely manner to avoid penalties. Because of our expertise and efficiency, having a professional accountant set up and maintain your business financials for you will save you time, which will allow you to focus on what you do best - building your business.
CT: So, as an accountant, you might be considered a "Numbers Whisperer." Is there any other information that is important for contractors to know about bookkeeping?
TC: Yes, accounting is very intuitive for me - I can usually tell how well or how poorly a business is doing financially within minutes of looking over their statements, because certain things immediately stand out to me. It's important to understand that, regardless of size, every business has 3 areas of focus: operations, marketing and financial. Some small businesses and contractors make the mistake of only paying attention to operations and marketing, but they also must have healthy, organized financial systems and records in place in order to be successful. Once you have your bookkeeping systems set up, it doesn't take a lot of time or expenses to keep your records updated, as long as you have it done regularly - it's a lot harder and more expensive to clean things up if they haven't been set up correctly in the first place or if they get messed up or your business gets way behind in terms of processing and entry. Hiring an accountant will make a huge difference in your ability to get bonded and to secure public agency work, so it's money well spent. Without good financial records, you can't know what you are doing.
To set up a consultation with Terry Chong for your small business, visit http://www.focus-grow.com or contact Terry at
[email protected]
. Or contract Merriwether & Williams for more information at 415-986-3999.
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The Basics and Benefits of Contractor Bonding: 1 of a 2-Part Conversation
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Spotlight: An Interview with
Greg McCartney of James E. McGovern, Inc.
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In Part 1 of this series, The Basics and Benefits of Contractor Bonding, we explore what bonding is and how contractors can benefit from obtaining bonding. In Part 2, Obtaining Bonding and Avoiding Claims, we will cover how to obtain or increase bonding and avoid bond claims.
For many small contractors, "bonding" can seem confusing or even intimidating, but it doesn't need to be. Basically, a bond is a promise issued by a surety company that guarantees that the owners of a construction project will be compensated for specific types of loss if the contractor who was awarded the construction contract fails to fulfill the obligations of that contract. There are different types of bonds to cover different potential losses.
Securing "bonding" or being "bonded" means that a contractor has been approved up to a specific limit of coverage by a bonding company, which then opens the door to be able to bid on profitable public sector work which would not otherwise be available. In other words, if you are bonded, you can bid on a greater variety of projects than if you are not bonded - which for many contractors, can be the difference between struggling to stay in business and actually being able to consistently grow their business.
By law, government and public agencies require that the contractors to whom they award contracts be bonded. Bonding helps to make sure that the project gets completed per the contract specifications and that suppliers of labor and materials on the project get paid as agreed. Bonds help protect everyone involved - from the project owners, contractors, subcontractors and suppliers, to the taxpayers who ultimately provided the project funding.
With the assistance of a local bonding assistance program and a surety agent knowledgeable in construction, many contractors who have never been bonded can secure bonding and thereby gain access to a wider range of new business opportunities. A skilled agent provides guidance on taking the necessary steps to show the bonding company that the contractor has the professional experience to do the work, has a track record of successfully completing projects, has good credit and detailed financial statements, and is financially stable and responsible. All of these are important factors in determining whether or not a contractor will be approved for bonding.
Contractor Tools
spoke with Greg McCartney, of insurance agency James E. McGovern, Inc., to gain more insight into what bonding is and the benefits of bonding. Greg originally graduated with a degree in economics, got into construction bonding at the largest insurance brokerage, and took graduate-level classes in accounting to gain an in-depth understanding of the required financial preparation and documentation. In business for over 47 years, Greg has expertise in all aspects of the bonding process and is enthusiastic about its vital role in helping contractors succeed in the public sector.
Contractor Tools:
Greg, can you tell us aboutyour company and how you assist contractors with bonding?
Greg McCartney:
We are an insurance agency specializing in construction. Construction bonds are much different than other insurance products, so it is important to be able to analyze a contractor's situation and help them get together what they need to be approved for bonding.
CT:
Who typically requires a bond?
GM:
Government and public agencies are the largest bond users, but private owners, other contractors and banks sometimes require bonds to reduce risks.
CT:
You've explained that bonds are required on public works projects because of laws, such as the Miller Act, that were passed to guarantee that suppliers of labor and materials on government and public agency projects have the right to be paid, and that this has made public sector construction projects attractive to suppliers and subcontractors. Help us understand the different types of construction-related bonds - what is a Bid Bond, a Performance Bond and a Payment Bond?
GM:
A Bid Bond guarantees that a contractor will honor his bid if awarded the contract. If the bidder/contractor does not sign and return the contract documents within the specified time, the owner could make a claim on the Bid Bond, usually for the difference between the low bid and the next bidder. If a contractor is awarded the contract, they are then required to provide a Performance Bond and a Labor and Materials Payment Bond, which are usually written together. Performance Bonds guarantee that the contractor does what the contract says. Payment Bonds ensure payment to subcontractors and suppliers. In combination, they guarantee that the job is complete and everyone is paid.
Be sure to read Part 2, Obtaining Bonding and Avoiding Claims, in our next newsletter!
If you're interested in learning more about bonding, you can reach Greg McCartney of James E. McGovern, Inc., at [email protected] or 650-593-8216. Additional information is also available from Merriwether & Williams Insurance Services, Inc., at (415) 986-3999 .
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