What is a Construction Surety Bond
- 3 party agreement
- Surety joins w/ contractor to gurantee the owner, that the contractor will comply w/ terms and conditions of the contract
What is the difference between insurance and bonding?
Insurnace
- Two party agreement
- Insurance liability is direct
- Premium calculated based on calculated loss
- Cancelable by either party
Bonding
- Three party agreement
- Surety’s liability is secondary
- Premium for credit facility
- Remains until all obiligations are fulfilled
What are the 3 parties in a bonding relationship?
- Obligee (owner): receive gurantee promised by the bond
- Principle (contractor): furnish bond
- Surety (financial institute): provide guarantee promised by the bond
What is a guarantee?
Surety underwritting principle’s performance
What is a penal sum?
the upper limit of surety’s potential financial liability to owner
What is a premium?
Fee that contractor pays to surety for providing gurantee to owner
What is an indemnitor?
Individual or entity who promises to indemnify for any losses to surety
What are the 3 types of Bond?
- Bid bond
- Performance bond
- Labour & material payment bond
What is bid bond?
- Assurance for owner that make contractor accepts and signs the contact at the bid price
- Canada: Bid bond = 10% of bid price
- US: Bid bond = 5~20% of bid price
What is “Consent of Surety”
- 2 party agreement
- When contractor enters the contract, surety will provide performance/labour and material bond
What is the performance bond?
- Assurance for owner that makes contractor perform IAW contract term
- Canada: 50% of contract
- US: 50~100% of contract
Who guarantee the performance bond?
- Surety will make contractor to fullfill their obligations
- If contractor unwilling/unable to perform
What Labour & Material Payment Bond guarantee?
- If contractor refuse/unable to pay, surety will pay claimants
- 50% fo contract price
What is an indemnity agreement?
- Seperate agreement between contractor and surety that owner will never see (Bond = evidence)
- It makes surety to provide guarantee to owner
- Payback to ppl pays surety, if there’s any losses
