COSC 465 Surety Bonds

clear default termination notification

What is required from the owner before a surety can step-in.

direct contractual relationship with the owner

What type of relationship is needed with the owner to file a constitutional lien?

full face value of the bid bond or the difference between the next low bidder and the bid up to the face value of the bond

When a bid bond is in effect, what are the two possible damages?

mistake of fact

When a computational error is made in the bid, and not a mistake of judgement, the full face value of the bid bond may be returned. What type of mistake is this?

tender

Surety provides a substitute contractor with a substituted bond and the owner releases the surety.

protects any level sub or supplier

The Mini-Miller Act payment bond requirement covers these parties in the state of Texas.

used to be $25,000, but now $50,000

The Mini-Miller Act requires a contractor to obtain both a performance and payment bond when the project is in excess of what amount?

1%, 1 1/2 - 2%, 3%

The actual bond premium does not change much for a lower bond percentage, so a 100% bond is generally the best buy. What is the approximate percentage of contract amount that is charged for projects greater than $1 million? less than $1 million? less than $100,000

The contract is signed and the payment and performance bonds are posted.

The bid bond of the low bidder becomes null and void when what occurs?

character, capacity, and capital

The bonding capacity level is based on the "3 c's" of underwriting which are what?

to pay back taxes, pay money owed for purchase, and for improvements made (must be a written contract with all parties including spouses)

These are the 3 ways that a homestead may be taken.

buyback, tender, take-over, direct completion

These are the 4 ways that a surety can satisfy its performance bond obligation.

surety, principle, obligee

These are the three parties in a surety arrangement.

can force the sell of building; retainage held by the owner can be attained; fund trapping - obtain money owed to the prime by the owner (requires non-payment 15th day after 2nd month of work performed; notice delivered through certified mail to prime and owner)

These are ways a sub or supplier may obtain money through a statuatory lien.

corporations and limited liability companies (LLC)

These entities are not permitted to have a homestead.

property damage, claims of the bonded contractor, costs to remedy design errors, costs to pay unpaid vendors

These liabilities are not included in a performance bond, in terms of the surety.

subrogation

These rights exist for the surety. It allows the surety to seek compensation from offending parties such as owners, subcontractors, suppliers, etc.. The surety can file suits that the contractor would have been able to file.

performance bond

These types of bonds assure that a financially responsible party will stand behind the prime contractor if he/she does not perform properly.

warranty bonds

These types of bonds cover latent defects (an item that is defective but takes time to find or see it).

Yes

Can a change in the construction contract, such as an extension of time or change order, release the surety if they are not notified?

The bond is still valid; however, if the owner knew that the contractor had misled the surety then it is less likely to be enforced.

If the contractor makes a misrepresentation to the surety when applying for a bond, is the bond valid? For example, if the contractor states that it has capital that does not exist?

prime contractor, owner, and surety

If the prime contractor has defaulted on payment, then these parties must be notified for the sub or supplier to receive payment from the surety.

a set fee

Insurance premiums are based on actuarial rates. Surety premiums are different in that the surety "presupposes no losses." Surety is generally structured, in terms of payment, on what?

No, unless the legality is marginal such as not obtaining the building permit prior to contract award.

Is a bond still valid in the case of a building project that is illegal?

50%

It is a general practice that for the amount of a single bonded contract to not exceed what % of bonding capacity?

A/E has communicated with the surety

It is the owner's responsibility to ensure that what has occurred when the contractor has been terminated?

yes

Must surety bonds be in writing and signed?

$100,000

The Miller Act requires both a performance and payment bond when the contract in in excess of what amount?

constitutional, statutory, and contractual

These are the 3 types of liens that can be placed on a property.

typically 5%

What % of the contract amount usually make up the face value of the bid bond?

company owners (corporate officers, major stockholders, and spouses)

A common practice is for sureties to require these people to sign guarantees as a condition of providing bonds. Through this mechanism, a surety effectively removes the protection offered by the corporate structure.

the bond is valid

A government agency that required a payment bond can only be responsible for payments to subs and suppliers, instead of the surety, if what is not checked?

3

An insurance policy is a 2 party contract whereas a surety arrangement has this many parties.

owner

An insurance policy protects the insured against a specified type of loss, unlike the surety arrangement that does not provide a guarantee for the contractor, but rather for who?

Yes, and generally they run through the 1 year warranty period.

Are the performance and payment bonds considered valid for the life of the project?

clouding the title

If a contractor makes a mistake on the lien, thereby making it invalid, he/she can be sued for what?

a judicial foreclosure sale on the property and to have the claim satisfied with the proceeds

If a lien is filed by a subcontractor or supplier and it is perfected, the lien claimant has the right to what?

surety

If a surety bond is in place and the contractor defaults on the contract, who will be obligated to satisfy the terms of the contract?

Only require the CM to obtain on a bond on his/her fees and general conditions and then have the subs get bonded for their portions.

In a CM at risk project, what should be done in terms of bonding?

Need to isolate the design from the construction and obtain professional liability insurance to cover the design.

In a design-build project, what should be done in terms of the bonding?

must be written

In order to place a lien on a residence, what is the requirement on the contract?

material suppliers of the general contractor, 1st tier subcontractors, 2nd tier subcontractors, and suppliers to 1st tier subcontractors

On federal projects, the Miller Act requires that payment bonds cover these parties only.

take-over

Surety contracts with the owner to complete and, in turn, the surety contracts with a substitute contractor to complete, but does not get released.

buyback

Surety gives the owner a check for the estimated cost of completion, less the remaining contract balances and walks away forever. Surety does not need owner's consent for this, unless the surety wants a release. Owner must sue and prove actual reasonable and necessary completion costs were greater than the amount provided by the surety.

direct completion

Surety manages the project to completion (usually by way of a consultant acting as a construction manager).

% of the total or face value of the bond

The premium rates for a bond are based on what?

overexpansion, bids are too low, subcontractor failures, unforeseen labor problems, unknown soil conditions, loss of key personnel, harsh contract provisions, and extraordinarily high wages

The surety underwrites against possible losses of any kind. These are some specific problems to be considered.

True

The underwriting procedure is so rigorous that many owners disregard the need to prequalify bidders. True/False

10%

There are financial limits on what a surety can do. The government adopted a rule that a surety cannot assume a single obligation that exceeds this % of the surety's equity or surplus.

surety

This party to a surety arrangement is obligated to perform or to pay a specified amount of money if the principle does not perform. It is the guarantor of the bond.

principle

This party to a surety arrangement is the debtor (general contractor or subcontractor) whose performance is promised or guaranteed.

obligee

This party to a surety arrangement is to whom (owner or general contractor) the promise of the performance is made. It is the beneficiary of the bond.

Dennis Descant, Senior Vice President with Brady Chapman Holland & Associates

This person provided a PowerPoint presentation on e-Learning regarding obtaining surety bonds.

payment bond

This type of bond gives protection to the owner if the subcontractors and suppliers are not paid by the prime contractor. These types of bonds prevent liens, due to the surety paying the subs and vendors after GC default.

bid bond

This type of bond is issued to give assurances that the contractor will enter into a binding construction contract and will provide the required payment and performance bonds.

statutory lien

This type of lien is also called a mechanic's and materialman's lien. If you have a contract as a sub with prime and have not been paid, then send a notice to the owner before filing the lien. There are certain time requirements.

contractual lien

This type of lien is established by contract between the owner and prime contractor.

written contract and deposit funds into a project specific bank account to show payment to subs and suppliers

What advise was given to protect prime contractors in residential construction?

No

Can liens be placed on a federal project where a payment bond was in place, even if the surety goes bankrupt?

foreclosure and auction

If constitutional lien is not paid by the owner within 2 years then the individual who filed it is able to do what?

owe money to the contractor

If surety steps in before there is a clear default termination, it could be tortious interference and cause the surety to have to do what?

lien waiver clause

If this is included in a contract, the prime contractor will not be able to place a lien on the building/property. The subs and vendors may not be able to either if there is an incorporation clause incorporating the prime contract into the sub/prime contract.

Miller Act

In 1935 this act was enacted by the US, stipulating that surety bonds (performance and payment) are required on construction projects in excess of $100,000.

constitutional lien

In Texas, if someone supplies labor, material, or expertise they already have a lien on the project. File it at the county clerk's office and send a notice to the owner. Allows the person who filed to get paid first if property sells. What type of lien is this?

a stop work notice

In public works projects, without a bond, subcontractors and suppliers would have to file what if they were not paid? This informs the owner that they have not been paid and that further payments are to be withheld by law from the prime contractor.

terms that extend the length of time the surety remains liable (warranty), terms that increase the obligations covered (design/build), terms that limit the surety's options in event of default, liquidated damages/consequential damages

In the Descant PowerPoint presentation, these were items listed as contract considerations that a surety will check before granting a performance bond.

contract documents, bond forms, project details (duration, breakdown of costs, major subs/suppliers), how the project fits within overall backlog, and bid tabulation

In the Descant PowerPoint presentation, these were items listed that a surety company will look at before granting a performance bond to a contractor for a specific project.

contractor qualification statement, historical corporate financial statements, personal financial statements of owners, resumes of key personnel, bank reference letter, certificate of insurance, business continuation plan

In the Descant PowerPoint presentation, these were listed as items establishing a bond line - underwriting information required.

bonding capacity

Sureties generally stipulate a maximum value of uncompleted work that a contractor can undertake at one time which is referred to as what?

at least equal to the performance bond

On federal projects, the face value of the payment bond must be of what amount?

complete the construction contract itself by soliciting bids from other contractors, pay the owner to complete it (up to the limit of the bond), or provide financial support to the defaulting contractor to complete the project

Performance bonds usually contain provisions that permit the surety to remedy the default to the owner in what 3 ways?

bond's penalty

Performance bonds usually state a specified dollar amount as a limit to the liability of the surety, more commonly referred to as what? Bonds usually have a face value of 100% of the contract price.

This is not advised since many contractors tend to use the same surety on every project that they construct. There is a relationship of trust.

Should the owner stipulate which surety the contractor should use?

from prime contractor (probably not because of bankruptcy); can sue the owner for any claims that the contractor could allege; try to get retainage held by owner (must compete with other contractors due to GC bankruptcy)

Sureties can try to recover their losses in what ways?

background (list of references, types and size of past projects, resumes of key personnel) capabilities (project controls systems in place, contractor's experience, progress on other jobs, size and nature of proposed project), financial responsibility (bank line of credit, corporate tax returns, key personnel of the company such as owners)

The surety underwriting procedure will consist of a thorough scrutiny of the contractor's solvency. These are some items that will be reviewed.

surety bond

The ultimate costs of the project can be in excess of the budget if the contractor defaults on the project. This owner risk can be diminished by requiring the contractor to provide what?

may be prohibited from doing any work on the project in a subcontractor capacity; barred from bidding on the same project, if it is readvertised for letting; private owners may refuse to consider future bids

These are all possible events that could occur if the prime contractor defaults on a bid bond.

failure to provide notice of default to the surety; material alteration in the contract (ex. lending $ to subs); change orders greater than 20% of the contract amount not being reported; not including the surety in every negotiation dealing with a big problem; owner pre-pays, owner does not hold back retainage; owner overpays; not performing inspections if required in contract; 1 year statute of limitations for public works (from final completion or abandonment; 2-4 years for private)

These are defenses that can be used by the surety.

liquidation of damages (full face value taken), a security device (difference between bids taken), or an unenforceable penalty

These are the 3 ways that a bid bond can be viewed.

Texas Trust Fund Act

This Texas act can place criminal charges on a contractor that does not pay its subs after being paid by the owner for the work.

underwriting

This consists of the surety rating the acceptability of risks being solicited from contractors.

indemnification

This is a means by which the principle is obligated to the surety for any debts it incurs as a result of default by the principle. This is what caused the surety to be obligated to finish the project if the principle fails to complete it in a performance bond. It also allows the surety to seek reimbursement from the contractor.

Mini-Miller Act

This is a state act that requires contractors to obtain a performance bond and payment bond.

surety bond

This is essentially a guarantee provided by a firm that states that the contractor will fulfill the terms of the contract.

$10 of uncompleted work for every $1 of net working capital

This is the conservative rule for determining bonding capacity.

200 acres and improvements thereon if married; only 100 acres and improvements thereon if single; not contain elements that define an urban homestead

This is the definition of a rural homestead, if used as primary residence (can also be place of business).

not more than 10 acres of land and improvements thereon; Must be located within limits of municipality, ETJ, or subdivision. Must be served by police department and paid fire department. 2 or more from list of utilities brought from outside of property (electric, gas, water, etc.)

This is the definition of urban homestead, if used as primary residence (can also be place of business).

usually within 3 to 15 days, next two lowest bidders are kept until contract is signed, or all are kept until contract is signed

When are the bid bonds of unsuccessful bidders returned? It is always stated in the instructions to bidders, but usually these 3 options are followed.

usually within 90 days of the work performed

When must notification be provided to the surety of prime contractor default on payment to sub or supplier?