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Transcript of 2013
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CONTRACT SURETY BONDS 101:THE BASICS OF BONDING
2013
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What is a Surety Bond?
ObligeePrincipal
Surety
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Federal Heard Act (1894) Miller Act (1935)
State & Local “Little Miller Acts”
Surety Bonds Mandated on Public Works
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Types of Bonds
Bid Performance Payment
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Fundamentals of Surety Bonds
Surety Bonds Traditional Insurance
Regulated by state insurance departments Regulated by state insurance departments
Prequalification intended to prevent loss Spreads fortuitous losses among a large group of similar risks
Three-party Two-party
Coverage is project-specific Coverage usually term-specific and renewable
Bond forms are standard or may be negotiated by owner or surety and contractor.
Policy forms vary by insurance company.
Coverage: 100% of the contract price for performance; 100% for payment, up to penal sum of bond
Coverage up to policy limit, less the deductible
Claims – Surety has right to contract balance and indemnity from contractor (contractor remains primarily liable)
No right to insured’s assets, however, companies can subrogate against a third party or another insurer
Bonds are required by law and voluntarily by private owners Buying insurance is a voluntary way of managing risk of loss for the insured
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Role of the Producer
ContractorSurety
Company
Attorneys
ProducerLenders
Auditors
Advisory Group
PrequalificationProcess
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Financial Statements
Capacity Organization
ReferencesCredit History
Prequalification
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Financial Statements
Capacity Organization
ReferencesCredit History
Banking Relationships
Prequalification
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Financial Statement Analysis
FinancialStatement
OpinionPage
BalanceSheet
IncomeStatement
Cash FlowStatement
AccountSchedules
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Financial Statement Analysis
FinancialStatement
OpinionPage
BalanceSheet
IncomeStatement
Cash FlowStatement
General &Administrative
ExpensesAccount
Schedules
ContractSchedules
ExplanatoryNotes
ManagementLetter
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Benefits of Bonds
Financial security Construction assurance
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Functions of Bonds
Avoid liens Create a smooth transition
from construction financing topermanent financing
Provide support to contractor Ensure project completion
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Cost of Surety Bonds
Bid BondNo charge if performance and payment bonds are required
Performance Bond 0.5%-2% of contract price
Payment BondPrice included with performance bond
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For More Information
Surety Information Office (SIO)www.sio.org | [email protected]
SIO is a joint initiative of The Surety & Fidelity Association of America (SFAA) and National Association of Surety Bond
Producers (NASBP).