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Protection for Third Party Vendor Contracts

This guide explores the necessity of surety bonds for third-party vendor contracts related to public works. Surety bonds protect public entities and taxpayers while ensuring that vendors meet their contractual obligations. Key concepts include the Miller Act, the significance of Little Miller Acts, and the essential components of surety bonding such as prequalification, risk assessment, and the claims process. Learn about the roles of principals, obligees, and sureties, and discover the advantages of surety bonds in achieving timely project execution and quality delivery.

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Protection for Third Party Vendor Contracts

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  1. Protection for Third Party Vendor Contracts Surety Bonds For Public Entities

  2. Why Bonds Are Required • Miller Act of 1935 • For federally funded public works projects over $150,000 • “Little Miller Acts” • For state & local public works projects

  3. What is a Surety Bond? Principal (Vendor) Obligee (Public Entity) Surety (Guarantor)

  4. Surety Bonds Vs. Traditional Insurance

  5. Elements Of Prequalification Capital Capacity Character

  6. Capital: Financial Strength Capital Financial statements Net Worth Cash Flow Indemnity

  7. Capacity: Ability to Perform Capital Financial statements Working capital Net Worth Cash Flows Indemnity Capacity Resumes Contingency plan Business plan- short & long term

  8. Character: References & Reputation Capital Financial statements Net Worth Cash Flows Indemnity Capacity Resumes Contingency plan Business plan- short & long term Equipment Character Reputation Relationships References

  9. Role of the Underwriter • Review obligations • Determine the risk • Provide qualified principal to owner Underwriter

  10. Underlying Agreement • Primary instrument to establish risk associated with the guarantee • Requirements contained in the contract documents

  11. Functions of Surety Bonds • Competitive bidding process • “On time performance” • Saves tax dollars • Protects tax payer dollars Surety Bonds

  12. The Advantages Of Surety Bonds • Qualified vendors • Competitive pricing • Timely contract performance • Quality product • Financial recourse • Insulates public officials • Efficient management of public works administration • Protect taxpayer dollars Surety Bonds

  13. Surety vs. ILOC ILOCBond • Financial Prequalification Yes Yes • Capabilities Prequalification No Yes • Review of contract documents and guarantee forms No Yes • Guarantee completion No Yes • Warranty Period Covered No Yes • Cancellable Yes No/Yes • 100% Coverage No Yes • Impact on Bank Line Yes No

  14. An Owner’s Guide To The Surety Claims Process(optional section)

  15. When Problems Arise .... • Keep the surety informed of the principal’s progress • If principal defaults, submit written declaration of default • Allow the surety time to investigate the claim Obligee

  16. Surety’s Responsibilities In a Claims Situation • Principal’s contractual obligations • Obligee’s contractual obligations • Principal’s defense • Whether the obligee has met its obligations Surety

  17. Managing The Claims Process • Be cognizant of legal position • Avoid improperly worded letters • Written notice of known problems • Ask for a specific response Obligee

  18. Surety Responsiveness • Be reasonable in your expectations • Be diligent in providing notice & maintaining records • Contact insurance commissioner Obligee

  19. The Advantages Of Surety Bonds • Qualified vendors • Competitive pricing • Timely contract performance • Quality product • Financial recourse • Insulates public officials • Efficient management of public works administration • Protect taxpayer dollars Surety Bonds

  20. Your Surety Professional Is Your Consultant Financial Security Qualified Principals

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