Protection for Third Party Vendor Contracts Surety Bonds For Public Entities

Why Bonds Are Required Miller Act of 1935 –For federally funded public works projects over $150,000 “Little Miller Acts” –For state & local public works projects

What is a Surety Bond? Surety (Guarantor) Obligee (Public Entity) Principal (Vendor)

Surety Bonds Vs. Traditional Insurance Surety BondsInsurance 3-party agreement2-party agreement Risk transfer Duty to obligeeDuty to insured Regulated by State Insurance Departments Premium fee for prequalification services Premium actuarially determined Project specificUsually term specific Penal sumPolicy limits

Elements Of Prequalification Capital Capacity Character Capital Capacity Character

Capital: Financial Strength Capital Financial statements Net worth Cash flow Indemnity

Capacity: Ability to Perform Capital Financial statements Working capital Net worth Cash flows Indemnity Capacity Resumes Contingency plan Business plan - short & long term Equipment

Character: References & Reputation Character Reputation Relationships References Capital Financial statements Net worth Cash flows Indemnity Capacity Resumes Contingency plan Business plan - short & long term Equipment

Role of the Underwriter Review obligations Determine the risk Provide qualified principal to owner Underwriter

Underlying Agreement Primary instrument to establish risk associated with the guarantee Requirements contained in the contract documents

Functions of Surety Bonds Competitive bidding process “On time performance” Save tax dollars Protect taxpayer dollars Surety Bonds

The Advantages Of Surety Bonds Qualified vendors Competitive pricing Timely contract performance Quality product Financial recourse Insulates public officials Efficient management of public works administration Protect taxpayer dollars Surety Bonds

Surety vs. ILOC ILOCBond Financial prequalificationYesYes Capabilities prequalificationNoYes Review of contract documents and guarantee formsNoYes Guarantee completion NoYes Warranty period coveredNoYes CancellableYesNo/Yes 100% coverageNoYes Impact on bank lineYesNo

An Owner’s Guide To The Surety Claims Process

When Problems Arise.... Keep the surety informed of the principal’s progress If principal defaults, submit written declaration of default Allow the surety time to investigate the claim Obligee

Surety’s Responsibilities In a Claims Situation Principal’s contractual obligations Obligee’s contractual obligations Principal’s defense Whether the obligee has met its obligations Surety

Managing The Claims Process Be cognizant of legal position Avoid improperly worded letters Written notice of known problems Ask for a specific response Obligee

Surety Responsiveness Be reasonable in your expectations Be diligent in providing notice & maintaining records Contact insurance commissioner Obligee

The Advantages Of Surety Bonds Qualified vendors Competitive pricing Timely contract performance Quality product Financial recourse Insulates public officials Efficient management of public works administration Protect taxpayer dollars Surety Bonds

Your Surety Professional Is Your Consultant Financial Security Qualified Principals