Understanding Bonding Requirements

1. Understanding Bonding Requirements Presented by: Department of Management Services, Division of State Purchasing 2004

2. Agenda • Bond vs. Insurance • Purpose of Bonds • Characteristics of a Bond • Bond Terminology • Bond Types • Bond Benefits • Bond Cost • Bond Considerations The intent of this presentation is to educate purchasing professionals about the aspects of bonds as they relate to contracts procured by a governmental entity.

3. Bonds vs. Insurance Policy Bondsare essentially a three party contract where there is an obligation by one party to another, which is guaranteed by a surety company. Insurance Policiesare a legal contract between the policyholder and the insurance company which involves the transfer of risk to an insurance company.

4. Purpose of Bonds Bonds provide a guarantee to the owner (typically the State of Florida or some other party identified) of the contractor’s performance, contract obligations or honesty.

5. Characteristics of a Bond • Qualifying a contractor • Contract bonds vs. bank loans • Prequalification criteria: • Character • Capacity • Capital

6. Bond Terminology • Principal is the contractor (or other party) whose performance is being guaranteed. • Obligee is the State of Florida (or other party) to whom the principal owes a duty and the recipient of the benefit from the guarantee. • Surety is the insurance or bonding company that guarantees that the principal will perform according to the contract requirements. • Power of Attorney is the authority to issue bonds on behalf of the insurance company or surety. • Attorney-in-fact is the party holding power of attorney to act on behalf of another party.

7. Surety Bonds • A Contract bonds guarantee that the principal will fulfill all its contractual obligations. In selling a bond to cover a specific contract, the surety must consider the obligations required by the contract and the ability of the principal to fulfill those obligations. • A Bid Bond promises that the contractor bidding on a solicitation will, if the bid is accepted, enter into a contract and furnish the other necessary contract bonds. Bid bonds are typically provided with a penalty equal to 10 percent of the amount bid. • A Performance Bond guarantees that the contractor will perform the work according to the contract, within the stipulated time, and according to the agreed price. • A Payment Bond also referred to as a labor and materials bond; guarantees that certain bills incurred by a contractor for labor and materials will be fully paid at the completion of the project. • A Maintenance Bond guarantees that defective materials used by the contractor will be replaced and poor workmanship performed by the contractor or its subcontractors will be corrected.

8. Surety Bond Benefits • The contractor is liable to the surety company. • The surety company must fulfill the contractor’s obligation and/or pay damages if the contractor fails to perform its obligation to the State. • When a bond is issued, the surety company is attesting to the contractor’s integrity, capability, trustworthiness, financial responsibility, or whatever qualities may be required for the undertaking. • Sureties companies carefully analyze the contractor and may even require collateral.

9. Surety Bond Cost A bid bond is provided for a nominal fee to the contractor, typically ranging from $500 - $1,000. The cost for a performance bond or payment bond is based on the contract price, type of contractor, financial wherewithal. • Type of Bond: Payment and Performance Bond Type of contractor: Major construction contractor Bond Amount: $1,000,000 Total Premium: $13,000 approx.

10. Surety Bond Considerations • Does the contract have an exposure of default by a vendor not performing in accordance with the contract specifications, stipulated time or agreed price? If yes, then consideration should be given to a performance bond requirement. • Does the contract have an exposure of defective materials or workmanship? If yes, then consideration should be given to a maintenance guarantee within the performance bond or as a separate maintenance bond. • Does the contract warrant a requirement of a performance bond? If yes, then consider the purpose, exposure, pre‑qualification process and availability of a bond. • To determine the bond limit consider the cost to complete the required services.

11. Conclusion Questions? Thank you for your participation.