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

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What is a Surety Bond

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

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Parties to a Surety Bond

Obligee Principal Surety

(Contractor) undertakes

• bligation and

provides bond Issues bond and provides guarantee (Owner) – Requires and receives protection of bond

Parties to a Surety Bond

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Surety Bonds

• Vs. Traditional Insurance

Surety Bonds Insurance

3-party 2-party Indemnification/surety doesn’t pay claims unless your organization fails Claims are expected & paid 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

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Who Requires Bonds?

Public Sector

• Federal Government
• State & Local

Governments

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Who Requires Bonds?

Private Sector

• Private Owners
• Lending Institutions
• General Contractors

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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.

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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.

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Types of Bonds

• 2. Performance

Bond

• Guarantees owner the

contractor will perform the

• bligations contained in the

contract documents.

• If the contractor defaults, the

Surety has the obligations to fulfill the contractor’s

• bligations.

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Types of Bonds

• 3. Payment Bond
• Guarantees the payment of

defined subcontractors and material suppliers.

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Types of Bonds

• 4. Maintenance

Bond

• Guarantees workmanship and

material for a period of time after project completion and acceptance

• f the work.

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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

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Prequalification

Surety Bonds

• Capital
• Capacity
• Character

Letters of Credit

• Single focus
• Quality &

liquidity of collateral

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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

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Borrow ing Capacity

Surety Bonds

• Issued on

unsecured basis

• Does not diminish

borrowing capacity

• Credit

enhancement Letters of Credit

• Assets used as

collateral

• Diminish existing

line of credit

• Can affect cash

flow

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Duration

Surety Bonds

• Duration of

contract

• Maintenance

period Letters of Credit

• Date specific
• “Evergreen”

clauses

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Claims

Surety Bonds

• Surety

investigates claim of default

• Surety’s options
• Surety pays

rightful claims of certain parties Letters of Credit

• Payable on

demand

• Owner determines

validity of claims by subs & suppliers

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Benefits of Surety Bonds

• Protects the interest
• f labor & vendors on

construction projects

• Surety company

assumes the responsibility of investigating & validating claims Surety Bonds

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Performance Bond Protection

• Re-bid the job for

completion

• Arrange for

replacement contractor

• Retain original

contractor

• Reimburse owner as

required by the bond Surety

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Payment Bond Protection

• Surety pays eligible

subs & suppliers

• Protects owner from

mechanics’ liens

• Protects

subcontractors from nonpayment Surety

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Benefits of Surety Bonds

• Qualified bidders
• Reduced risk of liens
• Timely project

completion

• Defect protection

Owner

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• Contract reviews
• Continuity plans
• Expertise
• Project qualification
• Private construction
• Lending institutions
• Subcontractor protection
• Technical, managerial,

financial assistance Contractor

Benefits of Surety Bonds

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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

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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

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P3’s (Public-Private Partnership)

Public Government Agency

• Federal
• State
• Local

Objective : FASTER COMPLETION and/or LOWER COST Contract with private entity(s) for any/all of :

• Finance
• Design
• Construction
• Operation
• Ownership
• Maintenance

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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

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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 ?

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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

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Thank You Questions ??