Procurement Management and Contract Administration Andualem Endris Yadeta

1. Bonds, Insurances, and Mitigating
Risks in Construction
Mada Walabu
University
Chapter 6
Procurement Management and Contract Administration
CoTM 4242
Lecture by: Andualem Endris (M.Sc)
andualem@anenypublishing.org
College of Engineering
Construction Technology and Management Department

2. CONTRACT BONDS
• Construction bonds, also known as contract bonds.
• They provide a financial guarantee that the bills on a
construction project will be paid.
• The issuing insurance company or bank guarantees the
project's completion by a specific contractor.
• Construction bonds protect the assets of the investor or project
owner against shoddy work or non-completion of the project.
7/31/2021
COTM 4242 2

3. PARTIES TO A CONTRACT BOND
• Obligee – Owner
• Principal – Prime Contractor
• Surety – Entity providing the surety bond
• Surety agrees to indemnify the Obligee (Owner), against any
default or failure in duty of the Principal (Contractor)
7/31/2021
COTM 4242 3

4. BONDS
• There are three types of
construction bonds
• Bid Bonds
• Performance Bonds
• Payment Bonds
• NB: See PPA (Section 9)
and MoWUD Contract
Conditions formats
7/31/2021
COTM 4242 4

5. … BONDS • Bonds are:
• Not Insurance but standing on their own
• Performance Bonds
• Purpose of the Performance Bond is to
secure fulfillment of all of the contractor's
obligations under the contract
• A contractor, or principal, uses a
performance bond to guarantee that it will
complete the contract in accordance with
its terms. If the principal defaults, the
owner may call upon the surety to
complete the contract.
7/31/2021
COTM 4242 5

6. … BONDS
7/31/2021
COTM 4242 6
• Payment Bonds
• The purpose of payment bond is to assure
payment to all persons supplying labor and
material for the execution of the work
provided for in the contract.
• Bid Bonds
• The purpose of bid bond is to protect the
project's owner if the bid is not honored
by the principal, such as a contractor.
• The client should secure the bid bond till
the winner agrees and signs the contract
• Do not release bonds too early

7. INSURANCE
7/31/2021
COTM 4242 7

8. WHAT IS INSURANCE?
7/31/2021
COTM 4242 8
• Insurance is a legal contract that transfers risk from a
policyholder to an insurance provider
• Insurance protects from risk of loss
• Insurance is CASH!!!
• CASH for:
• Replacing / repairing your property
• Replacing / repairing others property
• Medical Costs / Lost wages
• Defending you from others

9. INSURANCE
7/31/2021
COTM 4242 9
• Insurer Requirements
• Coverage Requirements
• Limit Requirements
• Premium / Deductible Responsibilities
• Documentation Requirements

10. • Builders Risk
• Workers’ Compensation
• General Liability
• Excess Liability
• Auto Liability
• Design Professionals Errors &
Omissions
• Pollution Liability
AVAILABLE COVERAGE
7/31/2021
COTM 4242 10

11. INSURANCE SUMMARY
7/31/2021
COTM 4242 11
 Commercial General Liability
 Bodily Injury, Property Damage
 Ongoing and Completed Operations & Products
 Business Automobile Liability
 Bodily Injury, Property Damage
 Workers’ Compensation and Employer’s Liability
 Bodily Injury and Illness of employees, work related
 Professional Liability (Architects, engineers, construction managers, etc.)
 Injury or Damages due to errors & omissions
 Builder’s Risk (Property)
 Damages or Losses to Property under construction

12. CONSTRUCTION PROJECT
COVERAGE PROGRAM
7/31/2021
COTM 4242 12
• “All Risk” Builder’s Risk Insurance
• Property Damage
• Materials in Transit
• Off site storage
• Direct physical loss to Insured
Project(s)
• Construction
• Reconstruction
• Renovation

13. INSURANCE DOCUMENTATION
7/31/2021
COTM 4242 13
• Certificates
• Endorsements
• Declaration Sheets
• Claims Reporting requirements
• Entire Policy
• Notice of Cancellation

14. ASSIGNMENT 3 (REPORT)
• Pay a visit to nearby insurance companies and
report the following please:
• Review the available construction insurance coverages.
• Review insurance policies for advance payment and
performance bond please and give your comment if any.
• Report your understanding from your review please.
Submission date: May 21, 2019
7/31/2021
COTM 4242 14

15. THANK YOU!