Surety Bonds The Sensible Choice For Managing Risk
U.S. Department of Housing & Urban Development Presented By:
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
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
Analyzing Financial Strength Capital Financial statements Working capital Work-in-progress Indemnity
Evaluating Ability To Perform Capital Financial statements Working capital Work-in-progress Indemnity Capacity Resumes Contingency plan Business plan Equipment
Assessing Reputation Capital Financial statements Working capital Work-in-progress Indemnity Capacity Resumes Contingency plan Business plan – short & long term Equipment Character Reputation Relationships References
Reviewing Business Ventures Surety Document business commitments that can affect the contractor’s business • Owning property • Side ventures
Contractor Failure Source: Dun & Bradstreet
Why Do Contractors Fail? Inadequate Management New Owner Failure Over Expansion Change in Scope Failure Sub Failure Materials Shortages Cost Escalations
Why Do Contractors Fail? Economic Downturn Inclement Weather Failure Failure Onerous Terms Work Environment Death or Illness of Key Employee
Claims Principal Obligee Surety
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 Surety • Assures payment • No mechanics’ liens • Keeps subcontractors on the job
Surety Bonds vs. Letters of Credit
The Value Of Surety Bonds • Bid Bonds • Performance Bonds • Payment Bonds
The Value Of Surety Bonds • Bid Bonds • Performance Bonds • Payment Bonds
The Value Of Surety Bonds • Bid Bonds • Performance Bonds • Payment Bonds
Cost of Surety Bonds *For a small and emerging contractor, premiums can start around 2.5-3%.
Premium Calculation Examples • Established Contractor • $500,000 Contract • Reviewed/Audited Financial Statements • Frequent Bond User • <1.0-1.5% Bond Rate (average – 1.35%) • <$5,000-7,500 • Likely no other costs involved (collateral, escrow, SBA)
Premium Calculation Examples • Emerging Contractor • $500,000 Contract • Limited Financial Info. (Tax Returns/Quickbooks) • Limited Bonding History • 1.8-3.0% Flat Rate (average – 2.5%) • $9,000-12,500 • May not include cost of getting bond (i.e., funds control, collateral, SBA fees)
How Is Premium Paid? • Premium is billed BY the contractor TO the owner • Usually paid on first billing, along with: • Mobilization • General Conditions • Bond • Cost of bond is included in final contract price • Contractor pays the bond premium to the surety • Prompt Pay Is Key To A Contractor’s Success!
The Underlying Agreement • Look at obligations • Determine risks • Match capable principal to fulfill agreement Surety
Bond Specifications • Owner specifies surety bonds in contract documents • Contractor contacts surety bond producer • Producer guides contractor through prequalification • Contractor obtains bonds & delivers to owner
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
Qualify Your Contractor’s Surety A.M. Best Companywww.ambest.com Dun & Bradstreetwww.dandb.com Standard & Poor’swww.sandp.com Moody’swww.moodys.com Treasury Dept.www.fms.treas.gov/c570/c570.html State Insurance Dept.www.naic.org
For More Information Construction Bonds, Inc. A Division of Murray Risk Management and Insurance 1110 Herndon Parkway, Suite 307 Herndon, VA 20170 703-934-1000 www.sbabonds.com
