Con E 221

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Con E 221

• Review graded exams on Monday
• Review presentation guideline for term papers
• Finalize presentation schedule on Monday

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Construction Engineering 221

• Contract Surety Bonds

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RPQ

• 1. A surety bond is a type of insurance.
• A. True B. False
• 2. Approximately ___________ of all construction
  firms in operation today will be out of business
  in seven years.
• A. One-third B. One-half C. Two-thirds
• 3. Surety bonds are required by law on public as
  well as private construction jobs.
• A. True B. False

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RPQ 1

• 1. A surety bond is a type of insurance.
• A. True B. False
• Correct Answer is B. False

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RPQ 2

• 2. Approximately ___________ of all construction
  firms in operation today will be out of business
  in seven years.
• A. One-third B. One-half C. Two-thirds
• Correct Answer is B. One-half

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RPQ 3

• 3. Surety bonds are required by law on public as
  well as private construction jobs.
• A. True B. False
• Correct Answer is B. False

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• What is a Surety?

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What is a Surety?

• Surety a party that assumes liability for the
  debt, default or failure in duty of another.
• Surety Bond a contract that outlines the
  conditions of the assumed liability by a Surety.

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Surety Bond

• Remember A surety bond is not an insurance
  policy
• Insurance protects from risk of loss
• Surety Bond guarantees the performance of a
  defined contractual duty.
• Surety Bond an extension of credit that serves
  as an endorsement to a contractual relationship

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Parties to a Surety Bond

• Obligee Owner
• Principle Prime Contractor Gen. Contractor
• Surety entity providing the surety bond
• Lending Institution organization that provides
  financial loan to obligee for construction and
  long term (mortgage)

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Surety Bonds More Definition

• Contract Surety Bonds Surety Bonds Contract
  Bonds Construction Contract Bonds
• Surety agrees to indemnify the Obligee (Owner),
  against any default or failure in duty of the
  Principle (Gen. Contractor)

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What does indemnify mean?

• To secure against hurt, loss, or damage
• To make compensation to for incurred hurt, loss,
  or damage (hold harmless)

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Failure in Duty

• Failure in duty breach of contract
• i.e. Non-payment of labor (wages, benefits,
  payroll taxes), stops work through no fault of
  the owner, non-payment of subcontractors and
  suppliers after being paid by the owner

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Surety Bonds More Definition

• Contact Bond
• Three-party agreement
• Guarantees
• Work completed in accordance with contract
  documents (plans, specifications)
• All construction costs will be paid
• Labor, benefits, payroll taxes
• Materials
• Subcontractors

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Surety Coverage?

• Regardless of the reason, if the prime contractor
  fails to fulfill its contractual obligations, the
  surety must assume the obligations of the
  contractor and see that the contract is
  completed, paying all costs up to the face amount
  of the bond. (in the book)
• Not just provide money to get the project
  completed but actually responsible for finishing
  the contract.

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Why Surety?

• Approximately one half of all construction
  contracting firms in operation today will not be
  in business seven years from now.
• Why Surety? Because construction is a very risky
  business. A risk that some owners are not
  prepared or able to assume.

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Other Info

• Bond can not be invoked until the contractor is
  in formal breach of the contract
• Contract bonds are always written documents
• Obligations of the bond provisions of the
  contract
• Required on public projects by law
• Not required by law on private projects owners
  call
• The dollar amount in which the bond is written
  for is called the penalty amount

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Prime Contractors Three Principle
Responsibilities

• What are they?

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Prime Contractors Three Principle
Responsibilities

• Prime Contractors three principle
  responsibilities
• Honor its bid and sign all contract documents if
  awarded the contract
• To perform the objectives of the contract
• Pay all cost associated with the work

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Con E 221 Revised Schedule

• Monday, Nov. 4th
• Change for presentations Must use Power Point
  Presentation
• Surety Bonds (continued)
• Tuesday, Nov. 5th
• Return EXAM 3
• Presentation Schedule
• Power Point Presentation guidelines and tips
• Wednesday, Nov. 6th
• Construction Insurance
• Thursday, Nov. 7th
• Term Papers are due at beginning of class at
  1100 AM
• Construction Insurance
• Monday, Nov. 11th
• First day of term paper presentations
• Split classes 11 AM and 4 PM

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Three Types of Bonds

• A Surety covers these responsibilities through
• Bid Bond
• Performance Bond
• Payment Bond
• Public separate bonds
• Private sometimes Performance Payment bond
  are combined into one contract bond

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Bid Bond

• Guarantees the owner that the contractor will
  honor it bid and will sign all contract documents
  if awarded the contact.
• Owner is the Obligee
• Obligee may sue principal (prime contractor) and
  surety to enforce the bond
• What happens if principal refuses to honor its
  bid?

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Contractor Does Not Honor Their Bid

• Principal and surety are liable on the bond for
  any additional costs the owner incurs in
  reletting the contract.
• This usually is the difference in dollar amount
  between the low bid and the second low bid.
• The penalty sum of a bid bond often is ten to
  twenty percent of the bid amount.

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Performance Bond

• Guarantees
• Contract performed
• Owner receives its structure
• Build in accordance with contract
• Covers warranty period (normally one year)
• Premium includes warranty period coverage
• If the principal defaults what are the options
  for the surety?

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Three Choices

• If principal defaults, or is terminated for
  default by the owner the surety has three
  choices
• Complete the contract itself through a completion
  contractor
• Select a new contractor to contract directly with
  the owner
• Allow the owner to complete the work with the
  surety paying the costs

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Payment Bond

• Protection of third parties to contract
• Guarantees payment of labor and materials used or
  supplied in the performance of construction
• Not required on privately financed work few
  state statutes
• Protects against liens
• What are liens?

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What are liens?

• Right created by law to secure payment for work
  performed and material furnished in the
  improvement of land
• A lien is recorded (with county recorders office)
  against the title or deed for a property (land
  and/or building)
• A Title to your new car will have a lien
  holder, your bank, if you have a car loan

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Statutory vs Common Law Bonds

• Payment Bonds are either statutory or common-law
• Public statutory (prescribed by law)
• Private common law (the bond instrument)
• Bond Forms
• Public standard by federal government written
  in accordance with Miller Act
• Private AIA form

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The Miller Act

• Enacted in 1935
• All federal projects greater than 25,000
  performance and payment bond required
• 100 percent of the contract amount
• Protects first and second tier subcontractors
  only
• Cannot sue on the payment bond until 90 days
  after the last day labor was performed on job

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Bond Premiums

• To compute contract bond premiums construction
  contracts are divided up into four
  classifications (see pg 183)
• A-1
• A
• B
• Miscellaneous
• More than one classification high premium rate
  controls

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The Surety

• Subject to public regulation same as insurance
  industry
• Approved by the U.S. Treasury Department for
  government projects
• A. M. Best Insurance Reports financial ratings
  for insurance and surety companies
• Owners can require a minimum Best Rating for the
  surety

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M. Bests Ratings of Surety http//www.ambest.com/

• Secure Bests Ratings
• A and A (Superior)
• A and A- (Excellent)
• B and B (Very Good)

• Vulnerable Bests Ratings
• B and B- (Fair)
• C and C (Marginal)
• C and C- (Weak)
• D (Poor)
• E (Under Regulatory Supervision)
• F (In Liquidation)
• S (Rating Suspended)

The rating symbols "A", "A", "A", "A-", "B",
and "B" are registered certification marks of
the A.M. Best Company, Inc.
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The Surety

• Owners may name the surety company for the
  contractor to use NOT RECOMMENDED PRACTICE, but
  is LEGAL for private work
• Contractor typically have one surety (bonding
  company) that has pre-approved contractor
• Surety pre-approval takes time and involves a
  review of audited financial statements and other
  records
• Co-sureties large project one surety does not
  have the financial capacity for large risks

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Indemnity of Surety

• Surety indemnifies the owner against default by
  the contractor
• Contractor indemnifies the surety against claims
  and damages due to contractors failure to
  perform
• Surety is not legally obligated to provide
  payment and performance bond if they provided bid
  bond but always do

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Bonding Capacity

• Maximum dollar value of uncompleted work the
  surety will allow the contractor to have on going
• Based on contractors net worth and cash
  liquidity
• Surety may also limit dollar value of one project
  
• Example total bonding capacity of 5 million
• maximum project bond of 1 million

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Surety Agent

• Local representative for surety
• Many agents are independent and sell contract
  bonds by multiple surety companies
• In reality, Bid Bonds cost the contractor nothing
  no cost, as a professional courtesy
• If contractor is the low bidder the surety agent
  wants the opportunity to sell the contract bonds

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Subcontractor Bonds

• Contract bond that covers the performance of
  subcontractors
• Common on private projects
• Requested by and paid by owner
• Cost 0.5 to 1 for excellent subcontractors
• 1 to 2 for good subcontractors
• gt2 for average to marginal subs
• (cost is a percentage of subcontract value)

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Miscellaneous Surety Bonds

• Bonds to Release Retainage
• Bonds to Discharge Liens or Claims
• Commonly called bonding over a lien
• Bonds to Indemnify Owner Against Liens
• License Bonds
• Self-Insurers Workers Compensation Bond
• Union Wage Bond