04/19/23

Understanding Bonding Requirements

Presented by:Department of Management Services, Division of State Purchasing

2004

04/19/23

Agenda

Bond vs. Insurance Purpose of Bonds Characteristics of a Bond Bond Terminology Bond Types Bond Benefits Bond Cost Bond Considerations

The intent of this presentation is to educate purchasing professionals about the aspects of bonds as they relate to contracts procured by a governmental entity.

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Bonds vs. Insurance Policy

Bonds are essentially a three party contract where there is an obligation by one party to another, which is guaranteed by a surety company.

Insurance Policies are a legal contract between the policyholder and the insurance company which involves the transfer of risk to an insurance company.

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Purpose of Bonds

Bonds provide a guarantee to the owner (typically the State of Florida or some other party identified) of the contractor’s performance, contract obligations or honesty.

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Characteristics of a Bond

Qualifying a contractor Contract bonds vs. bank loans Prequalification criteria:

– Character

– Capacity

– Capital

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Bond Terminology

•Principal is the contractor (or other party) whose performance is being guaranteed.

•Obligee is the State of Florida (or other party) to whom the principal owes a duty and the recipient of the benefit from the guarantee.

•Surety is the insurance or bonding company that guarantees that the principal will perform according to the contract requirements.

•Power of Attorney is the authority to issue bonds on behalf of the insurance company or surety.

•Attorney-in-fact is the party holding power of attorney to act on behalf of another party.

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Surety Bonds

A Contract bonds guarantee that the principal will fulfill all its contractual obligations. In selling a bond to cover a specific contract, the surety must consider the obligations required by the contract and the ability of the principal to fulfill those obligations.

A Bid Bond promises that the contractor bidding on a solicitation will, if the bid is accepted, enter into a contract and furnish the other necessary contract bonds. Bid bonds are typically provided with a penalty equal to 10 percent of the amount bid.

A Performance Bond guarantees that the contractor will perform the work according to the contract, within the stipulated time, and according to the agreed price.

A Payment Bond also referred to as a labor and materials bond; guarantees that certain bills incurred by a contractor for labor and materials will be fully paid at the completion of the project.

A Maintenance Bond guarantees that defective materials used by the contractor will be replaced and poor workmanship performed by the contractor or its subcontractors will be corrected.

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Surety Bond Benefits

The contractor is liable to the surety company.

The surety company must fulfill the contractor’s obligation

and/or pay damages if the contractor fails to perform its obligation to the State.

When a bond is issued, the surety company is attesting to the contractor’s

integrity, capability, trustworthiness, financial responsibility, or whatever qualities may be required for the undertaking.

Sureties companies carefully analyze the contractor and may

even require collateral.

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Surety Bond Cost

A bid bond is provided for a nominal fee to the contractor,

typically ranging from $500 - $1,000.

The cost for a performance bond or payment bond is based on the

contract price, type of contractor, financial wherewithal. Type of Bond: Payment and Performance Bond

Type of contractor: Major construction contractor

Bond Amount: $1,000,000

Total Premium: $13,000 approx.

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Surety Bond Considerations

Does the contract have an exposure of default by a vendor not performing in accordance with the contract specifications, stipulated time or agreed price? If yes, then consideration should be given to a performance bond requirement.

Does the contract have an exposure of defective materials or workmanship? If yes, then consideration should be given to a maintenance guarantee within the performance bond or as a separate maintenance bond.

Does the contract warrant a requirement of a performance bond? If yes, then consider the purpose, exposure, pre‑qualification process and availability of a bond.

To determine the bond limit consider the cost to complete the required services.

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Conclusion

Questions?

Thank you for your participation.