SURETY BONDS

Report
Surety
Bonds
Managing the Risk of
Contractor Default
What Is Surety Bonding?
Principal
Obligee
Surety
Types of Contract
Surety Bonds
• Bid Bond
• Performance Bond
• Payment Bond
Types of Contract
Surety Bonds
• Bid Bond
• Performance Bond
• Payment Bond
Types of Contract
Surety Bonds
• Bid Bond
• Performance Bond
• Payment Bond
How Surety Bonds Work
Protect owner against
contractor failure
Protect subcontractors,
laborers, & suppliers against
nonpayment
Role of the Producer
Producer
• Prepare case for surety
underwriting
• Preparation for
prequalification
• Relationship between
contractor & surety company
• Keep & increase surety
capacity
Seeing
Projects
To Completion
Contractor Default
Number of Years Failed Contractors Were in Business
10+ Years
39%
6-10 Years
29%
0-5 Years
32%
Source: Dun & Bradstreet
Surety’s Areas of Expertise
Prequalification
Claims Handling
Prequalification
Capacity
Financial
Strength
Organization
Company
History
Continuation
Plans
References
Projects
in progress
Surety Company’s
Checklist
 Good character
 Experience matching
contract requirements
 Financial strength
 Excellent credit history
 Established banking
relationship
 Line of credit
 Necessary equipment
Benefits
Of Surety Bonds
Financial
Security
Construction
Assurance
Benefits
Of Performance Bonds
Performance
Bond
• Increase likelihood of timely
project completion
• Assure compliance with
contract
• Surety may resolve contractor
problems
• Fulfills contractural obligations
if contractor defaults
Benefits
Of Payment Bonds
Payment
Bond
• Protect certain subcontractors,
suppliers, & laborers from
non-payment
• Eliminates mechanics’ liens
• Competitive pricing
• No cost when purchased with
performance bond
Cost of Surety Bonds
Project
Amount
Approx. Bond
Premium
$1 Million
$7,700 – $13,500
$5 Million
$33,200 – $47,250
$10 Million
$56,950 – $81,000
$20 Million
$101,950 – $146,000
* Premiums may vary depending on size, type &
contractors bonding capacity.
Responding to claims
is the fulfillment
of the surety’s promise
made in its bond
Reasons For Contractor
Failure
Accounting
Problems
Change in
Leadership
Scope of
Business
Unrealistic
Growth
Material/
Equipment
Shortages
Labor
Difficulties
Failure
Protection
Surety
• Provide trained personnel
• Provide payment to subs
& suppliers
• Offer financial assistance
to contractor
Steps in the Claims
Process
Declaration
Of Default
Claims
Investigation
Resolution
Completion
Review
Options
Steps in the Claims
Process
Declaration
Of Default
Claims
Investigation
Resolution
Completion
Review
Options
Steps in the Claims
Process
Declaration
Of Default
Claims
Investigation
Resolution
Completion
Review
Options
Actions of a Surety
Surety
• Re-bid job for completion
• Arrange for replacement
contractor
• Retain original contractor
• Pay the penal sum of the
bond
Case in Point
“Surety
Involvement
Saves
Projects”
The Facts
• Old line family-owned
contracting company
• Company sold to 5 key
employees
• 16 projects in progress
• $20 million school with
cost overruns &
schedule delays
The Problems
• Default on 3 senior
citizen homes & 1 low
income community
rehab center
• Delays would hinder
substantial HUD
financing and tax
credits
What Happened
• Contractor overextended
• Re-work slowed
schedule
• Key subs not
bonded
The Surety’s Solution
• Hired a replacement contractor with
experience on HUD projects
• Assembled team to handle HUD,
federal, & state requirements
• Retained and paid subcontractors,
laborers & suppliers
• Financial help with schools
The Outcome
•
•
•
•
Paperwork not delayed
Work completed on time
No loss of tax credits or financing
Occupied in time to satisfy HUD
deadlines
The Outcome
Surety protected school district
and taxpayers from $1,865,753 loss
Premium paid for bonds:
$129,290
The Goal
Is Project
Completion
For More Information
Surety Information Office
1828 L St. NW, Suite 720
Washington, DC 20036
202-686-7463 | Fax 202-686-3656
www.sio.org | [email protected]

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