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Con E 221 Review graded exams on Monday Review presentation guideline for term
papers Finalize presentation schedule on Monday
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RPQ
1. A surety bond is a type of insurance.A. True B. False
2. Approximately ___________ of all construction firms in operation today will be out of business in seven years.A. One-third B. One-half C. Two-thirds
3. Surety bonds are required by law on public as well as private construction jobs.A. True B. False
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RPQ #2
2. Approximately ___________ of all construction firms in operation today will be out of business in seven years.
A. One-third B. One-half C. Two-thirds
Correct Answer is: B. One-half
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RPQ #3
3. Surety bonds are required by law on public as well as private construction jobs.
A. True B. FalseCorrect Answer is: B. False
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What is a Surety? Surety – a party that assumes liability for
the debt, default or failure in duty of another.
Surety Bond – a contract that outlines the conditions of the assumed liability by a Surety.
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Surety Bond Remember – A surety bond is not an insurance
policy
Insurance – protects from risk of loss
Surety Bond – guarantees the performance of a defined contractual duty.
Surety Bond – an extension of credit that serves as an endorsement to a contractual relationship
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Parties to a Surety Bond Obligee – Owner
Principle – Prime Contractor – Gen. Contractor
Surety – entity providing the surety bond
Lending Institution – organization that provides financial loan to obligee for construction and long term (mortgage)
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Surety Bonds – More Definition Contract Surety Bonds = Surety Bonds =
Contract Bonds = Construction Contract Bonds
Surety agrees to indemnify the Obligee (Owner), against any default or failure in duty of the Principle (Gen. Contractor)
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What does “indemnify” mean?
To secure against hurt, loss, or damage To make compensation to for incurred
hurt, loss, or damage (hold harmless)
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Failure in Duty Failure in duty = breach of contract
i.e. Non-payment of labor (wages, benefits, payroll taxes), stops work through no fault of the owner, non-payment of subcontractors and suppliers after being paid by the owner
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Surety Bonds – More Definition Contact Bond
Three-party agreement Guarantees
Work completed in accordance with contract documents (plans, specifications)
All construction costs will be paid Labor, benefits, payroll taxes Materials Subcontractors
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Surety Coverage?
Regardless of the reason, if the prime contractor fails to fulfill its contractual obligations, the surety must assume the obligations of the contractor and see that the contract is completed, paying all costs up to the face amount of the bond. (in the book)
Not just provide money to get the project completed but actually responsible for finishing the contract.
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Why Surety?
Approximately one half of all construction contracting firms in operation today will not be in business seven years from now.
Why Surety? Because construction is a very risky business. A risk that some owners are not prepared or able to assume.
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Other Info Bond can not be invoked until the contractor is in
formal breach of the contract
Contract bonds are always written documents
Obligations of the bond = provisions of the contract
Required on public projects by law
Not required by law on private projects – owner’s call
The dollar amount in which the bond is written for is called the “penalty amount”
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Prime Contractor’s Three Principle Responsibilities
Prime Contractor’s three principle responsibilities
Honor its bid and sign all contract documents if awarded the contract
To perform the objectives of the contract
Pay all cost associated with the work
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Con E 221 – Revised Schedule Monday, Nov. 4th
Change for presentations: Must use Power Point Presentation
Surety Bonds (continued) Tuesday, Nov. 5th
Return EXAM 3 Presentation Schedule Power Point Presentation guidelines and tips
Wednesday, Nov. 6th
Construction Insurance Thursday, Nov. 7th
Term Papers are due at beginning of class at 11:00 AM Construction Insurance
Monday, Nov. 11th
First day of term paper presentations Split classes 11 AM and 4 PM
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Three Types of Bonds
A Surety covers these responsibilities through
Bid Bond
Performance Bond
Payment Bond
Public – separate bonds
Private – sometimes Performance & Payment bond are combined into one contract bond
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Bid Bond
Guarantees the owner that the contractor will honor it bid and will sign all contract documents if awarded the contact.
Owner is the Obligee Obligee may sue principal (prime
contractor) and surety to enforce the bond What happens if principal refuses to honor
its bid?
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Contractor Does Not Honor Their Bid
Principal and surety are liable on the bond for any additional costs the owner incurs in reletting the contract.
This usually is the difference in dollar amount between the low bid and the second low bid.
The penalty sum of a bid bond often is ten to twenty percent of the bid amount.
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Performance Bond Guarantees:
Contract performed Owner receives its structure Build in accordance with contract
Covers warranty period (normally one year)
Premium includes warranty period coverage
If the principal defaults what are the options for the surety?
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Three Choices If principal defaults, or is terminated for
default by the owner the surety has three choices:
Complete the contract itself through a completion contractor
Select a new contractor to contract directly with the owner
Allow the owner to complete the work with the surety paying the costs
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Payment Bond Protection of third parties to contract
Guarantees payment of labor and materials used or supplied in the performance of construction
Not required on privately financed work – few state statutes
Protects against “liens”
What are liens?
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What are “liens”? Right created by law to secure payment
for work performed and material furnished in the improvement of land
A lien is recorded (with county recorders office) against the title or deed for a property (land and/or building)
A Title to your new car will have a “lien holder”, your bank, if you have a car loan
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Statutory vs Common Law Bonds Payment Bonds are either statutory or
common-law Public – statutory (prescribed by law) Private – common law (the bond
instrument) Bond Forms
Public – standard by federal government written in accordance with Miller Act
Private – AIA form
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The Miller Act Enacted in 1935 All federal projects greater than $25,000 –
performance and payment bond required 100 percent of the contract amount Protects first and second tier
subcontractors only Cannot sue on the payment bond until 90
days after the last day labor was performed on job
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Bond Premiums
To compute contract bond premiums construction contracts are divided up into four classifications: (see pg 183) A-1 A B Miscellaneous
More than one classification – high premium rate controls
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The Surety
Subject to public regulation – same as insurance industry
Approved by the U.S. Treasury Department for government projects
A. M. Best Insurance Reports – financial ratings for insurance and surety companies
Owners can require a minimum Best Rating for the surety
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A. M. Best’s Ratings of Surety http://www.ambest.com/
Secure Best’s Ratings
A++ and A+ (Superior)
A and A- (Excellent)
B++ and B+ (Very Good)
Vulnerable Best’s Ratings
B and B- (Fair) C++ and C+ (Marginal) C and C- (Weak) D (Poor) E (Under Regulatory
Supervision) F (In Liquidation) S (Rating Suspended)
The rating symbols "A++", "A+", "A", "A-", "B++", and "B+" are registered certification marks of the A.M. Best Company, Inc.
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The Surety Owners may name the surety company for the
contractor to use – NOT RECOMMENDED PRACTICE, but is LEGAL for private work
Contractor typically have one surety (bonding company) that has pre-approved contractor
Surety pre-approval takes time and involves a review of audited financial statements and other records
Co-sureties – large project – one surety does not have the financial capacity for large risks
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Indemnity of Surety Surety indemnifies the owner against
default by the contractor
Contractor indemnifies the surety against claims and damages due to contractor’s failure to perform
Surety is not legally obligated to provide payment and performance bond if they provided bid bond – but always do
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Bonding Capacity Maximum dollar value of uncompleted
work the surety will allow the contractor to have on going
Based on contractor’s net worth and cash liquidity
Surety may also limit dollar value of one project
Example: total bonding capacity of $5 million
maximum project bond of $1 million
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Surety Agent Local representative for surety Many agents are independent and sell
contract bonds by multiple surety companies
In reality, Bid Bonds cost the contractor nothing – no cost, as a professional courtesy
If contractor is the low bidder the surety agent wants the opportunity to sell the contract bonds
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Subcontractor Bonds
Contract bond that covers the performance of subcontractors
Common on private projects Requested by and paid by owner Cost: 0.5 to 1% for excellent
subcontractors1 to 2% for good subcontractors>2% for average to marginal subs
(cost is a percentage of subcontract value)
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