lecture 15

Question 1

is a guarantee by one person 
(the surety) that if another person (the 
contractor) does not fulfill a 
responsibility to another (the owner) 
that the surety will.

Answer 1

A bond

Question 2

A bond is a ______ where Owner is the obligee Contractor is the principal Surety is the guarantor

Answer 2

3-party agreement

Question 3

will guarantee particular activities of the
contractor (principal) to the owner and to
the contractor’s workers, suppliers, and
subcontractors (as obligees).

Answer 3

The bonding company (surety)

Question 4

is a party that assumes the
liability for debt, default, or failure in duty of
another party. A surety bond is a contract
for the assumption of this liability

Answer 4

The surety

Question 5

is quite different from a contractor’s insurance.

Answer 5

A bond

Question 6

will relieve the contractor from loss due to

claims or damages that are insured.

Answer 6

Insurance

Question 7

If a person’s automobile is damaged, a _______ will pay the contractor’s liability and
relieve the contractor from that liability.

Answer 7

contractor’s liability insurance

Question 8

The Surety endorses contractors’
capability and good will. It does not relieve the
contractor from any liability or responsibility.

Answer 8

A bond is credit

Question 9

______ is liable for all losses or claims paid by the
bonding company. If the contractor defaults on paying a supplier and the bonding company pays, then the contractor owes the _________.

Answer 9

The contractor, bonding company

Question 10

A _____ is Insurance to the owner.

1. Owner is indemnified from loss caused by contractor.
2. Surety will take over (but will not necessarily pay the owner money).

Answer 10

bond

Question 11

The bond agreement ceases when contractor properly _______________.

Answer 11

discharges his obligation and after the warranty period

Question 12

If contractor fails to discharge obligation for any cause:

Answer 12

1. Surety must complete up to face value of bond.

2. Requires breach of contract.

Question 13

When dealing with contract bonds the Contract implies two responsibilities:

Answer 13

1. Perform work to plans and specifications

2. Pay all costs associated with the work

Question 14

Different bonds are needed to ensure

these duties are performed:

Answer 14

1. Bid Bond
2. Performance Bond
3. Payment Bond
4. Warranty Bond

Question 15

Guarantees that, if selected, the contractor
will:
A. Enter into contract and will provide other bonds
required by bidding documents, or
B. Pay the difference between its bid and the next
lowest responsible bid (difference in price), up to
the limit of the bid guarantee, or
C. Pay a stated amount as liquidated damages.

Answer 15

Bid Bond

Question 16

If the contractor does not pay the bid bond the surety will:

Answer 16

1. Limited to face value of bond.

2. Recommended amount is 5 -10% of maximum bid price

Question 17

1. A guarantee that contractor will complete the
   project (perform the contract) as required in the
   contract documents, or the surety will.
2. Protects owner from costs above contract sum if
   contractor should be unable to complete the
   contract.
3. Face value of the bond is the limit.
4. Usually derived as % of contract price.
   (100% is common)
5. Incorporates contract documents by reference.
6. Covers warranty period (usually one year).
7. On most government contracts the bond covers
   modifications and time extensions (to a certain
   extent).

Answer 17

Performance Bond

Question 18

1. A guarantee to owner that contractor will pay
   workers, subcontractors, and material suppliers,
   or the surety will.
2. Protects owner from liens placed upon the
   facility by workers, subcontractors, and
   suppliers who have not been paid.
3. Protects from mechanics lien.
4. Without a bond, owner might have to pay for these twice
5. Face value is usually for 100% of project price.

Answer 18

Payment Bond

Question 19

1. are based on 
the classification of the project being 
bonded. 4 classifications exist:
2. A-1, A, B, and Miscellaneous
3. Good standing results in lower premium 
(deviated).
4. Range from 0.33% to 1.2% (for first 24 month 
period).

Answer 19

Surety bonds rates (premiums)

Question 20

What are the three C’s?

Answer 20

1. Character
2. Capacity
3. Capital

Question 21

The details include:
1. Professional ability of principals of the firm
2. Integrity and personal habits of the firm’s principals
3. Financial standing and line of bank credit for the firm and its
principals
4. Experience of the firm and its principals in line of work
.

Answer 21

First stage investigations

Question 22

The ______of a contractor is the
maximum value of uncompleted work that a
contractor can undertake at one time.
1. It is based on the 3 C’s
2. A reasonable rule is that the bonding
capacity is about $10 of uncompleted work
for each $1 of net working capital,
depending on the job size.
3. Another practice is for the amount of a
single bonded contract not to exceed 50% of
the total bonding capacity.

Answer 22

bonding capacity of a contractor

Question 23

1. Amount of work currently on hand
2. Recent bidding record
3. Present working capital
4. Availability of credit
5. Terms of payment for required project
6. Previous experience with similar line of work
7. Amount or percentage of work to be bonded (equals total project volume – any subcontracted works)

Answer 23

Second Phase investigation

Question 24

an undesirable situation when both the GC and his subs post 100% performance bonds for their works. (Results in a higher bid price)

Answer 24

Double bonding:

Question 25

__________, the bond should cover only the build part, as the design part should be covered by an appropriate professional liability insurance policy.

Answer 25

For design/build projects

Question 26

______ should avoid double bonding by having his subs only post a performance bond.

Answer 26

A CM at risk

Question 27

1. Federal law enacted in 1935 and subsequently revised.
2. Contracts more than $25,000 must have bonds - performance and payment.
3. Performance bonds must cover 100% of contract amount.
4. Payment bonds must cover: 50% if project cost is up to $1M 40% if project cost is between $1M and $5M $2.5M (fixed amount) if project cost is above $5M

Answer 27

Miller ACT