Title: SURETY Bonds
1 SURETY Bonds
- Managing the Risk of Contractor Default
2What Is Surety Bonding?
Obligee
Principal
Surety
3Types of Contract Surety Bonds
- Bid Bond
- Performance Bond
- Payment Bond
4Types of Contract Surety Bonds
- Bid Bond
- Performance Bond
- Payment Bond
5Types of Contract Surety Bonds
- Bid Bond
- Performance Bond
- Payment Bond
6How Surety Bonds Work
- Protect owner against contractor failure
- Protect subcontractors, laborers, suppliers
against nonpayment
7Role of the Producer
- Prepare case for surety underwriting
- Preparation for prequalification
- Relationship between contractor surety company
- Keep increase surety capacity
Producer
8Getting ProjectsCompletedandSubcontractors Paid
9Contractor Failure Rates
Building, heavy/highway, and specialty trade contractors Building, heavy/highway, and specialty trade contractors Building, heavy/highway, and specialty trade contractors
In Business Survivors Failure Rate
853,372 (2002) 610,357 (2004) 28.5
850,029 (2004) 649,602 (2006) 23.6
1,155,245 (2006) 919,848 (2008) 20.4
897,602 (2009) 702,618 (2011) 21.7
918,483 (2010) 696,441 (2012) 24.2
10Suretys Areas of Expertise
Prequalification
Claims Handling
11Prequalification
Capacity
Financial Strength
Company History
Organization
Continuation Plans
References
Projects in progress
12Surety Companys Checklist
- Good character
- Experience matching contract requirements
- Financial strength
- Good credit history
- Established banking relationship
- Line of credit
- Necessary equipment
13Benefits of Surety Bonds
Construction Assurance
Financial Security
14Benefits of Performance Bonds
- Increase likelihood of timely project completion
- Assure compliance with contract
- Surety may resolve contractor problems
- Fulfills contractual obligations if contractor
defaults
Performance Bond
15Benefits of Payment Bonds
- Protects certain subcontractors, suppliers,
laborers from non-payment - Eliminates mechanics liens
- Competitive pricing
- No cost when purchased with performance bond
Payment Bond
16Cost of Surety Bonds
Project Amount Approx. Bond Premium 0.5 - 2
1 Million 5,000 20,000
5 Million 25,000 100,000
10 Million 50,000 200,000
20 Million 100,000 400,000
Premiums may vary depending on size, type contractors bonding capacity. Premiums may vary depending on size, type contractors bonding capacity.
17Responding to claims is the fulfillment of the
suretys promise made in its bond.
18Reasons For Contractor Failure
Accounting Problems
Change in Leadership
Material/ Equipment Shortages
Scope of Business
Labor Difficulties
Unrealistic Growth
Lack ofExperience
Failure
19Protection
- Provide trained personnel
- Provide payment to subs suppliers
- Offer financial assistance to contractor
Surety
20Steps in the Claims Process
Claims Investigation
Review Options
Declaration of Default Terminationof
Contractor
Resolution
Completion
21Steps in the Claims Process
Claims Investigation
Review Options
Declaration of Default Termination
ofContractor
Resolution
Completion
22Steps in the Claims Process
Claims Investigation
Review Options
Declaration of Default Termination
ofContractor
Resolution
Completion
23Actions of a Surety
- Re-bid job for completion
- Arrange for replacement contractor
- Retain original contractor
- Pay the penal sum of the bond
Surety
24Case in Point
- Surety Involvement Saves Projects
25The 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
26The Problems
- Default on 3 senior citizen homes 1 low income
community rehab center - Delays would hinder substantial HUD financing and
tax credits
27What Happened
- Contractor over-extended
- Re-work slowed schedule
- Key subs not bonded
28The Suretys Solution
- Hired a replacement contractor with experience on
HUD projects - Assembled a team to handle HUD, federal, state
requirements - Retained and paid subcontractors, laborers
suppliers - Provided financial help to the contractor
29The Outcome
- School opened on time
- Paperwork not delayed
- Work completed on time
- No loss of tax credits or financing
- Occupied in time to satisfy HUD deadlines
- Construction company stayed in business
30The Outcome
- Surety protected school district
- and taxpayers from 1,865,753 loss
- Premium paid for bonds
- 129,290
31The Goal Is Project Completion
32For More Information
- Surety Information Office (SIO)
- www.sio.org sio_at_sio.org
- SIO is a joint initiative of The Surety
Fidelity Association of America (SFAA) and
National Association of Surety Bond Producers
(NASBP).