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SURETY BONDS Managing the Risk of Contractor Default.

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Presentation on theme: "SURETY BONDS Managing the Risk of Contractor Default."— Presentation transcript:

1 SURETY BONDS Managing the Risk of Contractor Default

2 What Is Surety Bonding? Surety ObligeePrincipal

3 Types of Contract Surety Bonds  Bid Bond  Performance Bond  Payment Bond

4 Types of Contract Surety Bonds  Bid Bond  Performance Bond  Payment Bond

5 Types of Contract Surety Bonds  Bid Bond  Performance Bond  Payment Bond

6 How Surety Bonds Work Protect owner against contractor failure Protect subcontractors, laborers, & suppliers against nonpayment

7 Role of the Producer  Prepare case for surety underwriting  Preparation for prequalification  Relationship between contractor & surety company  Keep & increase surety capacity Producer

8 Getting Projects Completed and Subcontractors Paid

9 Contractor Failure Rates Source: BizMiner Building, heavy/highway, and specialty trade contractors In BusinessSurvivorsFailure Rate 853,372 (2002)610,357 (2004)28.5% 850,029 (2004)649,602 (2006)23.6% 1,155,245 (2006)919,848(2008)20.4% 897,602 (2009)702,618 (2011)21.7% 918,483 (2010)696,441 (2012)24.2%

10 Surety ’ s Areas of Expertise PrequalificationClaims Handling

11 Capacity Financial Strength Company History Organization Continuation Plans References Projects in progress Prequalification

12 Surety Company ’ s Checklist Good character Experience matching contract requirements Financial strength Good credit history Established banking relationship Line of credit Necessary equipment

13 Benefits of Surety Bonds Financial Security

14 Benefits of Performance Bonds  Increase likelihood of timely project completion  Assure compliance with contract  Surety may resolve contractor problems  Fulfills contractual obligations if contractor defaults Performance Bond

15 Benefits of Payment Bonds  Protects certain subcontractors, suppliers, & laborers from non- payment  Eliminates mechanics ’ liens  Competitive pricing  No cost when purchased with performance bond Payment Bond

16 Cost of Surety Bonds Project Amount Approx. Bond Premium 0.5% - 2% $1 Million$5,000 – $20,000 $5 Million$25,000 – $100,000 $10 Million$50,000 – $ 200,000 $20 Million$100,000 – $400,000 * Premiums may vary depending on size, type & contractors bonding capacity.

17 Responding to claims is the fulfillment of the surety ’ s promise made in its bond.

18 Reasons For Contractor Failure Accounting Problems Change in Leadership Scope of Business Material/ Equipment Shortages Unrealistic Growth Failure Labor Difficulties Lack of Experience

19 Protection  Provide trained personnel  Provide payment to subs & suppliers  Offer financial assistance to contractor Surety

20 Claims Investigation Review Options Resolution Completion Declaration of Default & Termination of Contractor Steps in the Claims Process

21 Claims Investigation Review Options Resolution Completion Declaration of Default & Termination of Contractor Steps in the Claims Process

22 Claims Investigation Review Options Resolution Completion Declaration of Default & Termination of Contractor Steps in the Claims Process

23 Actions of a Surety  Re-bid job for completion  Arrange for replacement contractor  Retain original contractor  Pay the penal sum of the bond Surety

24 Case in Point Surety Involvement Saves Projects

25 The Facts  Old line family-owned contracting company  Company sold to 5 key employees  16 projects in progress  $20 million school with cost overruns & schedule delays

26 The Problems  Default on 3 senior citizen homes & 1 low income community rehab center  Delays would hinder substantial HUD financing and tax credits

27 What Happened  Contractor over- extended  Re-work slowed schedule  Key subs not bonded

28 The Surety ’ s Solution  Hired a replacement contractor with experience on HUD projects  Assembled a team to handle HUD, federal, & state requirements  Retained and paid subcontractors, laborers & suppliers  Provided financial help to the contractor

29 The Outcome  School opened on time  Paperwork not delayed  Work completed on time  No loss of tax credits or financing  Occupied in time to satisfy HUD deadlines  Construction company stayed in business

30 The Outcome Surety protected school district and taxpayers from $1,865,753 loss Premium paid for bonds: $129,290

31 The Goal Is Project Completion

32 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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