How should contractors approach surety bonds? | Insurance business America
NFP expert on the risks to watch out for
Civil engineering
By Kenneth Araullo
In construction, surety bonds play a critical role in ensuring that contractors meet their obligations. Deanna Brewer, senior vice president of NFP Construction and Infrastructure Group, Surety, explains the key issues that sureties look at in construction contracts and offers guidance on resolving potential concerns.
“Simply put, a surety bond is an agreement between three parties. Typically these are the surety company (guarantor), the contractor (client) and the project owner (creditor). The project owner can be a private company or a public entity such as a government or a crown corporation,” she said.
Brewer emphasized that there are three main types of contract bonds; the tender guarantee, which ensures that an offer is made in good faith, the contractor intends to enter into the contract at the tender price and the contractor provides the necessary performance and payment guarantees.
“The performance bond ensures that the contractor will complete the construction job as specified. If the contractor fails to meet its contractual obligations, the bonding company will ensure the work is completed,” Brewer said.
The labor and materials payment bond, on the other hand, ensures that the contractor pays certain subcontractors, workers and suppliers.
“The surety provides assurances to the project owner that the contractor will fulfill a contract by performing specified work to a specified standard. Conditions may also include an assurance that the contractor will comply with certain regulations or pay certain workers, subcontractors and suppliers associated with the project,” Brewer said.
Should a contractor fail to meet these obligations, the bonding company ensures the completion of the project, it added. This representation is based on the surety’s assessment of the contractor’s history, financial strength and other factors.
Scope and limits for guarantees
For projects within a contractor’s typical scope and scope of work and with known owners, surety bonds may not require a thorough review of contract terms. However, for larger or atypical projects or when working with new private owners, guarantors often require a comprehensive review of the contract terms, including any additional conditions.
Brewer explains that this review is crucial because the guarantor assumes the risks of the contract if the contractor defaults – whether it fails to complete the work as specified or becomes insolvent.
“Understanding the contractor’s risk tolerances in contract performance as well as project performance therefore provides the surety with additional confidence in the contractor’s ability to perform the contract without significant problems and minimizes or eliminates possible contract defaults (guarantees). Default). However, should a default occur, the guarantor is fully prepared and understands the contractual risks under the construction contract between the owner and the defaulting contractor,” she said.
An experienced surety broker is essential throughout this process, Brewer added, as they can assist the contractor in identifying key contractual risk areas that the surety will review and assist in preparing a strong submission.
“By having your surety broker partner work with you in the early stages of project tracking and assist you in reviewing the project and expected contract requirements, the surety broker can help you provide a more informed submission with the correct information you need to proceed “We need to make sure we understand the project/contract risk and the contractor’s risk mitigation approach,” Brewer said.
Risk reduction for guarantees
Despite the surety broker’s expertise, contractors should involve their legal team in the contract review process. Legal teams provide a detailed understanding of the contractor’s risk tolerances and ensure proper legal review of the contract.
“Your experienced surety broker can help you understand what areas of risk may be of greater concern to the surety for any project requiring a contractual surety bond, providing you as a contractor with additional insight into your approach to contract risk mitigation and assisting you in establishing a “A solid template that the broker can send to the surety in support of the bond,” Brewer said.
Understanding the contractual risk profile early can also influence a contractor’s decision whether to pursue a project. The key contractual risk areas that surety bonds focus on include performance specifications, payment terms and late payment clauses.
“Through your combined efforts, you can reduce the time spent on surety contract questions and ensure you have minimal impact on your offers that require contract surety bonds,” she said.
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2024-06-21 15:03:17
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