Construction…..what could go wrong?? 101 Workshop...SIO is a joint initiative of The National...
Transcript of Construction…..what could go wrong?? 101 Workshop...SIO is a joint initiative of The National...
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Construction…..what could go wrong??
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What could go wrong?
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What could go wrong?
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What could go wrong?
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What could go wrong?
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CONTRACT SURETY
BONDS 101:
THE BASICS OF
BONDING
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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 agreement Two-party agreement
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 and
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 in public projects 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
Prequalification
Process
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Financial
StatementsCapacity Organization
ReferencesCredit
History
Prequalification
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Financial
StatementsCapacity Organization
ReferencesCredit
History
Banking
Relationships
Prequalification
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Financial Statement Analysis
Financial
Statement
Opinion
Page
Balance
Sheet
Income
Statement
Cash Flow
Statement
Account
Schedules
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Financial Statement Analysis
Financial
Statement
Opinion
Page
Balance
Sheet
Income
Statement
Cash Flow
Statement
General &
Administrative
Expenses
Account
Schedules
Contract
Schedules
Explanatory
Notes
Management
Letter
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Benefits of Bonds
Financial security
Construction assurance
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Benefits of Surety Bonds
Provide capable and
qualified contractors
Assure project completion
Offer financial security
Technical, managerial, or
financial assistance
Surety Bonds
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Benefits of Surety Bonds
Reduce risk of liens filed by subcontractors, laborers and suppliers
Protect taxpayer dollars
Smoother transition from construction to permanent financing
Lower costs
Surety Bonds
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Cost of Surety Bonds
Bid Bond
No charge if performance
and payment bonds are
required
Performance Bond 0.5%-3% 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 National Association of Surety Bond
Producers (NASBP) and Surety & Fidelity Association of America
(SFAA).