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Surety Bonds Essentials
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Surety Bonds Essentials
ch 7 and 8
Study
1
Question
What is a surety bond?
Answer
A guarantee of performance of a defined contractual duty, not an insurance policy protecting against risk.
2
Question
In contract surety bonds, who is the obligee?
Answer
The owner who is protected against default or failure of the GC or prime contractor.
3
Question
In contract surety bonds, who is the principal?
Answer
The GC/Prime or Subcontractor who has hired a surety company to guarantee their performance.
4
Question
What happens when a contractor fulfills their obligations and completes the project?
Answer
The bond expires, and the bond agreement is discharged. good thing
5
Question
What happens when a contractor fails to complete their obligations to the owner?
Answer
The surety firm must assume the obligations of the GC/Prime contractor, ensuring the contract is completed with the surety paying all costs up to the bond amount. This is called a default of the contractor"
6
Question
What is a dual obligee bond?
Answer
A bond that protects both the owner and the lending institution providing construction funding advances.
7
Question
Why might a lender request to be included in a dual obligee bond?
Answer
The lender is concerned about the GC's ability to complete the project, especially if the GC is new and lacks a history of bonded projects.
8
Question
What is bonding capacity?
Answer
The total dollar amount of uncompleted bonded construction contract work a bonding company will allow the contractor to have in progress at one point in time.
9
Question
Name the three types of surety bonds discussed
Answer
Bid Payment Performance
10
Question
What percentage of projects are bid in a competitive format
Answer
65-75%
11
Question
What 4 guarantees does a bid bond historically provide the owner?
Answer
1. A valid bid in good faith by the contractor 2.if contractor wins bid, they will enter into a contract with owner within stipulated time 3.contract amount is the same as the proposal 4. Contractor will provide P&P bonds to the owner
12
Question
What does a bid bond do for the owner?
Answer
A bid bond protects the owner if the low-bidding GC withdraws their bid, covering the difference between the low bid and the next lowest bid, or forfeiting the full bond value.
13
Question
What is the typical value range of bid bonds?
Answer
Most bid bonds are valued at 5-10% of the contractor's proposal amount.
14
Question
What is a bid spread bond?
Answer
A bid spread bond covers the difference between the two lowest bids if the original low bidder withdraws.
15
Question
What is a forfeiture bond?
Answer
A forfeiture bond returns the full value of the bond to the owner if the contractor withdraws their bid.
16
Question
Why is the cost of a bid bond relatively inexpensive?
Answer
The risk is very low because it is rare for a firm to back out of a submitted bid unless a significant error was made.
17
Question
What is the guarantee of a performance bond?
Answer
The surety guarantees that the GC will fully execute the contract documents and fulfill all requirements of the architect's drawings.
18
Question
What is the typical value of a performance bond?
Answer
Performance bonds are historically written for the face value of the GC's bid proposal.
19
Question
What is the purpose of a payment bond?
Answer
A payment bond protects third parties to the contract and guarantees payment for all labor and materials used in the project.
20
Question
Who are considered third parties in the context of a construction contract?
Answer
Third parties are entities not in direct contract with the owner. like material supplier
21
Question
What is the purpose of a payment bond?
Answer
To ensure that suppliers and subcontractors are paid for their work and materials, even if the general contractor (GC) fails to pay.
22
Question
Who can file a claim against a payment bond?
Answer
Suppliers and material providers (third parties) who are not paid by the GC or a subcontractor.
23
Question
What happens if there is no payment bond on a project?
Answer
The unpaid supplier/material provider may file a lien against the owner's property.
24
Question
What is a lien?
Answer
A legal claim against a property to secure the payment of a debt. It prevents the owner from selling the property until the debt is satisfied.
25
Question
Are payment and performance bonds required on all projects?
Answer
No. All public bid projects require them. On private projects, it depends on the owner's risk tolerance.
26
Question
What is the Miller Act of 1935?
Answer
It requires payment and performance bonds for all federal projects over $100,000.
27
Question
What should a supplier or subcontractor do if they are not paid?
Answer
Immediately seek legal guidance due to specific requirements for filing notices of nonpayment.
28
Question
Where can an unpaid claimant obtain a copy of the bond on private works projects?
Answer
From the owner, surety, architect, or engineer.
29
Question
Where can an unpaid claimant obtain a copy of the bond on public works projects?
Answer
From the public agency or the surety.
30
Question
How are contract changes covered by payment performance bonds?
Answer
The GC typically includes the increased bond fees in their proposal to the owner for each change request.