protection for third party vendor contracts surety bonds for public entities
TRANSCRIPT
Protection for Third Party
Vendor Contracts
Protection for Third Party
Vendor Contracts
Surety Bonds
For Public Entities
Why Bonds Are Required
• Miller Act of 1935– For federally funded
public works projects over $150,000
• “Little Miller Acts”– For state & local
public works projects
What is a Surety Bond?
Surety(Guarantor)
Obligee(Public Entity)
Principal(Vendor)
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
Elements Of Prequalification
Capital
Capacity
Character
Capital
Capacity
Character
Capital: Financial Strength
CapitalFinancial statements
Net Worth
Cash Flow
Indemnity
Capacity: Ability to Perform
CapitalFinancial statements
Working capital
Net Worth
Cash Flows
Indemnity
CapacityResumes
Contingency plan
Business plan- short & long term
Character: References & Reputation
CharacterReputation
Relationships
References
CapitalFinancial statements
Net Worth
Cash Flows
Indemnity
CapacityResumes
Contingency plan
Business plan- short & long term
Equipment
Role of the Underwriter
• Review obligations
• Determine the risk
• Provide qualified principal to owner
Underwriter
Underlying Agreement
• Primary instrument to establish risk associated with the guarantee
• Requirements contained in the contract documents
Functions of Surety Bonds
• Competitive bidding process
• “On time performance”• Saves tax dollars• Protects tax payer dollars
Surety Bonds
The Advantages Of Surety Bonds
• Qualified vendors• Competitive pricing• Timely contract performance• Quality product• Financial recourse• Insulates public officials• Efficient management of
public works administration• Protect taxpayer dollars
Surety Bonds
Surety vs. ILOCILOC Bond
• Financial Prequalification Yes Yes• Capabilities Prequalification No Yes• Review of contract documents
and guarantee forms No Yes• Guarantee completion No Yes• Warranty Period Covered No Yes• Cancellable Yes No/Yes• 100% Coverage No Yes• Impact on Bank Line Yes No
An Owner’s Guide
To The Surety
Claims Process(optional section)
An Owner’s Guide
To The Surety
Claims Process(optional section)
When Problems Arise ....
• Keep the surety informed of the principal’s progress
• If principal defaults, submit written declaration of default
• Allow the surety time to investigate the claim
Obligee
Surety’s Responsibilities In a Claims Situation
• Principal’s contractual obligations
• Obligee’s contractual obligations
• Principal’s defense
• Whether the obligee has met its obligations
Surety
Managing The Claims Process
• Be cognizant of legal position
• Avoid improperly worded letters
• Written notice of known problems
• Ask for a specific response
Obligee
Surety Responsiveness
• Be reasonable in your expectations
• Be diligent in providing notice & maintaining records
• Contact insurance commissioner
Obligee
The Advantages Of Surety Bonds
• Qualified vendors• Competitive pricing• Timely contract performance• Quality product• Financial recourse• Insulates public officials• Efficient management of
public works administration• Protect taxpayer dollars
Surety Bonds
Your Surety Professional Is Your Consultant
FinancialSecurity
QualifiedPrincipals