Surety Bonds 101 - WGFOA · Surety Bonds 101 September 20, 2012 Presented by: Troy Carlson...
Transcript of Surety Bonds 101 - WGFOA · Surety Bonds 101 September 20, 2012 Presented by: Troy Carlson...
What is a Surety Bond
An instrument where one party (Surety) guarantees the obligations of a second party (Principal) to a third party (Obligee)
Obligee
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to a third party (Obligee)
A three party contract between the Surety, Principal, and Obligee
PrincipalSurety
Parties to a Surety Bond
Obligee
(Owner) – Requires and receives
protection of bond
Parties to a Surety Bond
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PrincipalSurety
(Contractor) undertakes
obligation and provides bond
Issues bond and provides
guarantee
Surety Bonds Vs. Traditional Insurance
Surety Bonds Insurance3-party 2-party
Indemnification/surety doesn’t pay
claims unless your organization fails
Claims are expected & paid
Risk transfer Risk transfer
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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
Who Requires Bonds?
Public Sector
• Federal Government
• State & Local
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• State & Local Governments
Who Requires Bonds?
Private Sector
• Private Owners
• Lending Institutions
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• Lending Institutions
• General Contractors
Contract Surety Bonds
• Bid bonds
• Performance bonds
• Maintenance bonds
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• Payment bonds
• Supply 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.
Types of Bonds
1. Bid Bond
- Covers bid security
- Assures contractor, if
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- Assures contractor, if awarded a contract, will enter into the contract and provide the required Performance and Payment bonds.
Types of Bonds
2. Performance
Bond- Guarantees owner the contractor will perform the obligations contained in the
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obligations contained in the contract documents.
- If the contractor defaults, the Surety has the obligations to fulfill the contractor’s obligations.
Types of Bonds
3. Payment Bond
- Guarantees the payment of defined subcontractors and material suppliers.
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material suppliers.
Types of Bonds
4. Maintenance Bond
- Guarantees workmanship and
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- Guarantees workmanship and material for a period of time after project completion and acceptance of the work.
Functions of Bonds
- Ensure project completion
- Relieves owner from risk of financial loss due to Mechanic’s Liens
- Smooth transition from construction to permanent financing
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financing
- Provides payment protection for subcontractors and suppliers
- Protects public funds on public projects
Prequalification
Surety Bonds
• Capital
• Capacity
Letters of Credit
• Single focus
• Quality &
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• Capacity
• Character
• Quality &
liquidity of
collateral
What Are Bank Letters of Credit?
• Cash guarantee to owner
• Called on demand
• Payment to owner & loan for
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• Payment to owner & loan for contractor
• No guarantee of project completion
• Irrevocable
Borrowing Capacity
Surety Bonds
• Issued on unsecured basis
Letters of Credit
• Assets used as collateral
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• Does not diminish borrowing capacity
• Credit enhancement
• Diminish existing line of credit
• Can affect cash flow
Duration
Surety Bonds
• Duration of contract
Letters of Credit
• Date specific
• “Evergreen”
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contract
• Maintenance period
• “Evergreen” clauses
Claims
Surety Bonds
• Surety investigates claim of default
Letters of Credit
• Payable on demand
• Owner determines
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claim of default
• Surety’s options
• Surety pays rightful claims of certain parties
• Owner determines validity of claims by subs & suppliers
Benefits of Surety Bonds
• Protects the interest of labor & vendors on construction projectsSurety Bonds
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construction projects
• Surety company assumes the responsibility of investigating & validating claims
Surety Bonds
Performance Bond Protection
• Re-bid the job for completion
• Arrange for replacement
Surety
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replacement contractor
• Retain original contractor
• Reimburse owner as required by the bond
Surety
Payment Bond Protection
• Surety pays eligible subs & suppliers
• Protects owner from Surety
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• Protects owner from mechanics’ liens
• Protects subcontractors from nonpayment
Surety
Benefits of Surety Bonds
• Qualified bidders
• Reduced risk of liensOwner
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• Reduced risk of liens
• Timely project completion
• Defect protection
Owner
• Contract reviews
• Continuity plans
• Expertise
• Project qualificationContractor
Benefits of Surety Bonds
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• Project qualification
• Private construction
• Lending institutions
• Subcontractor protection
• Technical, managerial, financial assistance
Contractor
Cost of Surety Bonds
Bid Bonds Usually no cost
Performance Bonds ½ to 2% of contract price
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Payment Bonds Price included in cost of
Performance Bond
Maintenance Bonds Price for1 year included;
additional for longer term
Qualifying the Surety
A.M. Best Company
• Rating agency for all insurance and surety
companies. A+++ rating is best
• Anything B+ or lower is a red flag
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Treasury Dept. Circular 570
• Also know as the “Treasury List”, this publication lists the
sureties that are approved for Federal projects and the
maximum single bond that the government will accept
from that surety
Thank You
Questions ??
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Questions ??