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SURETY Bonds
SURETY Bonds
Managing the Risk of Contractor
Default
What Is Surety Bonding?
Surety
ObligeePrincipal
Types of Contract Surety Bonds
Bid Bond Performance
Bond Payment Bond
Types of Contract Surety Bonds
Bid Bond Performance
Bond Payment Bond
Types of Contract Surety Bonds
Bid Bond Performance
Bond Payment Bond
How Surety Bonds Work
Protect owner against contractor failure
Protect subcontractors, laborers, & suppliers against nonpayment
Role of the Producer
Prepare case for surety underwriting
Preparation for prequalification
Relationship between contractor & surety company
Keep & increase surety capacity
Producer
Getting Projects
Completed
and
Subcontractors Paid
Contractor Failure Rates
Source: BizMiner
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%
Surety’s Areas of Expertise
Prequalification Claims Handling
CapacityFinancialStrength
CompanyHistory
OrganizationContinuation
Plans
References
Projects in progress
Prequalification
Surety Company’s Checklist
Good character Experience matching
contract requirements Financial strength Good credit history Established banking
relationship Line of credit Necessary equipment
Benefits of Surety Bonds
FinancialSecurity
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
PerformanceBond
Benefits of Payment Bonds
Protects certain subcontractors, suppliers, & laborers from non-payment
Eliminates mechanics’ liens Competitive pricing No cost when purchased
with performance bond
PaymentBond
Cost of Surety Bonds
Project Amount
Approx. Bond Premium0.5% - 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.
Responding to claims
is the fulfillment
of the surety’s promise
made in its bond.
Reasons For Contractor Failure
AccountingProblems
Change inLeadership
Scope of Business
Material/EquipmentShortages
UnrealisticGrowth
Failure
LaborDifficulties
Lack ofExperience
Protection
Provide trained personnel
Provide payment to subs & suppliers
Offer financial assistance to contractor
Surety
ClaimsInvestigation
Review Options
Resolution
Completion
Declaration of Default &Termination
of Contractor
Steps in the Claims Process
ClaimsInvestigation
Review Options
Resolution
Completion
Declaration of Default &
Termination ofContractor
Steps in the Claims Process
ClaimsInvestigation
Review Options
Resolution
Completion
Declaration of Default &
Termination ofContractor
Steps in the Claims Process
Actions of a Surety
Re-bid job for completion Arrange for replacement
contractor Retain original contractor Pay the penal sum of the
bond
Surety
Case in Point
Surety
Involvemen
t Saves
Projects
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
The Problems
Default on 3 senior citizen homes & 1 low income community rehab center
Delays would hinder substantial HUD financing and tax credits
What Happened
Contractor over-extended
Re-work slowed schedule
Key subs not bonded
The Surety’s 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
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
The Outcome
Surety protected school district and taxpayers from $1,865,753
loss
Premium paid for bonds:$129,290
The Goal Is Project
Completion
For More Information
Surety Information Office (SIO)
www.sio.org | [email protected]
SIO is a joint initiative of The Surety & Fidelity Association of America (SFAA) and National
Association of Surety Bond Producers (NASBP).