WHEN YOU BUILD... BOND

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WHEN YOU BUILD...BOND
Surety Bonds Financial Security Construction
Assurance
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Requiring Surety Bonds

• What are surety bonds?
• Who issues surety bonds?
• What type of protection do they provide?

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What Are Surety Bonds?

• A surety bond offers assurances to the owner of a
  construction project that the contractor will
  perform the work specified in the contract and
  pay certain subcontractors and suppliers.

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Surety Bonds Mandated on Public Works

• Federal
• Heard Act (1893) Miller Act (1935)
• State Local
• Little Miller Acts

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The 3 Cs of Prequalification
C
Capital Capacity Character
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Types of Bonds

• Bid Bond
• Performance Bond
• Payment Bond

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Types of Bonds

• Bid Bond
• Performance Bond
• Payment Bond

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Types of Bonds

• Bid Bond
• Performance Bond
• Payment Bond

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Protection
Owner
Developers
Lenders
Surety Bonds
Risk managers
Attorneys
Engineers
Architects
Subs
CPAs
Contractor
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Contractor Failure
Source Dun Bradstreet
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Peace of Mind For Owners

• We often feel if the contractor qualifies for
  the bonds, its probably a stable organization
  and someone who has gone through a rigorous
  review of his financial credibility. Hes also
  probably capable of performing the work. We rely
  on the suretys background checks of the general
  contractor to bring the contractors to a certain
  level of performance and guarantee that level of
  performance to us. - Bob Knopf

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Peace of Mind For General Contractors

• Just as owners require surety bonds from our
  company, we require them of our subcontractors
  because they provide us two levels of assurance
• First of all, that the work will be complete in
  accordance with the contract documents.
• Secondly, that they will pay for the materials
  and subcontractors at their level we wont have
  to pay for anything more than once.
• - Jim Davis, President
• James G. Davis Construction Corp.

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Who Issues Surety Bonds?

• Insurance companies
• Surety bond producers

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Surety Bonds vs. Traditional Insurance
Surety Bonds Insurance
3-party 2-party
Risk transfer Risk transfer
Duty to obligee Duty to insured
Regulated by State Insurance Departments Regulated by State Insurance Departments
Premium fee for prequalification services Premium actuarially determined
Project specific Usually term specific
Penal sum Policy limits
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Performance Bond Protection

• Re-bid the job for completion
• Arrange for replacement contractor
• Retain original contractor
• Reimburse owner as required by the bond

Surety
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Payment Bond Protection

• Surety pays eligible subs suppliers
• Protects owner from mechanics liens
• Protects subcontractors from nonpayment

Surety
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The Goal is Project Completion

• We were financing the development of a retail
  project with a large well-known discount
  department store that likes to get into its
  projects in October so they can benefit from the
  Christmas season. We did have a bonded contractor
  on that job and when the general contractor
  encountered financial difficulties, the bonding
  company stepped in and worked with the owner to
  replace that general contractor so that we were
  able to get that anchor tenant in on time for
  that particular season. - Carleen Petronio

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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.
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Conclusion

• WHEN YOU
• BUILD...BOND

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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