lecture 15 Flashcards
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.
A bond
A bond is a ______ where Owner is the obligee Contractor is the principal Surety is the guarantor
3-party agreement
will guarantee particular activities of the
contractor (principal) to the owner and to
the contractor’s workers, suppliers, and
subcontractors (as obligees).
The bonding company (surety)
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
The surety
is quite different from a contractor’s insurance.
A bond
will relieve the contractor from loss due to
claims or damages that are insured.
Insurance
If a person’s automobile is damaged, a _______ will pay the contractor’s liability and
relieve the contractor from that liability.
contractor’s liability insurance
The Surety endorses contractors’
capability and good will. It does not relieve the
contractor from any liability or responsibility.
A bond is credit
______ 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 _________.
The contractor, bonding company
A _____ is Insurance to the owner.
- Owner is indemnified from loss caused by contractor.
- Surety will take over (but will not necessarily pay the owner money).
bond
The bond agreement ceases when contractor properly _______________.
discharges his obligation and after the warranty period
If contractor fails to discharge obligation for any cause:
- Surety must complete up to face value of bond.
2. Requires breach of contract.
When dealing with contract bonds the Contract implies two responsibilities:
- Perform work to plans and specifications
2. Pay all costs associated with the work
Different bonds are needed to ensure
these duties are performed:
- Bid Bond
- Performance Bond
- Payment Bond
- Warranty Bond
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.
Bid Bond
If the contractor does not pay the bid bond the surety will:
- Limited to face value of bond.
2. Recommended amount is 5 -10% of maximum bid price
- A guarantee that contractor will complete the
project (perform the contract) as required in the
contract documents, or the surety will. - Protects owner from costs above contract sum if
contractor should be unable to complete the
contract. - Face value of the bond is the limit.
- Usually derived as % of contract price.
(100% is common) - Incorporates contract documents by reference.
- Covers warranty period (usually one year).
- On most government contracts the bond covers
modifications and time extensions (to a certain
extent).
Performance Bond
- A guarantee to owner that contractor will pay
workers, subcontractors, and material suppliers,
or the surety will. - Protects owner from liens placed upon the
facility by workers, subcontractors, and
suppliers who have not been paid. - Protects from mechanics lien.
- Without a bond, owner might have to pay for these twice
- Face value is usually for 100% of project price.
Payment Bond
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).
Surety bonds rates (premiums)
What are the three C’s?
- Character
- Capacity
- Capital
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
.
First stage investigations
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.
bonding capacity of a contractor
- Amount of work currently on hand
- Recent bidding record
- Present working capital
- Availability of credit
- Terms of payment for required project
- Previous experience with similar line of work
- Amount or percentage of work to be bonded (equals total project volume – any subcontracted works)
Second Phase investigation
an undesirable situation when both the GC and his subs post 100% performance bonds for their works. (Results in a higher bid price)
Double bonding:
__________, the bond should cover only the build part, as the design part should be covered by an appropriate professional liability insurance policy.
For design/build projects
______ should avoid double bonding by having his subs only post a performance bond.
A CM at risk
- Federal law enacted in 1935 and subsequently revised.
- Contracts more than $25,000 must have bonds - performance and payment.
- Performance bonds must cover 100% of contract amount.
- 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
Miller ACT
