Surety Bonds

1
Surety Bonds

• Managing the Risk of
• Contractor Default

2
What Is Surety Bonding?
Obligee
Principal
Surety
3
Types of Contract Surety Bonds

• Bid Bond
• Performance Bond
• Payment Bond

4
Types of Contract Surety Bonds

• Bid Bond
• Performance Bond
• Payment Bond

5
Types of Contract Surety Bonds

• Bid Bond
• Performance Bond
• Payment Bond

6
How Surety Bonds Work

• Protect owner against contractor failure
• Protect subcontractors, laborers, suppliers
  against nonpayment

7
Role of the Producer

• Prepare case for surety underwriting
• Preparation for prequalification
• Relationship between contractor surety company
• Keep increase surety capacity

Producer
8
Seeing Projects To Completion
9
Contractor Default
Source Dun Bradstreet
10
Suretys Areas of Expertise
Prequalification
Claims Handling
11
Prequalification
Capacity
Financial Strength
Company History
Organization
Continuation Plans
References
Projects in progress
12
Surety Companys Checklist

• Good character
• Experience matching contract requirements
• Financial strength
• Excellent credit history
• Established banking relationship
• Line of credit
• Necessary equipment

13
Benefits Of Surety Bonds
Financial Security
Construction Assurance
14
Benefits Of Performance Bonds

• Increase likelihood of timely project completion
• Assure compliance with contract
• Surety may resolve contractor problems
• Fulfills contractural obligations if contractor
  defaults

Performance Bond
15
Benefits Of Payment Bonds

• Protect certain subcontractors, suppliers,
  laborers from non-payment
• Eliminates mechanics liens
• Competitive pricing
• No cost when purchased with performance bond

Payment Bond
16
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. Premiums may vary depending on size, type contractors bonding capacity.
17
Responding to claims is the fulfillment of the
suretys promise made in its bond
18
Reasons For Contractor Failure
Accounting Problems
Change in Leadership
Material/ Equipment Shortages
Scope of Business
Unrealistic Growth
Labor Difficulties
Failure
19
Protection

• Provide trained personnel
• Provide payment to subs suppliers
• Offer financial assistance to contractor

Surety
20
Steps in the Claims Process
Claims Investigation
Review Options
Declaration Of Default
Resolution
Completion
21
Steps in the Claims Process
Claims Investigation
Review Options
Declaration Of Default
Resolution
Completion
22
Steps in the Claims Process
Claims Investigation
Review Options
Declaration Of Default
Resolution
Completion
23
Actions of a Surety

• Re-bid job for completion
• Arrange for replacement contractor
• Retain original contractor
• Pay the penal sum of the bond

Surety
24
Case in Point

• Surety Involvement Saves Projects

25
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

26
The Problems

• Default on 3 senior citizen homes 1 low income
  community rehab center
• Delays would hinder substantial HUD financing and
  tax credits

27
What Happened

• Contractor over-extended
• Re-work slowed schedule
• Key subs not bonded

28
The Suretys 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

29
The Outcome

• Paperwork not delayed
• Work completed on time
• No loss of tax credits or financing
• Occupied in time to satisfy HUD deadlines

30
The Outcome

• Surety protected school district
• and taxpayers from 1,865,753 loss
• Premium paid for bonds
• 129,290

31
The Goal Is ProjectCompletion
32
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