Reducing Subcontractor Financial Risk

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Surety Bonds

• Performance Bond
• Payment Bond

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Benefits Of Bonding Subs

• Prequalified subs
• Risk Transfer
• Improves contractors credit standing

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Prequalification Process
Business Operations
Financial Strength
Experience
Sub Documents
Exposure Progress
Size Location
Ability To Perform
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Indemnification

• Corporate personal assets on the line
• Incentive for sub to complete bonded work

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Availability of Surety

• Traditional sureties
• Specialized sureties
• SBA program

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Confirm Ability To Provide Bonds
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Limited Surety Capacity

• Labor-only contract
• Phased contract

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Qualify The Subcontractors Surety

• A.M. Best Company www.ambest.com
• Dun Bradstreet www.dnb.com/us
• Standard Poors www.standardandpoors.com
• Moodys www.moodys.com
• Treasury Dept. www.fms.treas.gov/c570/c570.html
• State Insurance Dept. www.naic.org/state_web_map.h
  tm

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Surety Rates

Bid Bond Usually no or minimal charge
Performance Bond ½ - 2 of contract price
Payment Bond Usually included with Performance Bond)
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Surety Communications

• Job status reports
• Provide early warnings of serious problems

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Dispute vs. Default

• Performance obligations defined in subcontract
• Notify surety of problems
• Formal written declaration of default

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Why Subcontractors Fail
Accounting Issues
Management Issues
Personnel Issues
Performance Issues
Failure
Unrealistic Growth
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If Default Occurs

• Acknowledge claim
• Investigate claim
• Determine obligations
• Fulfill obligations

Surety
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Suretys Options

• Assist subcontractor to completion
• Bring in replacement
• Negotiate financial settlement

Surety
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Establishing A Bonding Policy

• Establish thresholds
• Articulate exceptions
• Notify subcontractors surety

Contractor
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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