Chapter 8: Surety Bonds
Difference between surety bonds and Insurance?
https://www.yutzmerkle.com/2012/05/04/5-key-differences-between-insurance-and-surety-bonds/
Surety, Principal, obligee
Principal-subcontractor Obligee-general contractor surety-bonding company
Subcontractor Bonds
The GC becomes responsible and liable if a subcontractor fails to pay for materials, labor, or sub-subcontractors.
Payment Bond
Gives protection to the owner if the subcontractors and suppliers are not paid by the prime contractor. -In private projects, the payment bond keeps a project free and clear of liens. -In public projects, with out bond, subcontractors or suppliers would have to file a stop notice if they were not paid. -Gives protection to materials suppliers who provide materials director to the GC, supplier of materials to the first-tier subs, assurance of payment for the subs or gc, etc. - BUT, do not provide protection to 2nd tier subs and suppliers
Performance Bond
Makes sure that a financially responsible party will stand behind the prime contractor if he or she does not perform properly. -A performance bond ensures payment of a sum (not exceeding a stated maximum) of money in case the contractor fails in the full performance of the contract. These bonds usually have a face value of 100% of the contract price. The performance bond and the payment bond are considered valid for the life of a contract. The protection period extends through the final acceptance by the owner, and generally extends though the one-year warranty period.
Parties involved in Surety arrangement
SURETY, PRINCIPAL and OBLIGEE -The principal is responsible for obtaining the bond from the surety and then, after signing it to establish the obligation of both the surety and the principal, deliver it to the obligee(owner).
SURETY
The surety (bond company) is obligated to perform or to pay a specified amount of money if the principal does not perform. The surety is the guarantor on the bond.
Bonding Capacity
This level or limit is based on the surety's appraisal of the contractor's abilities and resources. This assessment is based on the 3 C's of underwriting, namely Character, Capacity and Capital. An important issue for contractors as their capacity will determine which projects they can pursue. A company's bonding capacity is generally a single and an aggregate limit
Surety Bond
a guarantee provided by a firm that states that the contractor will fulfill the terms of the contract. If the contractor defaults the contract, the surety will then be obligated to satisfy the terms of the contract.
Insurance Premiums
based on actuarial rates. Premium is a fee for the extension of credit, like the interest charged by banks.
Bid Bond pg.99
issued to give assurances that the contractor will enter into a binding construction contract and will provide the required payment and performance bonds if the contract is awarded to him/her. If the contractor fails to sign, the bond stipulates that a responsible party (the surety) will pay the damages. -It can be a liquidation of damage (limitation of liability), a security device, or an unenforceable penalty. -To provide guarantee, that the winning bidder will undertake the contract under the terms at which they bid
The Miller Act
making sure the surety bond are required of construction contracts on all federal and federally assisted projects. The requirements of payment and performance bonds are stipulated for contracts that exceed $100,000 for the construction.
Contract default
pg.114
PRINCIPAL
the party (general contractor) whose performance is promised and guaranteed.
OBLIGEE
the party (owner) to whom the promise of the principal's performance is made. The obligee is the beneficiary of the bond.
Insurance Policy
two-party instrument between the insurance company and the insured that protects the insured against a specified type of loss. In surety agreement, the contractor is not providing the guarantee for himself, but for the owner. Insurance transfers risk, and surety agreement does not.