Construction Surety Bonds September 17, 2014 Presented by: Walt - PowerPoint PPT Presentation

Construction Surety Bonds September 17, 2014 Presented by: Walt Caldwell Walt.Caldwell@willis.com

What is a Surety Bond An instrument where one party (Surety) guarantees the obligations of a Obligee second party (Principal) to a third party (Obligee) Surety Principal A three party contract between the Surety, Principal, and Obligee 2

Parties to a Surety Bond Parties to a Surety Bond (Owner) – Requires and receives protection of bond Obligee Issues bond (Contractor) and provides undertakes Surety Principal guarantee obligation and provides bond 3

Surety Bonds Vs. Traditional Insurance Surety Bonds Insurance 3-party 2-party Indemnification/surety doesn’t pay Claims are expected & paid claims unless your organization fails Risk transfer Risk transfer Duty to obligee Duty to insured Regulated by State Insurance Regulated by State Insurance Departments Departments Premium fee for prequalification Premium actuarially determined services Project specific Usually term specific Penal sum Policy limits 4

Who Requires Bonds? Public Sector • Federal Government • State & Local Governments 5

Who Requires Bonds? Private Sector • Private Owners • Lending Institutions • General Contractors 6

Contract Surety Bonds • Bid bonds • Performance bonds • Maintenance bonds • Payment bonds • Supply 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. 7

Types of Bonds 1. Bid Bond - Covers bid security - Assures contractor, if awarded a contract, will enter into the contract and provide the required Performance and Payment bonds. 8

Types of Bonds 2 . Performance Bond - Guarantees owner the contractor will perform the obligations contained in the contract documents. - If the contractor defaults, the Surety has the obligations to fulfill the contractor’s obligations. 9

Types of Bonds 3. Payment Bond - Guarantees the payment of defined subcontractors and material suppliers. 10 10

Types of Bonds 4. Maintenance Bond - Guarantees workmanship and material for a period of time after project completion and acceptance of the work. 11 11

Functions of Bonds - Ensure project completion - Relieves owner from risk of financial loss due to Mechanic’s Liens - Smooth transition from construction to permanent financing - Provides payment protection for subcontractors and suppliers - Protects public funds on public projects 12 12

Prequalification Surety Bonds Letters of Credit • Capital • Single focus Quality & • • Capacity liquidity of collateral Character • 13 13

What Are Bank Letters of Credit? • Cash guarantee to owner Called on demand • • Payment to owner & loan for contractor • No guarantee of project completion • Irrevocable 14 14

Borrow ing Capacity Surety Bonds Letters of Credit • Issued on • Assets used as unsecured basis collateral • Does not diminish • Diminish existing borrowing capacity line of credit • Credit • Can affect cash enhancement flow 15 15

Duration Surety Bonds Letters of Credit • Duration of • Date specific contract • “Evergreen” • Maintenance clauses period 16 16

Claims Letters of Credit Surety Bonds • Payable on • Surety demand investigates claim of default • Owner determines validity of claims • Surety’s options by subs & • Surety pays suppliers rightful claims of certain parties 17 17

Benefits of Surety Bonds • Protects the interest of labor & vendors on construction projects Surety Bonds • Surety company assumes the responsibility of investigating & validating claims 18 18

Performance Bond Protection • Re-bid the job for completion • Arrange for replacement Surety contractor • Retain original contractor • Reimburse owner as required by the bond 19 19

Payment Bond Protection • Surety pays eligible subs & suppliers • Protects owner from Surety mechanics’ liens • Protects subcontractors from nonpayment 20 20

Benefits of Surety Bonds • Qualified bidders • Reduced risk of liens Owner • Timely project completion • Defect protection 21 21

Benefits of Surety Bonds • Contract reviews • Continuity plans • Expertise • Project qualification Contractor • Private construction • Lending institutions • Subcontractor protection • Technical, managerial, financial assistance 22 22

Cost of Surety Bonds Bid Bonds Usually no cost Performance Bonds ½ to 2% of contract price Payment Bonds Price included in cost of Performance Bond Maintenance Bonds Price for1 year included; additional for longer term 23

Qualifying the Surety A.M. Best Company • Rating agency for all insurance and surety companies. A+++ rating is best • Anything B+ or lower is a red flag Treasury Dept. Circular 570 • Also know as the “Treasury List”, this publication lists the sureties that are approved for Federal projects and the maximum single bond that the government will accept from that surety 24

P3’s (Public-Private Partnership) Public Government Agency Contract with private entity(s) for any/all of : • Federal • Finance • State • Design • Local • Construction • Operation • Ownership • Maintenance Objective : FASTER COMPLETION and/or LOWER COST 25

P3’s Continued Use of P3’s can vary greatly state by state, & even within states – Broad use or Limited / Specific project use ………………. Road/Highway – Buildings – Wastewater Treatment Facilities, etc.  Accordingly, state statutes can vary greatly in bonding requirements 26

P3’s Continued  While bonds still provide basic protection against 1. contractor default & 2. Payment protection for Subcontractors and Suppliers : ‐ Extent of such protection can vary significantly by State  Form and Amount of the Bond or Security < 100% of contract amount ? – or less ? Conform to Little Miller Act of State, or not ? Bond or “alternative form” of security ? (Cash, Bank Irrevocable Letter of Credit) ‐ Combination of both ? 27

P3’s Continued  These inconsistent bonding requirements can = insufficient payment protection for State’s vendors on P3 contracts  Contract surety bonding requirements on P3 contracts help maintain control for state & local governments that otherwise relinquish control to the private sector – HOWEVER much of the legislation concerning such is new and evolving with the “bottom line” presently that ALL parties to P3’s – Government, Contractors & Surety ‐ should pay particular attention to the applicable bonding requirements 28

Thank You Questions ?? 29