Bonding Flashcards
What is a Construction Surety Bond?
A construction surety bond is a three party instrument under which the Surety joins with the contractor (Principal) to guarantee to the owner (Obligee), that the contractor will comply with the terms and conditions of the contract.
What is the difference between Insurance and Bonding?
Insurance:
- Two party agreement
- insurance liability is direct
- Premium calculated based on predicted losses
- Cancelable by either party
Bonding:
- Three party agreement
- Surety’s liability is secondary
- Bond premium for credit facility
- Remains in effect until principal obligation performed
What are the three parties in a Bonding relationship?
- Obligee (Owner)
- Principal (Contractor)
- Surety (Bonding Company)
What is the Principal’s role in Bonding?
The Principal (Contractor) furnishes the bond
What is the Obligee’s role in Bonding?
The Obligee (Owner) receives the guarantee promised by the bond
What is the Surety’s role in Bonding?
- Financial Institution
- Posseses great wealth and stability
- Is the entity that furnishes the guarantee that the bond promises
What is a Guarantee?
The Surety underwriting the performance of the Contractor
What is a Penal Sum?
The upper limit of the Surety’s potential financial liability to the Owner
What is a Premium?
The fee that the Principal (Contractor) pays to the Surety in exchange for providing the guarantee to the Obligee
What is an Indemnitor?
A person or entity who promises to pay the Surety back for any cost that the Surety incurs if called to make good the guarantee
What are the 3 types of Bonds?
- Bid Bond
- Performance Bond
- Labour & Material Payment Bond
What is a Bid Bond?
An assurance that the bidding contractor who is awarded the contract will accept and sign it, and will furnish all insurance policies and additional surety bonds required by the bid documents.
What amount is the Bid Bond % in Canada?
Typically 10% of Bid Price
What is “Consent of Surety”?
A two party agreement where if the Contractor enters the contract, the Surety will provide the performance and labour and material bond
What is a Performance Bond?
An Assurance provided to Owners that once they have awarded the contract, the Contractor will perform according to the contract’s terms.
What is the typical amount of the Performance Bond in Canada?
50% of the Contract
Who guarantees the Performance Bond?
The Surety promises to fulfill the Contractor’s obligations to perform the contract made with the Owner if the Contractor is unwilling or unable to perform.
What and how much is the Labour and Material Payment Bond?
A bond (guaranteed by the Surety) to private owners who want to avoid having to sell property to satisfy liens or legal claims filed by subcontractors or suppliers. Usually 50% of the Contract Price
What is an Indemnity Agreement?
The separate contract between the Surety and the Contractor which outlines their price and guarantee.
The owner never sees this contract directly.
How much is a Bid Bond Premium?
$750+ per year
