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CONTRACT SURETY BONDS 101: THE BASICS OF BONDING 2013.

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Presentation on theme: "CONTRACT SURETY BONDS 101: THE BASICS OF BONDING 2013."— Presentation transcript:

1 CONTRACT SURETY BONDS 101: THE BASICS OF BONDING 2013

2 What is a Surety Bond? ObligeePrincipal Surety

3  Federal  Heard Act (1894)  Miller Act (1935)  State & Local  “Little Miller Acts” Surety Bonds Mandated on Public Works

4 Types of Bonds  Bid  Performance  Payment

5 Fundamentals of Surety Bonds Surety BondsTraditional Insurance Regulated by state insurance departments Prequalification intended to prevent lossSpreads fortuitous losses among a large group of similar risks Three-partyTwo-party Coverage is project-specificCoverage 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 ownersBuying insurance is a voluntary way of managing risk of loss for the insured

6 Role of the Producer Contractor Surety Company Attorneys Producer Lenders Auditors Advisory Group Prequalification Process

7 Financial Statements CapacityOrganization References Credit History Prequalification

8 Financial Statements CapacityOrganization References Credit History Banking Relationships Prequalification

9 Financial Statement Analysis Financial Statement Opinion Page Balance Sheet Income Statement Cash Flow Statement Account Schedules

10 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

11 Benefits of Bonds  Financial security  Construction assurance

12 Functions of Bonds  Avoid liens  Create a smooth transition from construction financing to permanent financing  Provide support to contractor  Ensure project completion

13 Cost of Surety Bonds Bid Bond No charge if performance and payment bonds are required Performance Bond0.5%-2% of contract price Payment Bond Price included with performance bond

14 For More Information Surety Information Office (SIO) | SIO is a joint initiative of The Surety & Fidelity Association of America (SFAA) and National Association of Surety Bond Producers (NASBP).


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