Surety Bonds:

Financial SecurityConstruction Assurance

WHEN YOU BUILD...

BOND

WHEN YOU BUILD...

BOND

Requiring Surety BondsRequiring Surety Bonds

• What are surety bonds?

• Who issues surety bonds?

• What type of protection do they provide?

What Are Surety Bonds? What Are Surety Bonds?

A surety bond offers assurances to

the owner of a construction project

that the contractor will perform the

work specified in the contract and pay

certain subcontractors and suppliers.

Surety Bonds Mandated on Public Works

Surety Bonds Mandated on Public Works

• Federal– Heard Act (1893) &

Miller Act (1935)

• State & Local– “Little Miller Acts”

The 3 Cs of PrequalificationThe 3 Cs of Prequalification

Capital

Capacity

Character

Capital

Capacity

Character

Types of BondsTypes of Bonds

• Bid Bond

• Performance Bond

• Payment Bond

Types of BondsTypes of Bonds

• Bid Bond

• Performance Bond

• Payment Bond

Types of BondsTypes of Bonds

• Bid Bond

• Performance Bond

• Payment Bond

ProtectionProtection

SuretyBonds

Developers Lenders

Owner

Riskmanagers

Attorneys

Architects Engineers

CPAs Subs

Contractor

Contractor FailureContractor Failure

Number of Years Failed Contractors Were in Business

6-10 Years29%

0-5 Years32%

10+ Years39%

Source: Dun & Bradstreet

Peace of Mind For Owners

Peace of Mind For Owners

“We often feel if the contractor qualifies for the bonds,

it’s probably a stable organization and someone who

has gone through a rigorous review of his financial

credibility. He’s also probably capable of performing the

work. We rely on the surety’s background checks of the

general contractor to bring the contractors to a certain

level of performance and guarantee that level of

performance to us.” - Bob Knopf

Peace of Mind For General Contractors

Peace of Mind For General Contractors

“Just as owners require surety bonds from our company, we

require them of our subcontractors because they provide

us two levels of assurance:

– First of all, that the work will be complete in accordance

with the contract documents.

– Secondly, that they will pay for the materials and

subcontractors at their level & we won’t have to pay for

anything more than once.”

- Jim Davis, President

James G. Davis Construction Corp.

Who Issues Surety Bonds?Who Issues Surety Bonds?

• Insurance companies

• Surety bond producers

Surety Bonds vs. Traditional Insurance

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

Performance Bond ProtectionPerformance Bond Protection

• Re-bid the job for completion

• Arrange for replacement contractor

• Retain original contractor

• Reimburse owner as required by the bond

Surety

Payment Bond Protection

Payment Bond Protection

• Surety pays eligible subs & suppliers

• Protects owner from mechanics’ liens

• Protects subcontractors from nonpayment

Surety

The Goal is Project Completion

The Goal is Project Completion

“We were financing the development of a retail project with

a large well-known discount department store that likes to

get into its projects in October so they can benefit from the

Christmas season. We did have a bonded contractor on

that job and when the general contractor encountered

financial difficulties, the bonding company stepped in and

worked with the owner to replace that general contractor

so that we were able to get that anchor tenant in on time

for that particular season.” - Carleen Petronio

Cost of Surety BondsCost of Surety Bonds

Project Amount

Approx. Bond Premium

$1 Million $7,700 – $13,500

$5 Million $33,200 – $47,250

$10 Million $56,950 – $81,000

$20 Million $101,950 – $146,000

* Premiums may vary depending on size, type & contractors bonding capacity.

ConclusionConclusion

WHEN YOU BUILD...

BOND

WHEN YOU BUILD...

BOND

For More Information For More Information

Surety Information Office1828 L St. NW, Suite 720

Washington, DC 20036

202-686-7463 | Fax 202-686-3656

www.sio.org | sio@sio.org