Surety Bonds The Sensible Choice For Managing Risk.

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]