SURETY BONDS
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
Getting Projects
Completed
and
Subcontractors Paid
Contractor Failure Rates
Building, heavy/highway, and specialty trade contractors
In Business
Survivors
Failure 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%
Source: BizMiner
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
Good credit history
Established banking
relationship
Line of credit
Necessary equipment
Benefits of Surety Bonds
Financial
Security
Benefits
of Performance Bonds

Performance
Bond



Increase likelihood of timely
project completion
Assure compliance with contract
Surety may resolve contractor
problems
Fulfills contractual obligations if
contractor defaults
Benefits
of Payment Bonds

Payment
Bond



Protects certain subcontractors,
suppliers, & laborers from nonpayment
Eliminates mechanics’ liens
Competitive pricing
No cost when purchased with
performance bond
Cost of Surety Bonds
Project
Amount
$1 Million
Approx. Bond
Premium
0.5% - 2%
$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.
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
Unrealistic
Growth
Material/
Equipment
Shortages
Labor
Difficulties
Lack of
Experience
Failure
Protection

Surety


Provide trained personnel
Provide payment to subs &
suppliers
Offer financial assistance to
contractor
Steps in the Claims Process
Declaration
of Default &
Termination
of Contractor
Claims
Investigation
Resolution
Completion
Review
Options
Steps in the Claims Process
Declaration
of Default &
Termination of
Contractor
Claims
Investigation
Resolution
Completion
Review
Options
Steps in the Claims Process
Declaration
of Default &
Termination of
Contractor
Claims
Investigation
Resolution
Completion
Review
Options
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 a team to handle HUD, federal, & state
requirements
Retained and paid subcontractors, laborers &
suppliers
Provided financial help to the contractor
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
The Outcome
Surety protected school district
and taxpayers from $1,865,753 loss
Premium paid for bonds:
$129,290
The Goal Is Project Completion
For More Information
Surety Information Office (SIO)
www.sio.org | sio@sio.org
SIO is a joint initiative of The Surety & Fidelity Association of
America (SFAA) and National Association of Surety Bond
Producers (NASBP).