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SURETY Bonds

SURETY Bonds. Managing the Risk of Contractor Default. What Is Surety Bonding?. Principal. Obligee. Surety. 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.

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SURETY Bonds

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  1. SURETY Bonds Managing the Risk of Contractor Default

  2. What Is Surety Bonding? Principal Obligee Surety

  3. Types of Contract Surety Bonds • Bid Bond • Performance Bond • Payment Bond

  4. Types of Contract Surety Bonds • Bid Bond • Performance Bond • Payment Bond

  5. Types of Contract Surety Bonds • Bid Bond • Performance Bond • Payment Bond

  6. How Surety Bonds Work Protect owner against contractor failure Protect subcontractors, laborers, & suppliers against nonpayment

  7. Role of the Producer • Prepare case for surety underwriting • Preparation for prequalification • Relationship between contractor & surety company • Keep & increase surety capacity Producer

  8. Getting ProjectsCompletedandSubcontractors Paid

  9. Contractor Failure Rates Source: BizMiner

  10. Surety’s Areas of Expertise Prequalification Claims Handling

  11. Prequalification Capacity Financial Strength Company History Organization Continuation Plans References Projects in progress

  12. Surety Company’s Checklist • Good character • Experience matching contract requirements • Financial strength • Good credit history • Established banking relationship • Line of credit • Necessary equipment

  13. Benefits of Surety Bonds Construction Assurance Financial Security

  14. 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

  15. 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

  16. Cost of Surety Bonds

  17. Responding to claims is the fulfillment of the surety’s promise made in its bond.

  18. Reasons For Contractor Failure Accounting Problems Change in Leadership Material/ Equipment Shortages Scope of Business Labor Difficulties Unrealistic Growth Lack ofExperience Failure

  19. Protection • Provide trained personnel • Provide payment to subs & suppliers • Offer financial assistance to contractor Surety

  20. Steps in the Claims Process Declaration of Default &Terminationof Contractor Claims Investigation Review Options Resolution Completion

  21. Steps in the Claims Process Declaration of Default &Termination ofContractor Claims Investigation Review Options Resolution Completion

  22. Steps in the Claims Process Declaration of Default &Termination ofContractor Claims Investigation Review Options Resolution Completion

  23. Actions of a Surety • Re-bid job for completion • Arrange for replacement contractor • Retain original contractor • Pay the penal sum of the bond Surety

  24. Case in Point Surety Involvement Saves Projects

  25. 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

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

  27. What Happened • Contractor over-extended • Re-work slowed schedule • Key subs not bonded

  28. 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

  29. 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

  30. The Outcome Surety protected school district and taxpayers from $1,865,753 loss Premium paid for bonds: $129,290

  31. The Goal Is Project Completion

  32. For More Information Surety Information Office (SIO) www.sio.org | sio@sio.org SIO is a joint initiative of The Surety & Fidelity Association of America (SFAA) and National Association of Surety Bond Producers (NASBP).

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