Managing the Risk of
Contractor Default

What Is Surety Bonding?
Principal Obligee
Surety

Types of Contract
Surety Bonds
• Bid Bond
• Performance Bond
• Payment Bond

Types of Contract
Surety Bonds
• Bid Bond
• Performance Bond
• Payment Bond

Types of Contract
Surety Bonds
• Bid Bond
• Performance Bond
• Payment Bond

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

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

Contractor Default
Number of Years Failed Contractors Were in Business
10+ Years
39%
6-10 Years
29%
Source: Dun & Bradstreet
0-5 Years
32%

Surety’s Areas of Expertise
Prequalification
Claims Handling

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

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

Benefits
Of Surety Bonds
Financial
Security
Construction
Assurance

Benefits
Of Performance Bonds
Performance
Bond
• Increase likelihood of timely project completion
• Assure compliance with contract
• Surety may resolve contractor problems
• Fulfills contractural obligations if contractor defaults

Benefits
Of Payment Bonds
Payment
Bond
• Protect certain subcontractors, suppliers, & laborers from non-payment
• Eliminates mechanics’ liens
• Competitive pricing
• No cost when purchased with performance bond

Cost of Surety Bonds
Project
Amount
Approx. Bond
Premium
$1 Million
$5 Million
$10 Million
$7,700 – $13,500
$33,200 – $47,250
$56,950 – $81,000
$101,950 – $146,000 $20 Million
* Premiums may vary depending on size, type & contractors bonding capacity.

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

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

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

Steps in the Claims
Process
Declaration
Of Default
Claims
Investigation
Review
Options
Resolution
Completion

Steps in the Claims
Process
Declaration
Of Default
Claims
Investigation
Review
Options
Resolution
Completion

Steps in the Claims
Process
Declaration
Of Default
Claims
Investigation
Review
Options
Resolution
Completion

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

Case in Point
“Surety
Involvement
Saves
Projects”

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

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

What Happened
• Contractor overextended
• Re-work slowed schedule
• Key subs not bonded

The Surety’s Solution
• Hired a replacement contractor with experience on HUD projects
• Assembled team to handle HUD, federal, & state requirements
• Retained and paid subcontractors, laborers & suppliers
• Financial help with schools

The Outcome
• Paperwork not delayed
• Work completed on time
• No loss of tax credits or financing
• Occupied in time to satisfy HUD deadlines

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

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 | sio@sio.org