surety bonds the sensible choice for managing risk
TRANSCRIPT
Surety
Bonds
Surety
BondsThe Sensible Choice For
Managing Risk
Can Surety Bonds Help You?
• How do you evaluate & manage risk?
• How do you ensure projects are completed on time, on budget, and to contract specifications?
• How do you ensure contractors successfully meet obligations?
Can Surety Bonds Help You?
• Bid Bond
• Performance Bond
• Payment Bond
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
Contract Surety Bonds
• Bid Bond
• Performance Bond
• Payment Bond
Contract Surety Bonds
• Bid Bond
• Performance Bond
• Payment Bond
Contract Surety Bonds
• Bid Bond
• Performance Bond
• Payment Bond
Fundamentals of Surety
Contractor default is preventable
Surety companies & producers prequalify contractors
Surety companies back the bond with their own assets
The 3 Cs Of Prequalification
Capital
Capacity
Character
Capital
Capacity
Character
Analyzing Financial Strength
CapitalFinancial
statements
Working capital
Work-in-progress
Indemnity
Evaluating Ability To Perform
CapitalFinancial
statements
Working capital
Work-in-progress
Indemnity
CapacityResumes
Contingency plan
Business plan
Equipment
Assessing Reputation
CapitalFinancial
statements
Working capital
Work-in-progress
Indemnity
CapacityResumes
Contingency plan
Business plan – short & long term
Equipment
CharacterReputation
Relationships
References
Reviewing Business Ventures
• Document business commitments that can affect the contractor’s business– Owning property– Side ventures
Surety
Contractor Failure
Number of Years Failed Contractors Were in Business
6-10 Years29%
0-5 Years32%
10+ Years39%
Source: Dun & Bradstreet
Why Do Contractors Fail?
Failure
MaterialsShortages
OverExpansion
NewOwner
Cost Escalations
SubFailure
Change inScope
Inadequate Management
Failure
Why Do Contractors Fail?
Work Environment
EconomicDownturn
Death or Illness of Key Employee
OnerousTerms
Inclement Weather
FailureFailure
Claims
Surety
ObligeePrincipal
Expediting The Claims Process
• Clearly define default in contract
• Submit status reports to surety
• Promptly notify surety of performance or payment problems
• Owner must file formal declaration of default
Responsibility Of The Surety
• Acknowledge claim
• Investigate claim
• Determine & fulfill obligations
Surety
Performance Bond Protection
• Re-let the job
• Provide replacement contractor
• Retain original contractor
• Reimburse owner penal sum
Surety
Payment Bond Protection
• Assures payment
• No mechanics’ liens
• Keeps subcontractors on the job
Surety
Surety Bonds vs. Letters of Credit
Surety Credit Bank CreditPremium Interest
Expect reimbursement if loss
Repay loan
Principal benefit of surety credit
Borrower has benefit of bank $
The Value Of Surety Bonds
• Bid Bonds
• Performance Bonds
• Payment Bonds
The Value Of Surety Bonds
• Bid Bonds
• Performance Bonds
• Payment Bonds
• Bid Bonds
• Performance Bonds
• Payment Bonds
The Value Of Surety Bonds
Cost 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.
The Underlying Agreement
• Look at obligations
• Determine risks
• Match capable principal to fulfill agreement
Surety
The Owner’s Responsibilities
• Provide working set of plans and specifications
• Establish terms of the agreement
• Ensure full & timely payment• Maintain adequate insurance• Pay property taxes• Communicate
Owner
1. Owner specifies surety bonds in contract documents
2. Contractor contacts surety bond producer
3. Producer guides contractor through prequalification
4. Contractor obtains bonds & delivers to owner
Bond Specifications
Qualify Your Contractor’s Surety
A.M. Best Company www.ambest.com
Dun & Bradstreet www.dandb.com
Standard & Poor’s www.sandp.com
Moody’s www.moodys.com
Treasury Dept. www.fms.treas.gov/c570/c570.html
State Insurance Dept. www.naic.org
For More Information
Surety Information Office1828 L St. NW, Suite 720
Washington, DC 20036
202-686-7463 | Fax 202-686-3656
www.sio.org | [email protected]