Transcript Document
WHEN YOU BUILD... BOND Surety Bonds: Financial Security Construction Assurance Requiring Surety Bonds • What are surety bonds? • Who issues surety bonds? • What type of protection do they provide? What Are Surety Bonds? A surety bond offers assurances to the owner of a construction project that the contractor will perform the work specified in the contract and pay certain subcontractors and suppliers. Surety Bonds Mandated on Public Works • Federal – Heard Act (1893) & Miller Act (1935) • State & Local – “Little Miller Acts” The 3 Cs of Prequalification Capital Capacity Character Types of Bonds • Bid Bond • Performance Bond • Payment Bond Types of Bonds • Bid Bond • Performance Bond • Payment Bond Types of Bonds • Bid Bond • Performance Bond • Payment Bond Protection Owner Developers Risk managers Lenders Surety Bonds Architects Attorneys Engineers Subs CPAs Contractor Contractor Failure Number of Years Failed Contractors Were in Business 10+ Years 39% 0-5 Years 32% 6-10 Years 29% Source: Dun & Bradstreet Peace of Mind For Owners “We often feel if the contractor qualifies for the bonds, it’s probably a stable organization and someone who has gone through a rigorous review of his financial credibility. He’s also probably capable of performing the work. We rely on the surety’s background checks of the general contractor to bring the contractors to a certain level of performance and guarantee that level of performance to us.” - Bob Knopf Peace of Mind For General Contractors “Just as owners require surety bonds from our company, we require them of our subcontractors because they provide us two levels of assurance: – First of all, that the work will be complete in accordance with the contract documents. – Secondly, that they will pay for the materials and subcontractors at their level & we won’t have to pay for anything more than once.” - Jim Davis, President James G. Davis Construction Corp. Who Issues Surety Bonds? • Insurance companies • Surety bond producers Surety Bonds vs. Traditional Insurance Surety Bonds Insurance 3-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 Performance Bond Protection Surety • Re-bid the job for completion • Arrange for replacement contractor • Retain original contractor • Reimburse owner as required by the bond Payment Bond Protection Surety • Surety pays eligible subs & suppliers • Protects owner from mechanics’ liens • Protects subcontractors from nonpayment The Goal is Project Completion “We were financing the development of a retail project with a large well-known discount department store that likes to get into its projects in October so they can benefit from the Christmas season. We did have a bonded contractor on that job and when the general contractor encountered financial difficulties, the bonding company stepped in and worked with the owner to replace that general contractor so that we were able to get that anchor tenant in on time for that particular season.” - Carleen Petronio 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. Conclusion WHEN YOU BUILD... BOND For More Information Surety Information Office 1828 L St. NW, Suite 720 Washington, DC 20036 202-686-7463 | Fax 202-686-3656 www.sio.org | [email protected]