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SURETY BONDS

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					 Surety
 Bonds
Managing the Risk of
 Contractor Default
What Is Surety Bonding?


   Principal            Obligee




               Surety
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
Producer   • Preparation for
             prequalification
           • Relationship between
             contractor & surety company
           • Keep & increase surety
             capacity
   Seeing
  Projects
To Completion
Contractor Default




     Source: Dun & Bradstreet
Surety’s Areas of Expertise



            Prequalification



            Claims Handling
    Prequalification
              Financial      Company
Capacity
              Strength        History

                    Continuation
    Organization
                       Plans


            References


              Projects
             in progress
Surety Company’s
    Checklist
       Good character
       Experience matching
        contract requirements
       Financial strength
       Excellent credit history
       Established banking
        relationship
       Line of credit
       Necessary equipment
        Benefits
    Of Surety Bonds
               Financial
               Security



Construction
  Assurance
           Benefits
    Of Performance Bonds

              • Increase likelihood of timely
                project completion
Performance   • Assure compliance with
    Bond
                contract
              • Surety may resolve contractor
                problems
              • Fulfills contractural obligations
                if contractor defaults
          Benefits
     Of Payment Bonds

          • Protect certain subcontractors,
            suppliers, & laborers from
Payment     non-payment
 Bond
          • Eliminates mechanics’ liens
          • Competitive pricing
          • No cost when purchased with
            performance bond
     Cost of Surety Bonds

       Project                Approx. Bond
       Amount                   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.
Responding to claims
   is the fulfillment
of the surety’s promise
   made in its bond
  Reasons For Contractor
         Failure
Accounting
               Change in
 Problems
               Leadership

                            Material/
    Scope of
                           Equipment
    Business
                           Shortages

             Unrealistic         Labor
              Growth          Difficulties

                                             Failure
         Protection


         • Provide trained personnel
         • Provide payment to subs
Surety
           & suppliers
         • Offer financial assistance
           to contractor
      Steps in the Claims
           Process

Declaration      Claims       Review
 Of Default   Investigation   Options




               Resolution



              Completion
      Steps in the Claims
           Process

Declaration      Claims       Review
 Of Default   Investigation   Options




               Resolution



              Completion
      Steps in the Claims
           Process

Declaration      Claims       Review
 Of Default   Investigation   Options




               Resolution



              Completion
   Actions of a Surety

         • Re-bid job for completion
         • Arrange for replacement
Surety     contractor
         • Retain original contractor
         • Pay the penal sum of the
           bond
Case in Point

          “Surety
        Involvement
           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 team to handle HUD,
  federal, & state requirements
• Retained and paid subcontractors,
  laborers & suppliers
• Financial help with schools
             The Outcome

•   Paperwork not delayed
•   Work completed on time
•   No loss of tax credits or financing
•   Occupied in time to satisfy HUD
    deadlines
        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
       1828 L St. NW, Suite 720
        Washington, DC 20036
   202-686-7463 | Fax 202-686-3656
     www.sio.org | sio@sio.org

				
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posted:3/13/2011
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