Understanding The Benefits Of Surety Bonds

What is Surety Bonding? Principal Obligee Surety Surety bonding is a careful, rigorous, and professional process in which surety companies prequalify contractors and then assure project owners that these contractors are capable of performing the contract according to its terms and conditions. Surety

Types of Surety Bonds Bid Bond Performance Bond Payment Bond There are three basic types of bonds used in construction. The Bid Bond provides financial assurance that the bid has been submitted in good faith and that the contractor intends to enter in to the contract at the price bid and provide the required performance and payment bonds.

Types of Surety Bonds Bid Bond Performance Bond Payment Bond The Performance Bond protects the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions.

Types of Surety Bonds Bid Bond Performance Bond Payment Bond The Payment Bond assures that the contractor will pay certain subcontractors, laborers, and materials suppliers associated with the project.

Benefits of Surety Bonds Provide capable & qualified contractors Assure project completion Offer financial security Technical, managerial, or financial assistance Surety Bonds There are many benefits of contract surety bonds. As an impartial third party, the surety prequalifies the contractor to verify that the contractor is capable and qualified. The owner has assurance of project completion. A capable contractor is less likely to default on a project. However, there are many things that can cause contractors default, and in that event, the surety bond offers protections against financial loss. If the contractor requests help, the surety may offer technical, managerial, or financial assistance. This can help the project move forward and significantly reduce the likelihood of default.

Benefits of Surety Bonds Reduce risk of liens filed by subcontractors, laborers, & suppliers Protect taxpayer dollars Smoother transition from construction to permanent financing Lower costs Surety Bonds Surety bonds relieve the private project owners from risk of liens filed by unpaid subcontractors and suppliers. They also protect taxpayer dollars on public projects. In the absence of liens, the transition from construction to permanent financing is much smoother. When subcontractors and suppliers know they are protected by a payment bond, they may present lower quotes since they no longer have to absorb the risk of nonpayment.

Surety Bonds vs. Letters of Credit Surety Credit Bank Credit Premium Interest Expect reimbursement if loss Repay loan Principal benefit of surety credit Borrower has benefit of bank $ There are alternatives to surety bonds, the most common being a letter of credit. But there are important differences to be aware of. While the surety analyzes the contractor’s ability to perform, with a letter of credit, the banker examines the quality and liquidity of the collateral in case there is a demand on the LOC. If the bank is satisfied of the contractor’s ability to pay, there is no further prequalification. The performance and payment bond each cover 100% of the contract price. A letter of credit is limited to the stated amount, usually 5-10% of the contract price. The bond remains in effect for the duration of the contract and may include a one-year maintenance period as well. The letter of credit is usually date specific, generally for one year. It may contain an “evergreen” clause for automatic renewal, with related fees. In the event of contractor failure, the surety conducts an impartial investigation of the claim. If the contractor is in default, the surety completes the contract. With a letter of credit, the bank pays on demand of the holder. The owner must then administer completion of the contract with the funds remaining.

Who Benefits From A Surety Bond?

Primary Decision Makers Surety assures qualified contractor Surety provides expertise, experience, & assistance In event of contractor failure, surety handles & completes project Private Owners Primary Decision Makers - Those who require the bond receive the most benefit! Private Owners, including CEOs, CFOs, Boards of Directors, and Risk Managers. The surety commits its financial resources to assure a qualified contractor and a completed project. In addition, the surety is there with its expertise, experience and assistance to assist the contractor through the duration of the project. In the event of contractor failure, the surety is responsible for claims handling and project completion.

Primary Decision Makers Assures project will be built according to terms & conditions of the contract Lender can be dual obligee with direct rights under the bond Bankers & Lenders Bankers, including Senior Bank Officials and Construction Lending Officers. For bankers and lender, the bond assures that the project securing the loan will be built in accordance with the terms and condition of the contract. The lender can be named as an additional obligee on the bond, known as a dual obligee, which gives the lender direct rights under the bond.

Primary Decision Makers Protects taxpayer dollars Assures that lowest bidder is capable of completing the project Necessary payment protection for subcontractors & suppliers Public Owners Public Owners, including Federal, state, and local government officials, School Boards, Procurement Officers, and Legislators. Surety bonds offer taxpayer protection. When a government entity awards a construction project to the lowest bidder, it knows a surety company stands behind the contractor’s promise to complete the job according to the owner’s specifications and terms of the contract. Subcontractors and suppliers are also protected. Since mechanic’s liens cannot be placed against public property, the payment bond assures they will be paid for the goods and services they provide.

Influential Advisors Surety Bonds Owner Developers Lenders Risk managers Surety Bonds Attorneys Architects/ Engineers Engineers Architects Surety bonds also benefit influential advisors. To the architect or engineer, the surety bond means the contractor is capable of translating the plans into a finished project. For real estate developers, a subdivision bond assure completion of the development’s infrastructure and the bid, performance, and payment bonds assure qualified contractors and subcontractor protection. For contractors, a surety bond screens out unqualified and irresponsible competition. Bonding capacity enables a contractor to bid on public work and those private projects when a bond is required by the owner or lender. In addition, the surety may offer technical, managerial, and financial assistance to the contractor if needed. CPAs may want to recommend a surety bond as a risk transfer device to owner and contractor clients. For the owner’s attorney, bonds provide the security of knowing that the project owner is protected should the contractor fail to perform. CPAs Subs Contractor

Surety Bonds Financial Security Construction Assurance Surety bonds provide financial security and construction assurance while building relationships among the surety, the contractor, the owner, and all parties involved in the construction process.

Surety Information Office www.sio.org | sio@sio.org For More Information Surety Information Office www.sio.org | sio@sio.org SIO is a joint initiative of The National Association of Surety Bond Producers (NASBP) and Surety & Fidelity Association of America (SFAA). For more information about contract surety bonds, visit the Surety Information Office on the Web at www.sio.org.