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WHEN YOU BUILD... BOND. Surety Bonds: Financial Security Construction Assurance. Requiring Surety Bonds. What are surety bonds? Who issues surety bonds? What type of protection do they provide?. What Are Surety Bonds?. - PowerPoint PPT PresentationTRANSCRIPT
Surety Bonds:
Financial SecurityConstruction Assurance
WHEN YOU BUILD...
BOND
WHEN YOU BUILD...
BOND
Requiring Surety BondsRequiring Surety Bonds
• What are surety bonds?
• Who issues surety bonds?
• What type of protection do they provide?
What Are Surety Bonds? What Are Surety 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.
Surety Bonds Mandated on Public Works
Surety Bonds Mandated on Public Works
• Federal– Heard Act (1893) &
Miller Act (1935)
• State & Local– “Little Miller Acts”
The 3 Cs of PrequalificationThe 3 Cs of Prequalification
Capital
Capacity
Character
Capital
Capacity
Character
Types of BondsTypes of Bonds
• Bid Bond
• Performance Bond
• Payment Bond
Types of BondsTypes of Bonds
• Bid Bond
• Performance Bond
• Payment Bond
Types of BondsTypes of Bonds
• Bid Bond
• Performance Bond
• Payment Bond
ProtectionProtection
SuretyBonds
Developers Lenders
Owner
Riskmanagers
Attorneys
Architects Engineers
CPAs Subs
Contractor
Contractor FailureContractor Failure
Number of Years Failed Contractors Were in Business
6-10 Years29%
0-5 Years32%
10+ Years39%
Source: Dun & Bradstreet
Peace of Mind For Owners
Peace of Mind For Owners
“We often feel if the contractor qualifies for the bonds,
it’s probably a stable organization and someone who
has gone through a rigorous review of his financial
credibility. He’s also probably capable of performing the
work. We rely on the surety’s background checks of the
general contractor to bring the contractors to a certain
level of performance and guarantee that level of
performance to us.” - Bob Knopf
Peace of Mind For General Contractors
Peace of Mind For General Contractors
“Just as owners require surety bonds from our company, we
require them of our subcontractors because they provide
us two levels of assurance:
– First of all, that the work will be complete in accordance
with the contract documents.
– Secondly, that they will pay for the materials and
subcontractors at their level & we won’t have to pay for
anything more than once.”
- Jim Davis, President
James G. Davis Construction Corp.
Who Issues Surety Bonds?Who Issues Surety Bonds?
• Insurance companies
• Surety bond producers
Surety Bonds vs. Traditional Insurance
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
Performance Bond ProtectionPerformance Bond Protection
• Re-bid the job for completion
• Arrange for replacement contractor
• Retain original contractor
• Reimburse owner as required by the bond
Surety
Payment Bond Protection
Payment Bond Protection
• Surety pays eligible subs & suppliers
• Protects owner from mechanics’ liens
• Protects subcontractors from nonpayment
Surety
The Goal is Project Completion
The Goal is Project Completion
“We were financing the development of a retail project with
a large well-known discount department store that likes to
get into its projects in October so they can benefit from the
Christmas season. We did have a bonded contractor on
that job and when the general contractor encountered
financial difficulties, the bonding company stepped in and
worked with the owner to replace that general contractor
so that we were able to get that anchor tenant in on time
for that particular season.” - Carleen Petronio
Cost of Surety BondsCost 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.
ConclusionConclusion
WHEN YOU BUILD...
BOND
WHEN YOU BUILD...
BOND
For More Information 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]