SURETY Bonds

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SURETY Bonds

• Managing the Risk of Contractor Default

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

• Bid Bond
• Performance Bond
• Payment Bond

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Types of Contract Surety Bonds

• Bid Bond
• Performance Bond
• Payment Bond

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Types of Contract Surety Bonds

• Bid Bond
• Performance Bond
• Payment Bond

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How Surety Bonds Work

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

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Role of the Producer

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

Producer
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Getting ProjectsCompletedandSubcontractors Paid
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Contractor 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

• Source BizMiner

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Suretys Areas of Expertise
Prequalification
Claims Handling
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Prequalification
Capacity
Financial Strength
Company History
Organization
Continuation Plans
References
Projects in progress
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Surety Companys Checklist

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

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Benefits of Surety Bonds
Construction Assurance
Financial Security
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Benefits 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
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Benefits 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
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Cost 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.
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Responding to claims is the fulfillment of the
suretys promise made in its bond.
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Reasons For Contractor Failure
Accounting Problems
Change in Leadership
Material/ Equipment Shortages
Scope of Business
Labor Difficulties
Unrealistic Growth
Lack ofExperience
Failure
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Protection

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

Surety
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Steps in the Claims Process
Claims Investigation
Review Options
Declaration of Default Terminationof
Contractor
Resolution
Completion
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Steps in the Claims Process
Claims Investigation
Review Options
Declaration of Default Termination
ofContractor
Resolution
Completion
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Steps in the Claims Process
Claims Investigation
Review Options
Declaration of Default Termination
ofContractor
Resolution
Completion
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Actions of a Surety

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

Surety
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Case in Point

• Surety Involvement Saves Projects

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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

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The Problems

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

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What Happened

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

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The 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

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The 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

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The Outcome

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

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The Goal Is Project Completion
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For 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).