Bonds

Question 1

What are the surety bonds?

Answer 1

• a bond is a guarantee by the surety that if the contractor doesn’t fulfill a responsibility to the owner the surety will

Question 2

A bond is a three-part agreement where:

Answer 2

• contractor is the principal required to be bonded
• owner is the obligee requiring the bonds
• surety is the guarantor providing bond to protect obligee from mishaps that may occur on behalf of principal

Question 3

Bond VS Insurance

Answer 3

Insurance: will relieve contractor from LOSS due to claims/damages which are insured

Surety bonds:
- guarantees PERFORMANCE of defined contractual duty
- bond is credit (contractor is liable for all losses/claims paid by bonding company)
- guarantee to OWNER (owner indemnified from losses caused by contractor. surety will take over)

Question 4

How do surety bonds work?

Answer 4

surety bond is a contract
- failiure in duty = breach of contract
- required by law on public contracts
-GC can require bonds from SCS

Question 5

What is surety coverage?

Answer 5

• if GC fails to fulfill contractual obligations, surety must assume obligations of contractor and see that contract is completed, paying all costs up to face amount of bond
• not only provide money to get project completed but responsible for FINISHING THE CONTRACT

Question 6

Why use surety?

Answer 6

• construction is a very risky business

Question 7

other things to note w surety bonds

Answer 7

• bond cannot be invoked until contractor is in formal breach of contract
• contract bonds are always written documents
• obligations of bond = provision of the contract
• required on public projects by law
• not required by law on private projects (owner’s call)
• penalty amount: monetary amount the surety is liable for in surety bond

Question 8

Three Types of Bonds

Answer 8

• Bid
• Performance
• Payment

Question 9

Bid bonds

Answer 9

1. honor its bid and sign all contract documents if awarded the contract

• guarantees that if selected, contractor will enter into contract and provide other bonds required by bidding documents
• otherwise, pays difference btwn its bd=id and next lowest responsible bid, up to limited of bid guarantee, or pay stated amount as liquidated damage
• if contractor doesn’t pay, surety will pay 5-10% (recommended amount) of max possible contract amount
• face value of bond is expressed as fixed sum of money (usually 100% of contract price)

Question 10

what happens if performance bond defaults?

Answer 10

Surety has 3 choices:
- complete contract itself through a completion contractor
- select new contractor to contract directly w owner
- allow owner to complete the work within the surety paying the costs

Question 11

Performance bodns

Answer 11

2. perform the objectives of the contract

• guarantees that contractor will complete project as required in contract documents, or surety will
• protects owner from costs above contract sum if contractor unable to complete contract

Question 12

Payment bonds

Answer 12

3. pay all cost associated w the work

• guarantees to owner that contractor will pay workers, SCs, and material suppliers, or surety will
• face value usually 100% of project price
• protects owner from liens placed upon the facility by workers, SCs, and material suppliers who haven’t been paid
• without bond owner might hv to pay for these second time