Bonds Flashcards
What are the surety bonds?
- a bond is a guarantee by the surety that if the contractor doesn’t fulfill a responsibility to the owner the surety will
A bond is a three-part agreement where:
- 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
Bond VS Insurance
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)
How do surety bonds work?
surety bond is a contract
- failiure in duty = breach of contract
- required by law on public contracts
-GC can require bonds from SCS
What is surety coverage?
- 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
Why use surety?
- construction is a very risky business
other things to note w surety bonds
- 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
Three Types of Bonds
- Bid
- Performance
- Payment
Bid bonds
- 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)
what happens if performance bond defaults?
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
Performance bodns
- 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
Payment bonds
- 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
