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Surety Bonds: Manage Risk Effectively with HUD Guidelines

Discover the benefits of surety bonds in managing risk for construction projects. Learn about bid, performance, and payment bonds, and how they safeguard project completion. Understand the fundamentals of contractor prequalification and the three Cs of assessing financial strength. Explore reasons why contractors fail and how surety bonds protect against losses. Navigate the claims process and the importance of surety performance and payment bond protections. Compare surety bonds to letters of credit and grasp the value they offer. Get insight into the cost of surety bonds and premium calculation examples. Learn how to qualify your contractor's surety with essential resources from the U.S. Department of Housing and Urban Development. Utilize detailed guidelines for surety bond specifications, owner responsibilities, and tips for contractor success. Practical information and contacts are available for further assistance and more resources.

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Surety Bonds: Manage Risk Effectively with HUD Guidelines

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  1. Surety Bonds The Sensible Choice For Managing Risk

  2. U.S. Department of Housing & Urban Development Presented By:

  3. Can Surety Bonds Help You? • How do you evaluate & manage risk? • How do you ensure projects are completed on time, on budget, and to contract specifications? • How do you ensure contractors successfully meet obligations?

  4. Can Surety Bonds Help You? • Bid Bond • Performance Bond • Payment Bond

  5. Surety Bonds vs. Traditional Insurance

  6. Contract Surety Bonds • Bid Bond • Performance Bond • Payment Bond

  7. Contract Surety Bonds • Bid Bond • Performance Bond • Payment Bond

  8. Contract Surety Bonds • Bid Bond • Performance Bond • Payment Bond

  9. Fundamentals of Surety Contractor default is preventable Surety companies & producers prequalify contractors Surety companies back the bond with their own assets

  10. The 3 Cs Of Prequalification Capital Capacity Character

  11. Analyzing Financial Strength Capital Financial statements Working capital Work-in-progress Indemnity

  12. Evaluating Ability To Perform Capital Financial statements Working capital Work-in-progress Indemnity Capacity Resumes Contingency plan Business plan Equipment

  13. Assessing Reputation Capital Financial statements Working capital Work-in-progress Indemnity Capacity Resumes Contingency plan Business plan – short & long term Equipment Character Reputation Relationships References

  14. Reviewing Business Ventures Surety Document business commitments that can affect the contractor’s business • Owning property • Side ventures

  15. Contractor Failure Source: Dun & Bradstreet

  16. Why Do Contractors Fail? Inadequate Management New Owner Failure Over Expansion Change in Scope Failure Sub Failure Materials Shortages Cost Escalations

  17. Why Do Contractors Fail? Economic Downturn Inclement Weather Failure Failure Onerous Terms Work Environment Death or Illness of Key Employee

  18. Claims Principal Obligee Surety

  19. Expediting The Claims Process • Clearly define default in contract • Submit status reports to surety • Promptly notify surety of performance or payment problems • Owner must file formal declaration of default

  20. Responsibility Of The Surety • Acknowledge claim • Investigate claim • Determine & fulfill obligations Surety

  21. Performance Bond Protection • Re-let the job • Provide replacement contractor • Retain original contractor • Reimburse owner penal sum Surety

  22. Payment Bond Protection Surety • Assures payment • No mechanics’ liens • Keeps subcontractors on the job

  23. Surety Bonds vs. Letters of Credit

  24. The Value Of Surety Bonds • Bid Bonds • Performance Bonds • Payment Bonds

  25. The Value Of Surety Bonds • Bid Bonds • Performance Bonds • Payment Bonds

  26. The Value Of Surety Bonds • Bid Bonds • Performance Bonds • Payment Bonds

  27. Cost of Surety Bonds *For a small and emerging contractor, premiums can start around 2.5-3%.

  28. Premium Calculation Examples • Established Contractor • $500,000 Contract • Reviewed/Audited Financial Statements • Frequent Bond User • <1.0-1.5% Bond Rate (average – 1.35%) • <$5,000-7,500 • Likely no other costs involved (collateral, escrow, SBA)

  29. Premium Calculation Examples • Emerging Contractor • $500,000 Contract • Limited Financial Info. (Tax Returns/Quickbooks) • Limited Bonding History • 1.8-3.0% Flat Rate (average – 2.5%) • $9,000-12,500 • May not include cost of getting bond (i.e., funds control, collateral, SBA fees)

  30. How Is Premium Paid? • Premium is billed BY the contractor TO the owner • Usually paid on first billing, along with: • Mobilization • General Conditions • Bond • Cost of bond is included in final contract price • Contractor pays the bond premium to the surety • Prompt Pay Is Key To A Contractor’s Success!

  31. The Underlying Agreement • Look at obligations • Determine risks • Match capable principal to fulfill agreement Surety

  32. Bond Specifications • Owner specifies surety bonds in contract documents • Contractor contacts surety bond producer • Producer guides contractor through prequalification • Contractor obtains bonds & delivers to owner

  33. The Owner’s Responsibilities • Provide working set of plans and specifications • Establish terms of the agreement • Ensure full & timely payment • Maintain adequate insurance • Pay property taxes • Communicate Owner

  34. Qualify Your Contractor’s Surety A.M. Best Companywww.ambest.com Dun & Bradstreetwww.dandb.com Standard & Poor’swww.sandp.com Moody’swww.moodys.com Treasury Dept.www.fms.treas.gov/c570/c570.html State Insurance Dept.www.naic.org

  35. For More Information Construction Bonds, Inc. A Division of Murray Risk Management and Insurance 1110 Herndon Parkway, Suite 307 Herndon, VA 20170 703-934-1000 www.sbabonds.com

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