Question 1

SURETY OUTLOOK – 2026

Accepted Answer

Market trends

The surety market is holding steady as 2026 approaches – there are slowdowns in the
construction industry due to the national economic climate. Continued growth for the industry through the first quarter of 2026 has indications of being strong with projected increases in both staffing and profit margins that will continue throughout the year.

While claims have risen, there is skepticism on frequency and severity. With the influx of
federal funding in 2025, the construction industry overall still showed signs of cooling off in
certain areas.

Future contracted work for commercial, heavy industrial and institutional
construction has slowly declined during the past year for firms with revenue between $30
million and $100 million.

There are bright spots that will assist in the ability to increase construction backlog. Data
centers, schools, local and county buildings, LLB and DB projects will drive backlog growth. On the other side, material pricing rose steadily in 2025 – in some cases almost 50% -- in part due to tariffs. In addition, tariffs reduce competition, which can increase both domestic pricing and the wait time for materials.

Success during the headwinds of surety company changes
Relet and replacement costs for struggling projects have increased due to last year's
uncertainty, past losses exceeded estimates requiring updated claims and risk forecasts.

Yet construction spending remains near records. Disciplined project selection and risk management are supporting strong results, and the pipeline for new work is robust.
With smaller teams, project owners are combining tasks into bigger, longer contracts. We have issued fewer performance and payment bonds in 2025 compared to 2024, but the average contract size have increased. However, firms focused on smaller projects face fewer opportunities and intensified competition.

According to 2025 second quarter data - $900 million in direct losses incurred across the top 100 sureties stand as the second highest total for that period since 2004. That elevated claim activity underscores the need for careful due diligence before expanding geographically.

Reviewing local laws, codes, political environments, and obtaining required licenses can help prevent many problems. Assessing the quality and availability of the local labor force and ensuring a thorough process for prequalifying subs are also important.

Focusing on 2026 - Underbillings are one of the most telling indicators on a work-in-progress (WIP) schedule. When the amount of work completed exceeds, the amount billed; large underbillings, particularly in the later stages of a project, may point to unapproved change orders, slow project documentation, or challenges with cost tracking. To the surety, they can reflect overly aggressive revenue recognition and serve as an early warning sign for potential cash flow strain. We encourage maintaining regular WIP reviews, reconciling costs with billings, and communicating openly about disputes which helps strengthen the financial profile on your bonding capacity.

Increasing capacity during greater surety scrutiny
Overall, financial liquidity is mixed; contractors have less cash and more debt from growth, but their financial positions remain stable. Contractors prioritizing early dispute resolution,
subcontractor prequalification and risk controls are tightening overhead to protect margins.

And margin is available as public and private investment is supportive.
Looking ahead to 2026, the contract surety market is healthy and stable. One item to watch in the coming year is bigger project sizes leading to larger claims. That said, there continues to be ample capacity in the marketplace and added underwriting scrutiny is occurring only on a case-by-case basis.

Philip E. Vega
President

Question 2

Super Bowl 58 Commercial

Accepted Answer

https://youtu.be/ItEWzU0MtSA

Question 3

Kern County Builders Exchange Tournament Sponsor

Accepted Answer

https://video.wixstatic.com/video/c4e698_2cc565d3de094245830aea364a6761cd/720p/mp4/file.mp4

Question 4

City of Los Angeles’ LA Asphalt Plant No. 1 Earns Envision Bronze Award for Sustainable Infrastructure

Accepted Answer

April 15th, 2021

WASHINGTON, D.C. – March 10, 2021 – The Institute for Sustainable Infrastructure (ISI) announced today that the LA Asphalt Plant No. 1 – Replacement and Modernization located in Los Angeles, CA, is the recent recipient of the Envision® Bronze award for sustainable infrastructure. To earn Envision Bronze, a project must demonstrate that it delivers a range of environmental, social, and economic benefits to the
host and affected communities.

The Asphalt Plant No. 1 (AP1) is located on an approximately 2-acre site in an industrial area south of downtown Los Angeles. AP1 has been operated by the City of Los Angeles Bureau of Street Services (BSS) since 1947. The existing plant currently produces up to a total of 100K to 200K tons of asphalt per year; and it utilizes 20% recycled asphalt product.

The new AP1 will continuously produce asphalt at a rate of up to 400 tons per hour, up to 600k tons per year, and utilize up to 50% recycled asphalt product. It is expected to exceed regulatory requirements, permit requirements, and industry guidelines for energy efficiency and emissions control, and meet the current BACT conditions set forth by the SCAQMD (Air Board).

This owner-led project worked closely with Partner Engineering & Science and Papich Construction Incorporated to deliver this award-winning sustainable project. “By utilizing material that would typically be sent to the landfill, this project is turning trash to a valuable material that is important for maintaining the city’s streets,” said Melissa Peneycad, ISI’s managing director. “ISI is pleased to present the Envision Bronze award for sustainable infrastructure to the City of Los Angeles for the LA Asphalt Plant No. 1 project.”

The Envision sustainable infrastructure framework assesses project sustainability across five categories:

Quality of Life, Leadership, Resource Allocation, Natural World, and Climate and Resilience. These key areas contribute to positive social, economic, and environmental impacts on a community during the planning, design, and construction of infrastructure projects. Key factors contributing to the LA Asphalt No. 1 project earning an Envision Bronze award include:
Minimize Light Pollution
Lighting needs were designed based on local guidelines that encourages strategies that minimize light glare and trespass. In addition to incorporating LEDs, lighting controls adjust to the project’s needs based on availability of daylight.

Air Quality
As a project located in the South Coast Air Quality Management district, the project was required to meet stringent requirements to reduce particulate matter and other air pollutants. The new plant will be more efficient and provide significant improvements to air quality compared to the previous plant that was designed in 1947.

Avoiding Traps and Vulnerabilities
By using reclaimed aggregates from local resurfacing projects in the production of Hot Mix Asphalt (HMA), the city will avoid uncertainty in future mining and transportation costs and the inherent pollution of acquiring new virgin rock and sand material through mining.

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MEDIA CONTACT:
Institute for Sustainable Infrastructure
For inquiries related to ISI, Envision or the Envision verification program, please contact Dyan Lee, Marketing and Communications Director, at lee@sustainableinfrastructure.org

PROJECT ORGANIZATION INFORMATION:
About Papich Construction: Papich Construction, with its commitment to client satisfaction, quality, and community, has earned a respected industry name as a full-service general contractor. Our diverse resume of successfully completed projects ranges from single-family home site development to complex design build-bid-construct infrastructure improvement projects. Papich Construction has
a reputation for working diligently to provide a complete turnkey product to clients and completing quality projects both on schedule and under budget. To learn more, visit the Papich website at http://papichco.com/construction/

About ISI and Envision®: Envision is the product of a joint collaboration between ISI, which was founded by three national engineering associations: American Society of Civil Engineers (ASCE), American Council of Engineering Companies (ACEC) and American Public Works Association (APWA), and the Zofnass Program for Sustainable Infrastructure at Harvard University Graduate School of Design. For more information, please visit www.sustainableinfrastructure.org.

Question 5

Managing This Time of Crisis

Accepted Answer

October 31st, 2020

What to Expect from Changing Underwriting Report Requirements

The Covid 19 pandemic has created a great deal of uncertainty regarding its effects on construction bond users. Much is unknown regarding what will happen during this crisis as well as once it is over, making it more important than ever to take proactive steps to protect your business and your business relationships. 
Some things are predictable. Surety companies can be expected to tighten up their books of business. While doing so, they’re going to be asking for up-front and on-going information in quantities larger than ever seen before. Here are a few pointers to help mitigate the reaction of the bond companies in these unforeseen circumstances.

In the past, an acceptable amount of financial reporting entailed providing six-month and year-end statements.  However, we believe that the surety companies are going to be managing their risk with greater scrutiny. It’s going to be more important in the following months to be able to provide real-time information such as monthly Work-in-Progress reports, Cash Balances, Debt, and Performance indications.

Increasing your line of credit immediately is also a very good idea, as the banks will start tightening up as well. Bonding capacity is based on the “three Cs”: a company’s Character, Capacity, and Capital. These aspects provide a foundation for producers and underwriters to form an opinion on a contractor’s past, as well as anticipate current and future performance.

You can also expect shortages of material and labor, so looking for alternative suppliers and crews to help mitigate risk will be a must. 
To summarize, you should do the following:
 • Prepare for Timely Financial Reporting
 • Offer monthly Work-in-Progress Statements
 • Maintain a low Debt Position
 • Increase your Bank Line of Credit
 • Find Alternative Suppliers
 • Maintain a strong Cash Position

Question 6

C&D Bonding Green Flag Set to Fly at ’21 Wild West Shootout

Accepted Answer

October 28th, 2020

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QUEEN CREEK, Ariz. (Oct. 21, 2020) — Every time that a race starts or restarts during the 15th annual Keyser Manufacturing Wild West Shootout presented by O’Reilly Auto Parts, it will do so as the Contractors & Developers (C&D) Bonding green flag waves high in the air. The western-based company is the newest marketing partner for the motorsports extravaganza, which is slated to span January 9-17, 2021 at FK Rod Ends Arizona Speedway.

“It’s awesome to have such a well-respected company like C&D Bonding sponsor our event. Owner, Phil Vega has always been a great supporter of dirt track racing. Over the years he’s sponsored tracks, series, and various Dirt Late Model teams,” event promoter Chris Kearns shared. “In fact, C&D Bonding has been a sponsor of mine since 2009, when they sponsored Santa Maria Speedway. It’s great to have their continued support, and I really appreciate that Phil sees the value in sponsoring the Wild West Shootout.

“Having them as the sponsor of the green flag will provide them with a great deal of publicity throughout the miniseries, and hopefully it leads to new business from within the motorsports community.”

Contractors & Developers Bonding is a surety bond only, brokerage company, specializing in providing bonds to contractors in the public and private sectors. Their specialization in surety puts them ahead of their competitors. Additionally, the company currently enjoys being the largest independently owned, surety only brokerage company in the western states.

For more information on what C&D Bonding’s 90 years of combined surety bond underwriting and brokerage expertise can do for you, please visit www.cndbonding.com.(http://www.cndbonding.com/)

The 2021 Keyser Manufacturing Wild West Shootout presented by O’Reilly Auto Parts will pay out over $235,000 in purses over six nights of Super Late Model, Modified and X-Mod racing. Tripleheaders are set for Jan. 9, 10, 13, 15, 16 and 17 at the 3/8-mile oval located just outside of Phoenix.

Additionally, an open practice session is slated for both Jan. 8 and 12.
Online sales of single and multi-day tickets are now available for the Southwest’s popular miniseries, which features six nights of racing from January 9 – 17 for Super Late Models, Modifieds and X-Mods at FK Rod Ends Arizona Speedway.
Tickets are priced at $25 per night for adults and $10 for kids ages 6-12 with children 5-and-under admitted free of charge.

Last but not least, each division will compete for a miniseries point’s championship and accompanying point fund.

A six-day general admission combo ticket is also available for $150 and includes a pit-pass upgrade for one night as chosen by the purchaser as well as a free Wild West Shootout seat cushion. Six-day passes can be purchased in advance at www.wildwestshootout.net/schedule/ (http://www.wildwestshootout.net/schedule/)or at the track on January 9’s opening night of the Wild West Shootout.

For more information on the 15th Annual Wild West Shootout, please visit www.WildWestShootout.net.(http://www.wildwestshootout.net/)

The Wild West Shootout is made possible by Keyser Manufacturing, O’Reilly Auto Parts, FK Rod Ends, Dirt Track Bank, Black Diamond Race Cars, Shaw Trucking, Schaeffer Oil, SportTruck RV, Mesilla Valley Transportation, Border Tire, Arizona Differential, RHR Racing Swag, Barnett Harley Davidson, Dirt Pro Grading & Padwork, Contractors & Developers (C&D) Bonding, Shocks by Hammer, Hoker Trucking, Premier Waste Services, Midwest Sheet Metal, Speedway Motors, Rodeo Chrysler Dodge Jeep Ram, VP Racing Fuel, Hoosier Racing Tires, Pro Power Engines, Penske Racing Shocks, Beaver Stripes, Gorsuch Performance Solutions, Toste Construction, Sipes Tractor & Transport Service, Total Ag Solutions, The Joie of Seating, Schill Construction, Screven Motor Speedway, DirtDraft.com and FloRacing.com.

Ben Shelton, Owner

Question 7

2019 Surety Outlook – Good news or Concerning News

Accepted Answer

April 10th, 2019

Good news or concerning news?

By the end of 2018, the construction and surety industries remained robust and resilient. For most contractors, backlogs are as strong as they have ever been over the past decade, margins have returned to pre-recession highs and work is abundant. Profits are at an all-time high, loss margins remain low, and demand for bonding continues to grow across the nation. The industry does not appear to be slowing down any time soon, with direct written premiums estimated at more than $6.5 billion in 2018.

The continued results and positive forecast for both underwriters and contractors have many wondering when the market will reach its boiling point and how to prepare for the inevitable decline. Many subcontractors, overextended with work opportunities and thin on resources, have started to show signs of struggling and there has been an increase in defaults. This growing frequency of defaults has resulted in some the industry’s largest sureties experiencing significant general contractor failures both domestically and internationally.
As a result, reinsurers are beginning to institute firmer underwriting compliance standards. Surety underwriters are depending even more on their clients and surety partners to proactively manage their operation and the risks associated with growth in an expanding economy. Those using best practices are taking advantage of the market’s positive trends to intelligently grow their backlogs rather than over-extending by taking on work far outside of their abilities and capacities.

During this growth cycle, three main questions continue to be the focus: labor shortages, material costs and governmental policies.

LABOR SHORTAGES: The ability to attract and retain skilled labor is the number one concern of general contractors, subcontractors, suppliers, and vendors. Although the quantity of skilled labor has increased in recent years, it has not kept up with the increase in construction spending. As a result, the industry is experiencing one of the largest labor shortages in history – in 2018 we saw the biggest gap in growth between new construction employment and construction spending since the recession. To meet demand, many companies are hiring new employees who might not have the experience required, or simply don’t meet the company’s standards for employment. Regardless, these employees are needed to ensure that companies can take advantage of the current market and meet their growth plans. This is a principle issue and underscores the importance of employing a high-level human resources professional to ensure the hiring of the right employees — people who will be retained and developed into future leaders. It’s up to business owners to hire and develop the right talent. If they fail to do this, the industry could experience a wave of subpar construction with significant long-term consequences.

RISING MATERIAL COSTS:  The cost of materials has always been a key concern for contractors, but in today’s market it seems to carry even more weight. Even without rising tariffs, material costs have increased significantly over the past 12-24 months. Securing material and trade buy-outs, post project award, has become critical to the economic success of contractors. Once a contract is in place and a project has begun, contractors have little to no ability to bill material cost escalations to a job. Proactively managing costs and changes can have a significant impact on success and profitability. That means anticipating price increases and having a comprehensive understanding of specific contract terms and conditions. Contractors need to lock in fixed prices with their vendors and suppliers before starting projects. In addition, billing for materials upon purchase and storing them onsite or in a secured location allows the contractor to be paid upfront for the purchase as opposed to upon install. This allows the contractor to manage cash flow more effectively and sustain the profit margin throughout the job.

GOVERNMENTAL POLICIES:  Interest rates will have a major monetary impact on contractors. As the Federal Reserve has been increasing the interest rate, tightening in construction lending from banks and a decrease in overall investment could be the result. This will have a direct negative impact initially on residential projects and overall spending in the building industry. However, there should conversely be a flow of infrastructure spending to support the Trump administration’s plan to implement growth in the public sector. To prepare for the rising interest rates, companies should continue to be aggressive with their lenders by locking in low rates, paying down interest-bearing debt, and avoiding the use of operating lines of credit. As always, “cash is king” in the construction industry. The ability to finance costs and retain liquid paying power will continue to be one of the most important factors in the success and growth of a contractor.

In addition, many will experience the impact from the new revenue recognition requirements. Private firms must report their revenue compliant with ASC 606 starting with the first quarter of the year. Challenges include setting up the right performance obligation contracts, handling one-time set up costs, and factoring in the costs of acquiring and tracking contracts. Credit relationships with both sureties and lenders will be tested. Producing CPA financial statements in 2019 will not be as easy as in the past.

In conclusion, construction is cyclical in nature, and the current upswing will not last forever. However, there is little to suggest that the end is near. This past year has seen strong growth in construction despite a weakening labor pool, increasing material costs, and uncertainty surrounding governmental policies.
Wise contractors will continue to capture acceptable profit margins by proactively growing, developing and managing an appropriate level of highly skilled work force while continuing to achieve the best operating, accounting, and cash management performance standards.

CONTRACTORS & DEVELOPERS BONDING
PHILIP E. VEGA
PRESIDENT

Question 8

Sub Loss History – National GCs

Accepted Answer

October 3rd, 2017

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Question 9

Creating a Positive Company Culture

Accepted Answer

November 16th, 2016

Creating a Positive Company Culture

Developing a positive company culture is the key to success in any industry, and that includes the construction industry.

Nurturing a high level of achievement among employees comes down to two fundamental truths:  People want to be appreciated, and they want to be part of a team, to feel included.

Accomplishing this can be achieved by following these simple rules:
 • Always say “we” rather than “I.” This is an easy way to reinforce that you are a team.
 • Say “please” and “thank you.”
 • Remember, the most important person for your success is not your boss, but your subordinate.  Titles are over-rated.
 • No one person has all the answers, and you should be wary of people who think they do.
 • The contractors’ graveyard is filled with people who can build but can’t count. Every decision is a business decision, and every person is a businessperson.
 • Barriers and roadblocks should be seen as opportunities.
 • Stay open to new ideas and suggestions while maintaining a great work ethic.
 • 
Your employees will perform at a higher level than even they believed possible when they are treated with dignity as part of your team. Your business reputation and workplace satisfaction will also benefit from the positive company culture that you have created.

Philip E. Vega, President
Contractors & Developers Bonding

Question 10

The Devil is in the Details – Preliminary Notice Filing

Accepted Answer

March 30th, 2016

When it comes to construction payment remedies, it’s very important to pay attention to the required details of the process, as they can make all the difference in whether you get paid.

One of these, preliminary notices, are a precondition of recording a mechanics lien, serving a stop payment notice, and, often, making a payment bond claim. If you don’t serve a preliminary notice or don’t do it right, you may be precluded from asserting critical construction payment remedies available to California contractors and material suppliers.

Here’s a memorable example of a situation that had to be resolved in court: Material supplier Hub Construction Specialties, Inc. (Hub), supplied rebar and other materials to a general contractor on a construction project owned by Esperanza Charities, Inc. (Esperanza). The general contractor ultimately became insolvent and, as a result, failed to pay for the materials.

Fortunately, Hub had served a preliminary notice, and when Esperanza recorded a notice of completion, Hub recorded a mechanics lien for the amount it was owed – $81,857.55. However, while Hub had served its preliminary notice by certified mail as required by Code, it failed to pay the nominal $2.35 fee for a return receipt.
At the time, Civil Code section 3097.1 required, as proof of service of a preliminary notice, an affidavit accompanied by either: (1) a return receipt or a photocopy of the record of delivery; or (2) a receipt maintained by the post office showing the date of delivery and to whom the preliminary notice was delivered.

Hub could show neither, and Esperanza argued to the trial court that Hub’s mechanics lien was invalid due to its failure to strictly follow the requirements of Section 3097. The trial court agreed, and dismissed the case. Hub argued on appeal that Esperanza admitted to having received the preliminary notice by certified mail, so although past California cases have held that statutes governing the manner or form of serving notice are strictly construed, its failure to pay for a return receipt should not bar its mechanics lien claim. The California Court of Appeals agreed with Hub, noting that past cases had not specifically addressed whether strict compliance is necessary with regard to return receipts, so it would not do so here.

The material supplier won, but it was at the cost of thousands of dollars in attorney’s fees and other expenses incurred during more than three years of litigation. And it’s not over. Hub will need to pursue the judicial sale of the property at further expense and time, all for a $2.35 mistake. The lesson is this: Make sure you attend to the details, or you could have a Devil of time getting paid.  
Philip E. Vega, President
Contractors & Developers Bonding

Question 11

Council Green Lights $6.3 Million To Build Buffer Park

Accepted Answer

November 19th, 2015

Santa Monica City Council on Tuesday awarded a $6.3 million construction contract to USS Cal Builders to build Buffer Park as part of the Expo Line project.
The name “Buffer Park” is a work in progress and a new, more permanent moniker will likely be in play by the time the open space is operational.

Once built, the new 2.35-acre park would exist facing a residential neighborhood along Exposition Boulevard at Stewart Street and adjacent to the new Expo Maintenance Facility.

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The construction contract approval comes after more than three years of planning.

On Sept. 11, 2012, Council approved a design contract with Mia Lehrer +Associates to provide design and preconstruction services for the Expo Buffer Park Project along Exposition Boulevard, adjacent to the new Expo Maintenance Facility.

Following two and a half years of design, the City issued a Request for Qualifications to building contractors on April 23, 2015.

A total of nine qualifications packages were received for construction services.
After a staff review of qualifications a short list of three firms were selected to provide bids. A Request for Bids was issued on Aug. 6, 2015 and three bids were received on Sept. 14, 2015.

City staff from Public Works recommended USS Cal Builders as the best bidder for the construction of the Expo Buffer Park Project in an amount not to exceed $6,312,856.

Staff reviewed the qualifications and rated the submissions based on selection criteria including price, direct experience on similar projects, record performing public sector work, understanding of the project’s scope, approach to the work, qualifications of proposed staff, and scheduling of project activities.

Following a thorough review process that included interviews with two of the three bidding teams (the other was W. E. O’Neil – $6,033,886 bid), it was determined that USS Cal Builders was the most qualified firm and best bidder, based on their clear understanding of the project, track record of projects of a similar size and scope, price, and excellent references.

USS Cal Builders’ recently completed projects include portions of the Orange County Great Park as well as the Encinitas Community Park.

References were contacted and respondents reported that the contractor performed well on their projects.

The California Contractors State License Board verified that contractor’s license is current and in good standing. The lowest bidder (Icon West Inc. – $5,692,880) was not selected because their understanding, past professional experience, and plan for building in sensitive residential neighborhoods was not as extensive or strategic as the approach articulated by USS Cal Builders.

Additionally, the lowest bidder’s previous construction experience did not reflect a similar size, scope or complexity of park construction that is reflective of the Expo Buffer Park project. The lowest bidder submitted an initial letter of protest, but has chosen not to protest the determination any further.

Staff will return to Council in early 2016 with a park name recommendation in accordance with the City’s public land and buildings naming guidelines.

Question 12

New Revenue Recognition Standards Will Change the Way You Think

Accepted Answer

November 9th, 2015

New Revenue Recognition Standards Will Change the Way You Think

Contractors are facing the most significant event in financial reporting in recent history as the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) present a new way to recognize revenue. You will be required to think differently.

FASB Accounting Standard Update No. 2014-09 affecting Revenue from Contracts with Customers (ASC 606) will apply to all your customer contracts and transactions. The good news is that in the effort to remove past inconsistencies, some of the changes will simplify the preparation of financial statements by reducing the number of requirements to which businesses must refer, making the statements easier to understand.  
 
The new guidance utilizes a contract-based approach that places the focus on the assets and liabilities. Some of the changes will affect the reporting of the amount of revenue earned and the timing when it is recognized. Until now, revenue has been recognized upon the culmination of the earnings process – the price is fixed or determinable, delivery has occurred or service has been rendered, and collectability is reasonably assured. Collectability is one of the key differences in ASC 606, as it is a factor when determining whether a valid contract exists.
 
Under the new rules, contractors will apply a five-step model to determine when to recognize revenue and at what amount. They are as follows:
1. Identify the contract(s) with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when (or as) a performance obligation is satisfied.
 
While on the surface the five-step process does not seem complex, the transfer of “control” to the customer becomes the driving issue in evaluating the appropriateness of revenue recognition under the new guidance. Significant judgments by management and an auditor in applying the underlying principles will be required. Several issues will need to be addressed.
 
Contracts will now be considered to include both implied and verbal agreements while in the past many contractors did not recognize the revenue based on verbal agreements. Your auditor will have to decide how to verify these agreements, criteria will be needed to determine enforceable rights and obligations in these instances, and the new constraint provision will impact revenue recognition.
 
A number of the current standards to recognize claim revenue are not being carried forward in ASC 606.  Change orders, including those that are unpriced, will be considered as contract modification, and the new standard may enable contractors to record more change orders than were previously allowed. However, you will need to determine whether the change order is a new contract, a new performance obligation that is distinct, or a change in the original agreement. That will affect the timing of revenue recognition, presentation, and possibly disclosures. This may require evaluation under the new “variable consideration” standard.
 
Unlike the current standards that includes indicators for whether two or more contracts should be combined, ASC 606 requires that you combine contracts that were entered into at or near the same time if they meet the following criteria:  The contracts must be negotiated as a package with a single commercial objective, they must have interdependent pricing, and the goods or services are a single-performance obligation.  
 
Current practice evaluates “profit centers” which are the entire contract. A performance obligation is a promise in a contract to transfer a good or service (or bundle of same) that is distinct. Determining whether the good or service is “distinct within the context of the contract” is a critical aspect of identifying the performance obligations. If a promised good or service is not distinct, goods or services must be combined with others until it achieves that qualification. Then it becomes a single-performance obligation. This will require each contract to be evaluated.
 
Determining the transaction price will be impacted by variable consideration, constraining estimates, financing, non-cash consideration and consideration payable to a customer.  
Variable consideration may include discounts, rebates, refunds, credits, incentives, performance bonuses, economic price adjustments, latent defects and more. Variable consideration should be included in the transaction price only to the extent that it is probable that a significant reversal in revenue will not occur when the uncertainty associated with it is resolved.  
 
At the end of each reporting period, an update of the estimated transaction price (including updating its assessment of whether an estimated variable consideration is constrained) must be provided to represent the circumstances present at the end of the reporting period and the changes in circumstances that have occurred.
 
The objective in allocating the transaction price is to tie each performance obligation (or distinct good or service) to the consideration it expects to receive.  An estimation of the stand-alone selling price is allowable.
 
If the performance obligation qualifies to be reported at the contract level, the revenue model can be simplified to a three-step process:
1. Identify the contract(s) with a customer.
2. Determine the transaction price.
3. Recognize revenue when a performance obligation is satisfied.
 
For those projects satisfied over time, measurements can be made in a manner similar to current practices and reflective of the gradual transfer of control of the asset to the customer.  
 
The costs of obtaining a contract that a business expects to recover can be recognized as long as they would not have been incurred if the contract had not been obtained. Costs to fulfill a contract also follow the existing guidance. Otherwise, they may be recognized as an asset if they are expected to be recovered.  Examples of this include pre-construction costs and mobilization.  
 
The disclosure requirements of ASC 606 are significantly in excess of what is currently required under U.S. GAAP, and the overhaul of your revenue recognition practices will likely take more time, effort and expertise than expected. The functions within your organization that will be affected include information systems, sales contracts and agreements, sales incentives and commissions, internal control processes, executive compensation arrangements, debt covenants, and tax implications.  
 
The effective date for public entities to adopt the amendments in ASC 606 is for annual reporting periods beginning on or after December 15, 2016, including interim periods. For all other (nonpublic) entities, the annual reporting periods begin after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.  Nonpublic entities may elect to adopt the standard earlier.  
 
The FASB allows contractors two options when transitioning to the guidance under the new standard.  Contractors may opt for full retrospective application of the new standard, which requires reflecting the cumulative effect of the change in all contracts on the opening retained earnings of the earliest period presented, along with adjusting the financial statements for each prior period presented to reflect the effect of applying the new accounting standard.  Retrospective application would be applied to interim periods, as well as annual periods presented.
 
As an alternative, contractors may apply the amendments to the new standard retrospectively with the cumulative effect of initially applying the amendments recognized at the date of the initial application. When using this method, the contractor should provide additional disclosures in the reporting periods related to the reasons for significant changes.
 
You may benefit by talking with your auditor and other professional advisors. Additional advice on making this transition will be forthcoming from the FASB Revenue Recognition Implementation Group.
 
CONTRACTORS & DEVELOPERS BONDING
 
Philip E. Vega
President

Question 13

How to Protect Your Teaming Agreements from Affiliation Protests

Accepted Answer

September 10th, 2015

How to Protect Your Teaming Agreements from Affiliation Protests
Teaming relationships are important to small business contractors who may benefit from the insight of a more experienced contractor while growing their portfolios. Teaming agreements are valuable tools for government contractors, as they allow the proposed prime contractor and subcontractor to negotiate and agree on operational details prior to competing for opportunities.
 
However, small business primes teamed with large subcontractors on set-aside contracts are chief targets for size protests. Therefore, all small business primes must ensure that their teaming agreements cannot give rise to a finding of affiliation if such a protest arises. Here are some issues to consider which may ensure that your teaming agreement will avoid making you vulnerable to this problem:
 
1. Make sure that the prime contractor is performing the primary and vital requirements, and has assigned discrete functions to its subcontractors. It is important to be as detailed as possible in describing what the subcontractor will do. If the arrangement is challenged via a size protest, the SBA will look at the teaming agreement. If it gives the impression that the subcontractor will be involved with the project’s every aspect, it will look as if that entity is the lead contractor.
2. The teaming agreement must indicate that the prime contractor is in charge of decisions regarding the proposal and the hiring of additional subcontractors. Otherwise, the SBA will find that the subcontractor and the prime are joint venturers and therefore, affiliates, thereby rendering the prime ineligible for the contract. The prime should have responsibility over approving the proposal before submission, negotiations with the government and the execution of performance. It should determine what types and how many subcontractors will be needed.
3. A teaming agreement for a set-aside opportunity should specify the subcontractor’s maximum work share, stating that it will perform no more than 50% of the task. According to SBA rules, by assigning more than 50% of the work to the subcontractor, the prime contractor will become ineligible for the contract.  
4. The subcontractor must not provide more than its services under the teaming agreement. For example, a subcontractor’s subleasing of office space to the prime may be grounds for a charge of affiliation. Likewise, if the agreement indicates that the subcontractor is supplying all resources for preparation of the proposal and an entire team to prepare the proposal, the SBA may find that the prime is unduly reliant upon the subcontractor. That would classify the association as a joint venture, rather than a prime-subcontractor relationship.  
5. The teaming agreement should avoid business terms that are common to joint ventures, like sharing profits and losses. Although that alone may not give rise to affiliation charges, it may lead to the discovery of other issues of concern to the SBA. Therefore, it’s best to avoid it.
6. 
In addition to considering these factors when creating your agreements, you may also want to ask an experienced small business government contracting attorney to assist you in eliminating any red flags.

A carefully worded and fully thought out teaming agreement is essential to your success.

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