Con E 221
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Review graded exams on Monday
Review presentation guideline for term papers
Finalize presentation schedule on Monday
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Construction Engineering 221
Contract Surety Bonds
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RPQ
1. A surety bond is a type of insurance.
A. True
B. False
2. Approximately ___________ of all construction
firms in operation today will be out of business
in seven years.
A. One-third
B. One-half
C. Two-thirds
3. Surety bonds are required by law on public as
well as private construction jobs.
A. True
B. False
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RPQ #1
1. A surety bond is a type of insurance.
A. True
B. False
Correct Answer is: B. False
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RPQ #2
2. Approximately ___________ of all construction
firms in operation today will be out of business
in seven years.
A. One-third
B. One-half
C. Two-thirds
Correct Answer is: B. One-half
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RPQ #3
3. Surety bonds are required by law on public as
well as private construction jobs.
A. True
B. False
Correct Answer is: B. False
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What
is a Surety?
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What is a Surety?
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Surety – a party that assumes liability for the
debt, default or failure in duty of another.
Surety Bond – a contract that outlines the
conditions of the assumed liability by a Surety.
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Surety Bond
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Remember – A surety bond is not an insurance
policy
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Insurance – protects from risk of loss
Surety Bond – guarantees the performance of
a defined contractual duty.
Surety Bond – an extension of credit that serves
as an endorsement to a contractual relationship
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Parties to a Surety Bond
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Obligee – Owner
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Principle – Prime Contractor – Gen. Contractor
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Surety – entity providing the surety bond
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Lending Institution – organization that provides
financial loan to obligee for construction and
long term (mortgage)
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Surety Bonds – More Definition
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Contract Surety Bonds = Surety Bonds =
Contract Bonds = Construction Contract Bonds
Surety agrees to indemnify the Obligee
(Owner), against any default or failure in duty
of the Principle (Gen. Contractor)
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What does “indemnify” mean?
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To secure against hurt, loss, or damage
To make compensation to for incurred hurt,
loss, or damage
(hold harmless)
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Failure in Duty
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Failure in duty = breach of contract
i.e. Non-payment of labor (wages, benefits,
payroll taxes), stops work through no fault of
the owner, non-payment of subcontractors and
suppliers after being paid by the owner
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Surety Bonds – More Definition
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Contact Bond
 Three-party agreement
 Guarantees
 Work completed in accordance with
contract documents (plans, specifications)
 All construction costs will be paid
 Labor, benefits, payroll taxes
 Materials
 Subcontractors
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Surety Coverage?
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Regardless of the reason, if the prime
contractor fails to fulfill its contractual
obligations, the surety must assume the
obligations of the contractor and see that the
contract is completed, paying all costs up to
the face amount of the bond. (in the book)
Not just provide money to get the project
completed but actually responsible for finishing
the contract.
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Why Surety?
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Approximately one half of all construction
contracting firms in operation today will not be
in business seven years from now.
Why Surety? Because construction is a very
risky business. A risk that some owners are not
prepared or able to assume.
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Other Info
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Bond can not be invoked until the contractor is in
formal breach of the contract
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Contract bonds are always written documents
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Obligations of the bond = provisions of the contract
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Required on public projects by law
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Not required by law on private projects – owner’s call
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The dollar amount in which the bond is written for is
called the “penalty amount”
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Prime Contractor’s Three Principle
Responsibilities
What
are they?
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Prime Contractor’s Three Principle
Responsibilities
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Prime Contractor’s three principle responsibilities
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Honor its bid and sign all contract documents if
awarded the contract
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To perform the objectives of the contract
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Pay all cost associated with the work
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Con E 221 – Revised Schedule
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Monday, Nov. 4th
 Change for presentations: Must use Power Point Presentation
 Surety Bonds (continued)
Tuesday, Nov. 5th
 Return EXAM 3
 Presentation Schedule
 Power Point Presentation guidelines and tips
Wednesday, Nov. 6th
 Construction Insurance
Thursday, Nov. 7th
 Term Papers are due at beginning of class at 11:00 AM
 Construction Insurance
Monday, Nov. 11th
 First day of term paper presentations
 Split classes 11 AM and 4 PM
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Three Types of Bonds
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A Surety covers these responsibilities through
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Bid Bond
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Performance Bond
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Payment Bond
Public – separate bonds
Private – sometimes Performance & Payment bond are
combined into one contract bond
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Bid Bond
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Guarantees the owner that the contractor will
honor it bid and will sign all contract
documents if awarded the contact.
Owner is the Obligee
Obligee may sue principal (prime contractor)
and surety to enforce the bond
What happens if principal refuses to honor its
bid?
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Contractor Does Not Honor Their Bid
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Principal and surety are liable on the bond for
any additional costs the owner incurs in
reletting the contract.
This usually is the difference in dollar amount
between the low bid and the second low bid.
The penalty sum of a bid bond often is ten to
twenty percent of the bid amount.
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Performance Bond
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Guarantees:
 Contract performed
 Owner receives its structure
 Build in accordance with contract
Covers warranty period (normally one year)
Premium includes warranty period coverage
If the principal defaults what are the options
for the surety?
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Three Choices
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If principal defaults, or is terminated for
default by the owner the surety has three
choices:
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Complete the contract itself through a
completion contractor
Select a new contractor to contract directly
with the owner
Allow the owner to complete the work with
the surety paying the costs
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Payment Bond
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Protection of third parties to contract
Guarantees payment of labor and materials
used or supplied in the performance of
construction
Not required on privately financed work – few
state statutes
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Protects against “liens”
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What are liens?
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What are “liens”?
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Right created by law to secure payment for
work performed and material furnished in the
improvement of land
A lien is recorded (with county recorders office)
against the title or deed for a property (land
and/or building)
A Title to your new car will have a “lien
holder”, your bank, if you have a car loan
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Statutory vs Common Law Bonds
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Payment Bonds are either statutory or commonlaw
 Public – statutory (prescribed by law)
 Private – common law (the bond instrument)
Bond Forms
 Public – standard by federal government
written in accordance with Miller Act
 Private – AIA form
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The Miller Act
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Enacted in 1935
All federal projects greater than $25,000 –
performance and payment bond required
100 percent of the contract amount
Protects first and second tier subcontractors
only
Cannot sue on the payment bond until 90 days
after the last day labor was performed on job
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Bond Premiums
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To compute contract bond premiums
construction contracts are divided up into four
classifications: (see pg 183)
 A-1
 A
 B
 Miscellaneous
More than one classification – high premium
rate controls
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The Surety
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Subject to public regulation – same as insurance
industry
Approved by the U.S. Treasury Department for
government projects
A. M. Best Insurance Reports – financial ratings
for insurance and surety companies
Owners can require a minimum Best Rating for
the surety
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A. M. Best’s Ratings of Surety
http://www.ambest.com/
Secure Best’s Ratings Vulnerable Best’s Ratings
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A++ and A+
(Superior)
A and A- (Excellent)
B++ and B+ (Very
Good)
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B and B- (Fair)
C++ and C+ (Marginal)
C and C- (Weak)
D (Poor)
E (Under Regulatory
Supervision)
F (In Liquidation)
S (Rating Suspended)
The rating symbols "A++", "A+", "A", "A-", "B++", and "B+" are registered
certification marks of the A.M. Best Company, Inc.
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The Surety
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Owners may name the surety company for the
contractor to use – NOT RECOMMENDED PRACTICE, but
is LEGAL for private work
Contractor typically have one surety (bonding company)
that has pre-approved contractor
Surety pre-approval takes time and involves a review of
audited financial statements and other records
Co-sureties – large project – one surety does not have
the financial capacity for large risks
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Indemnity of Surety
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Surety indemnifies the owner against default by
the contractor
Contractor indemnifies the surety against
claims and damages due to contractor’s failure
to perform
Surety is not legally obligated to provide
payment and performance bond if they
provided bid bond – but always do
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Bonding Capacity
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Maximum dollar value of uncompleted work the
surety will allow the contractor to have on
going
Based on contractor’s net worth and cash
liquidity
Surety may also limit dollar value of one
project
Example: total bonding capacity of $5 million
maximum project bond of $1 million
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Surety Agent
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Local representative for surety
Many agents are independent and sell contract
bonds by multiple surety companies
In reality, Bid Bonds cost the contractor nothing
– no cost, as a professional courtesy
If contractor is the low bidder the surety agent
wants the opportunity to sell the contract
bonds
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Subcontractor Bonds
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Contract bond that covers the performance of
subcontractors
Common on private projects
Requested by and paid by owner
Cost:
0.5 to 1% for excellent subcontractors
1 to 2% for good subcontractors
>2% for average to marginal subs
(cost is a percentage of subcontract value)
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Miscellaneous Surety Bonds
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Bonds to Release Retainage
Bonds to Discharge Liens or Claims
Commonly called “bonding over a lien”
Bonds to Indemnify Owner Against Liens
License Bonds
Self-Insurers’ Workers’ Compensation Bond
Union Wage Bond
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