Surety Bonds

101

Surety Bonds

101

The Basics of Bonding

Surety Bonds Vs. Traditional Insurance

Surety Bonds Insurance3-party 2-party

Risk transfer Risk transfer

Duty to obligee Duty to insured

Regulated by State Insurance Departments

Regulated by State Insurance Departments

Premium fee for prequalification services

Premium actuarially determined

Project specific Usually term specific

Penal sum Policy limits

What is Surety Bonding?

Surety

ObligeePrincipal

Types of Surety Bonds

• Bid Bond

• Performance Bond

• Payment Bond

Types of Surety Bonds

• Bid Bond

• Performance Bond

• Payment Bond

Types of Surety Bonds

• Bid Bond

• Performance Bond

• Payment Bond

CapacityFinancialStrength

CompanyHistory

OrganizationContinuation

Plans

References

Prequalification

WorkIn progress

Common Perceptions

Perception RealitySurety wants contractors capable of completing the project

Surety wants sound businesspersons who run construction companies

Surety wants contractor to fulfill contractual obligations

Surety wants contractor to generate income by fulfilling contractual obligations

No failures leads to increased surety capacity

Ability to grow business & generate revenue leads to increased surety capacity

Benefits of Bonds

FinancialSecurity

ConstructionAssurance

Why

Do

Contractors

Fail?

Why

Do

Contractors

Fail?

Factors Beyond Control

MaterialsShortages

SiteConditions

Inflation

LaborDifficulties

WeatherDelays

EconomicDownturn

Failure

RISK

HighMaterials

prices

Unreasonableowners

Onerouscontracts

Shortage of qualified,skilled workers

Contractor Failure Risks

Insufficient Capital

Slow collections

Low profit margins

RISK

MaterialsShortages

OverExpansion

NewOwner

Inclement Weather

Contractor Failure Risks

SubFailure

Change inScope of

Work

Inadequate Management

Contractor Failure

Accountingissues Management

issues

Personnelissues

Performanceissues

Unrealisticgrowth

Failure

Accounting Issues

• Inadequate cost tracking systems

• Estimating or procurement problems

• Underinsured

• Improper accounting practices

Tips for Contractors To Avoid Default

• Construction-oriented CPA

• Adjust overhead

• Bank credit

• Conserve capital

• Bond subcontractors

Contractors

Surety Bonds and Insurance Coverage for Small and Emerging Contractors

817-226-4311 – Local866-226-4311 – Toll Free