| Accrual Basis | Accrual basis accounting records revenue/income and expenses when they are incurred, regardless of when the cash is received or expense is paid. The term “accrual” refers to the recognition or recording of revenue and expenses without a cash transaction taking place. |
| Affiliated Entities | Any owner, partner or principal or company that is associated with another company, either through investment, partnership, Joint Venture, etc. When applying for a bond, principals or owners of a company are required to declare their interest, investment or working relationship in any other company that represents more than a 10% ownership. |
| Aging Schedules | This Schedule or Report breaks down the Accounts Payables and Accounts Receivables into different categories. The surety company wants to know how much of a company’s Accounts Receivable is 30 days old or less, 31-60 days old, 61-90 day old, 91 days or older. At a certain point, it may become possible that certain receivables may no longer be collectible. See Sample Aging Schedules |
| Balance Sheet | A Balance Sheet represents the company’s Assets, Liabilities, Retained Earnings and/or Net Worth at a point in time. Sample Balance Sheet |
| Bid Bond | A Bid Bond is submitted at the time a bid is presented. A Bid Bond guarantees to the project manager/owner/municipality etc. that your company will enter into a contract and obtain the necessary Payment and Performance Bonds required if the job is awarded to your company. There is no fee or premium paid for a bid bond. |
| Capacity | This is a term that underwriters use to refer to how large a bond or bond program your company is qualified for. Capacity is determined by financial statements, work history and what size jobs the company has completed, how many jobs have been outstanding at one time and other factors. |
| Cash Basis | Recognizes revenue/income and expenses when the cash is received or the expense is actually paid. Most surety companies will not accept financial statements that are prepared on a cash basis, as it is not an accurate reflection of the company’s assets and liabilities (accounts receivable and accounts payable accounts). |
| Cash Flow Analysis | A Statement that is prepared by a CPA that shows all the in-flows and out-flows (increases and decreases) of cash during a period. It will also include a cash opening balance at the beginning of the period and an ending cash balance at the end of the period. Sample Cash Flow Statement |
| Collateral | Collateral is an asset that is pledged to secure a loan or bond. Collateral is subject to seizure on the default of a loan or a claim against a bond. Collateral is required by a surety to offset any risk against the issuance of a bond. The SBA has a program that will act as a support for a bond, in lieu of a surety requiring collateral. |
| Contract Bonds | This is a bond that guarantees the performance of terms and conditions under a contract. Construction contracts make up most of the contract bonds. See also Payment and Performance Bonds. |
| Credit Score | A credit score of all owners (and spouses) is one of the key pieces of financial information that enables a company to qualify for a bond. A poor or low personal credit score (not to be confused with a D&B rating) is sometimes a barrier in qualifying for a surety bond. |
| D&B Rating | D&B stands for Dun & Bradstreet, which uses a rating system to determine a company’s financial strength and risk rating. |
| Funds Control | Funds Control is a method that a surety uses to offset any possibility of a claim against the Payment Bond. A third-party is hired to receive all billings and pay the expenses associated with the contract, including material, labor, bond premium, subcontractors, etc. There is usually a fee associated with the use of this third party. |
| GIA | The General Indemnity Agreement is a binding document that is signed before any Payment and Performance Bonds, Maintenance or Supply bonds are issued. This is the agreement that is signed by all owner(s) (and spouses) of a company that protects the Surety Company. Without this document in place, surety companies will not issue a bond. This agreement indemnifies the Surety company that issues a bond on behalf of your company. This will allow the Surety to reclaim any money from the company owner(s), both on a company level and personally, if the Surety has to advance any money or incur expenses on any bond issued. As an example, a Payment and Performance bond is issued for $500,000 for Company A and the contractor walks off the job and leaves it unfinished. If the Surety company has to hire Company B to finish the contract and it costs them $100,000, they will attempt to collect the $100,000 in expenses they incurred on the bond from Company A, whether from the company OR the company owners personally. |
| ILOC | Irrevocable Letter of Credit. The Surety will require an ILOC under certain circumstances and the ILOC is held by the obligee. In the event of a claim, the obligee can draw on these funds held by the ILOC. The Bank holds the full amount of the ILOC and the account holder has no access to these funds until after the project is completed and the bond released. Once the bond is released, the ILOC is subsequently released. |
| Indemnification | The act of guaranteeing another (person, company, etc.) repayment in the event of a loss. |
| Income Statement | This is also referred to as a “Profit and Loss Statement”. This shows the revenue, expenses and net profit or loss for a company for a given period. Sample Income Statement. |
| Interim Financials | These are financial statements that are prepared during the fiscal year. If a company’s year end is 12/31, interim financial statements would be as of the end of each of the quarters, 3/31, 6/30 or 9/30. |
| Maintenance Bonds | These are bonds that are used to ensure or provide for the upkeep of the project after the project is complete. They also provide a guarantee against defective workmanship, materials, etc. |
| Net Worth | The Statement of Net Worth outlines the equity that a company has in terms of Paid in Capital, Retained Earnings, etc. Sample Statement of Net Worth |
| Notes | These are included in the CPA Financial Statements as explanations for various calculations, such as Completed Contracts Revenue, how revenue is recognized, depreciation expenses, etc. Sample Notes to the Financial Statements |
| Obligee | The person, group, company or municipality to which a surety guarantees that a principal will perform as expected, under the terms of the contract. The obligee can be the Prime Contractor, General Contractor, Project Manager, Subcontractor, government agency, etc. |
| Open Penalty | This is a term that is used to refer to an unlimited liability of the surety on a bond. |
| Payment Bond | A Payment Bond guarantees payment of the contractor’s obligations under the contract for any subcontractors, laborers, materials and suppliers. If a subcontractor is not paid, a “claim” may be made against the bond for non-payment and the surety company will then rectify the situation. |
| Penalty | This word or term is used to refer to the size or $ amount of the bond. |
| Percentage of Completion | The Percentage of Completion method of accounting recognizes revenue/income and expenses (without a cash transaction taking place) based on the progress or completion of a project and in more than one accounting period. Simple example: If a $1,000,000 contract will take 12 months and at the end of 3 months the contractor has completed 25% of the work on the contract, then 25% of $1,000,000 (or $250,000) will be recorded as revenue earned, regardless of whether paid or not. Likewise, the same example will apply to expenses incurred during the period as well. Revenue and expenses are recognized before the contract is completed. |
| Performance Bond | A Performance Bond guarantees the contractor will perform according to the terms of the contract. A Performance Bond protects the owner from financial loss should the contractor fail to complete the project or perform in accordance with the contract. |
| Premium | A premium is the cost of securing the bond, which is a percentage of the bond issued. If a $1,000,000 bond is issued and the rate is 5% (arbitrary example), the premium paid by the contractor for the bond would be $50,000. |
| Principal | The contractor or individual required to be bonded by the project owner, municipality, company, etc. The project owners or company requiring the bond is the Obligee. |
| Questionnaire | A document that is filled out by a company requiring a Bid Bond or Payment and Performance Bond. The Questionnaire outlines a company’s financial history, work experience, insurance history, lists supplier and work references, types of jobs completed, etc. This is used by the surety to get to know a company’s background. Sample Completed Contractor’s Questionnaire |
| Rate | The amount of money, per thousand dollars, that determines the bond premium. The rate is determined by the Surety company. Usually, the larger the risk, the higher the rate. |
| Schedules | These are attachments to the CPA financial statements (Balance Sheet, Income Statement, Statement of Net Worth) that explain how various numbers were calculated or how various schedules were prepared. Some of the Schedules include Accounts Receivable and Accounts Payable Aging Schedules, Work in Progress Schedule, Cash Flow Analysis, General and Administrative Expenses, etc. Sample Schedules |
| SBA | This stands for Small Business Administration, which has programs to assist small and minority contractors in obtaining bonds for projects. |
| Single/Aggregate | These terms refer to a bond program. The single refers to the largest size job an underwriter will issue a bond for, while the aggregate is the total bond amount that will be written for a company. As an example, if a bond line is $500,000 single/$750,000 aggregate, the largest single bond that a company qualifies for is $500,000 and the total number of bonds that will be written at one time cannot exceed $750,000. A company with a $750,000 aggregate would qualify for a $500,000 bond, a $100,000 bond and a $150,000 bond all at one time. |
| Supply Bond | A Supply Bond guarantees the performance of a contract which requires the delivery and/or furnishing of supplies for a project. An example would be a company requires a supply bond to furnish cement for a project that will last 12 months. The company does not mix or lay the concrete, only supplies the materials to the job site. |
| Surety | A person or company that guarantees the acts (or performance) of another. |
| Surety Bond | Surety Bonds are three-party agreements, unlike an insurance policy where there are only two parties (insured and insurer). The issuer of the bond is the surety (first party) who insures or guarantees the contractor (second party) will perform according to the contract terms to the obligee (third party). The obligee is the company, person, or government agency that receives the bond and is protected against any loss by the surety company. |
| Treasury Listing | A Treasury listing is a financial rating by the federal government. |
| Work in Progress | This is a type of schedule that lists the current projects that a contractor has at any given time. Details about each contract include the Contract Price, costs incurred to date, estimated profits, estimated completion dates, etc. This is also called a WIP Schedule. Sample WIP Schedule (Word Format), Sample WIP Schedule (Excel Format). |
