Informed Decisions:

1
Informed Decisions

• Surety Bonds
• or
• Bank Letters
• Of Credit?

2
What Is A Surety Bond?
Surety Bonds
3
Three Types of Bonds

• Bid
• Performance
• Payment

Surety Bonds
4
What Are Bank Letters of Credit?

• Cash guarantee to owner
• Called on demand
• Payment to owner loan for contractor
• No guarantee of project completion
• Irrevocable

Letters of Credit
5
Prequalification

• Surety Bonds
• Capital
• Capacity
• Character

• Letters of Credit
• Single focus
• Quality liquidity of collateral

6
Borrowing Capacity

• Surety Bonds
• Issued on unsecured basis
• No direct effect on bank line of credit
• Credit enhancement

• Letters of Credit
• Assets used as collateral
• Diminish existing line of credit
• Can affect cash flow

7
Duration

• Surety Bonds
• Duration of contract
• Maintenance period

• Letters of Credit
• Date specific
• Evergreen clauses

8
How to Obtain

• Surety Bonds
• Issued through surety bond producers

• Letters of Credit
• Issued through banking or lending institution

9
Cost

• Surety Bonds
• ½-1 of contract price
• Includes performance, payment, warranty
• Included in bid price

• Letters of Credit
• 1 of contract amount covered
• Included in bid price

10
Coverage

• Surety Bonds
• 100 performance
• 100 payment
• 100 warranty (typical)

• Letters of Credit
• Typically 10 of contract
• No protection for unpaid subs

11
Claims

• Surety Bonds
• Surety investigates claim of default
• Suretys options
• Surety pays rightful claims of certain parties

• Letters of Credit
• Payable on demand
• Owner determines validity of claims by subs
  suppliers

12
International

• Surety Bonds
• Acceptance growing outside North America

• Letters of Credit
• More commonly required accepted outside North
  America

13
Conclusion

• Informed
• Decisions
• On Risk
• Management

14
For More Information

• Surety Information Office
• 1828 L St. NW, Suite 720
• Washington, DC 20036
• 202-686-7463 Fax [phone]
• www.sio.org sio_at_sio.org