Surety Bonds

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Surety Bonds

• The Sensible Choice For Managing Risk

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Can Surety Bonds Help You?

• How do you evaluate manage risk?
• How do you ensure projects are completed on time,
  on budget, and to contract specifications?
• How do you ensure contractors successfully meet
  obligations?

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Can Surety Bonds Help You?

• Bid Bond
• Performance Bond
• Payment Bond

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Surety Bonds vs. Traditional Insurance
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Contract Surety Bonds

• Bid Bond
• Performance Bond
• Payment Bond

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Contract Surety Bonds

• Bid Bond
• Performance Bond
• Payment Bond

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Contract Surety Bonds

• Bid Bond
• Performance Bond
• Payment Bond

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Fundamentals of Surety

• Contractor default is preventable
• Surety companies producers prequalify
  contractors
• Surety companies back the bond with their own
  assets

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The 3 Cs Of Prequalification
C
Capital Capacity Character
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Analyzing Financial Strength
C
Capital Financial statements Working
capital Work-in-progress Indemnity
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Evaluating Ability To Perform
C
Capital Financial statements Working
capital Work-in-progress Indemnity
Capacity Resumes Contingency plan Business
plan Equipment
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Assessing Reputation
C
Capital Financial statements Working
capital Work-in-progress Indemnity
Capacity Resumes Contingency plan Business plan
short long term Equipment
Character Reputation Relationships References
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Reviewing Business Ventures

• Document business commitments that can affect the
  contractors business
• Owning property
• Side ventures

Surety
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Contractor Failure
Source Dun Bradstreet
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Why Do Contractors Fail?
New Owner
Inadequate Management
Failure
Over Expansion
Change in Scope
Failure
Materials Shortages
Sub Failure
Cost Escalations
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Why Do Contractors Fail?
Economic Downturn
Inclement Weather
Failure
Failure
Work Environment
Onerous Terms
Death or Illness of Key Employee
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Claims
Obligee
Principal
Surety
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Expediting The Claims Process

• Clearly define default in contract
• Submit status reports to surety
• Promptly notify surety of performance or payment
  problems
• Owner must file formal declaration of default

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Responsibility Of The Surety

• Acknowledge claim
• Investigate claim
• Determine fulfill obligations

Surety
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Performance Bond Protection

• Re-let the job
• Provide replacement contractor
• Retain original contractor
• Reimburse owner penal sum

Surety
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Payment Bond Protection

• Assures payment
• No mechanics liens
• Keeps subcontractors on the job

Surety
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Surety Bonds vs. Letters of Credit
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The Value Of Surety Bonds

• Bid Bonds
• Performance Bonds
• Payment Bonds

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The Value Of Surety Bonds

• Bid Bonds
• Performance Bonds
• Payment Bonds

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The Value Of Surety Bonds

• Bid Bonds
• Performance Bonds
• Payment Bonds

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Cost of Surety Bonds

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The Underlying Agreement

• Look at obligations
• Determine risks
• Match capable principal to fulfill agreement

Surety
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The Owners Responsibilities

• Provide working set of plans and specifications
• Establish terms of the agreement
• Ensure full timely payment
• Maintain adequate insurance
• Pay property taxes
• Communicate

Owner
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Bond Specifications

• Owner specifies surety bonds in contract
  documents
• Contractor contacts surety bond producer
• Producer guides contractor through
  prequalification
• Contractor obtains bonds delivers to owner

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Qualify Your Contractors Surety

• A.M. Best Company www.ambest.com
• Dun Bradstreet www.dandb.com
• Standard Poors www.sandp.com
• Moodys www.moodys.com
• Treasury Dept. www.fms.treas.gov/c570/c570.html
• State Insurance Dept. www.naic.org

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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