FEDCON Summit: Bonding & Surety for Federal Construction Projects

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FEDCON Summit: Bonding & Surety for Federal Construction Projects

  1. 1. Getting Bonded on Federal Projects The Basics of Bonding
  2. 2. Surety Bonds  A surety bond is an instrument under which one party guarantees to another that a third will perform a contract.  Surety bonds used in construction are called contract bonds. Usually this is actually two bonds – Performance and Payment.
  3. 3. What is surety bonding? Contractor Owner Surety Company 3 party agreement  Owner (Obligee)  Contractor  Surety Company
  4. 4. What is surety bonding? - A thorough underwriting process in which surety companies prequalify contractors. - Assuring project owners that these contractors will perform the contract according to its terms and conditions at the contracted price and schedule. This is the Performance Bond. - Will pay certain laborers, subcontractors, and suppliers associated with the project. This is the Payment Bond.
  5. 5. The Performance Bond Protects the obligee from financial loss should the contractor fail to perform the contract in accordance with the terms and conditions of the contract documents.
  6. 6. The Payment Bond Guarantees that the contractor will pay certain subcontractors, laborers, and material suppliers associated with the project.
  7. 7. How does a surety provide the assurance that a contractor can perform?
  8. 8. PREQUALIFICATION  An in-depth look at the contractor’s entire business operations  Underwriting is done to determine contractor’s ability to meet current & future obligations
  9. 9. Underwriting A complete analysis of . . . .  Capacity to perform  Financial strength  Track record & history of company  Organizational structure & reporting  Business continuation plans  Trade references  Analysis of all projects in progress
  10. 10. Surety Company’s Checklist Before issuing a bond, the surety must be satisfied of contractor’s   Good character   Experience   Financial strength   Good credit history – Company AND Owners   Established banking relationship & line of credit   Project Management
  11. 11. Cost of Surety Bonds Premium is a fee for the surety’s underwriting services. “In theory, sound underwriting should result in no loss to the surety.”
  12. 12. What is the cost of guaranteeing performance & project completion? 1 to 3% of the total contract price (or less for large projects)
  13. 13. Examples of the Cost of Surety Bonds Project Amount $1 million Preferred Bond Premium $7,770 Standard Percent of Bond Contract Premium Amount $13,500 .77% to 1.35% $5 million $33,200 $47,250 .66% to .95% $10 million $56,950 $81,000 .57% to .81% $20 million $101,950 $146,000 .51% to .75% Standard & Preferred Premium are approximate. Premium listed are from 2 of the nation’s Top 10 sureties. NOTE: Some surety rates are lower than this example; rates vary company to company.
  14. 14. Bonding for Teaming Agreements -  “Co-Bonding” is used for many teaming -  -  -  -  agreements Both parties indemnify each surety through a jobspecific indemnity agreement Each contractor maintains their existing bonding relationship % of co-bonding can differ from the % of teaming agreement Does not violate “affiliation” rules
  15. 15. Questions??? -  For more information you can stop by the BB&T Insurance booth… -  Or contact me at: BB&T Insurance Services Construction Risk Services Chris Lydick, Surety Specialist 919-281-4522 clydick@bbandt.com

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