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 | sio@sio.org

SIO is a joint initiative of The Surety & Fidelity Association of America (SFAA) and National

Association of Surety Bond Producers (NASBP).