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Protect Your Construction Lending Capital With a Surety Bond

Contract Surety Bonds - Investment Protection for Today's Lender

Construction surety bonding generally is a three party agreement which holds a contractor to the terms and conditions of the owner's contract. There are three types of contract surety bonds:

• The bid bond provides financial assurance that the bid has been submitted in good faith and that the contractor intends to enter into the contract at the price bid and provide the required performance and payment bonds.
• The performance bond protects the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions.
• The payment bond guarantees that the contractor will pay certain subcontractors, laborers, and material suppliers associated with the project.

For years, surety bonds have been mandated by law for federal public construction projects ($100,000 or greater) under the Miller Act of 1935. Many state and local governments also require surety bonds on their public construction projects with "Little Miller Acts." Surety bonds also have been used voluntarily for many private projects as well. Moreover, an increasing number of construction financiers are now recognizing the wisdom of requiring contract surety bonds to protect loans secured by private sector projects.

Surety Bonds Provide Benefits for All Concerned

Basically, surety bonds protect a project owner by guaranteeing the contractor's performance and payment for labor and materials. When a contractor provides a surety bond, you can be assured that he/she has met the surety company's rigorous prequalification standards. Indirectly, construction lenders are also assured that the project will proceed according to the terms of the contract. Thus, the parties are required to fulfill their financial and performance responsibilities - with protection from events which might inhibit project completion or cause financial loss.

The Surety's Role in Project Completion

When claims occur, the borrower's rights are protected, in turn, protecting the lender. The surety is prepared to provide assistance when necessary. Knowledgeable claims representatives are trained to facilitate completion of a project. And to this end, the surety may, among other things:

• provide personnel trained to consult and solve problems;
• arrange to bring in a completion contractor;
• provide for payment of subcontractors and suppliers to keep the job moving forward; and
• arrange financial assistance for the contractor.

When advised of problems in time, the surety can take steps to set a project back on course. However, should contractor default occur, settlement is made as fairly and quickly as possible. The goal is, of course, to see any project through to completion with the minimum amount of time and money lost. For you, the construction lender, contract surety bonds assure that your financial investment is protected by guaranteeing that the construction project will be done in accordance with the contract terms.

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For more information about surety bonding, please contact the: Surety Information Office 1828 L St. NW, Suite 720 Washington, DC 20036-5104 (202) 686-7463 | Fax (202) 686-3656 www.sio.org | sio@sio.org The Surety Information Office (SIO) is the information source on contract surety bonds in public and private construction. SIO offers complimentary brochures and CDs and can provide speakers, write articles, and answer questions on contract surety bonds. SIO is supported by The Surety & Fidelity Association of America (SFAA) and the National Association of Surety Bond Producers (NASBP). All materials may be accessed at www.sio.org.

The Surety & Fidelity Association of America 1101 Connecticut Avenue, NW, Suite 800 Washington, DC 20036 (202) 463-0600 | Fax (202) 463-0606 www.surety.org | information@surety.org The Surety & Fidelity Association of America (SFAA) is a District of Columbia non-profit corporation whose members are engaged in the business of suretyship worldwide. Member companies collectively write the majority of surety and fidelity bonds in the United States. SFAA is licensed as a rating or advisory organization in all states, as well as in the District of Columbia and Puerto Rico, and it has been designated by state insurance departments as a statistical agent for the reporting of fidelity and surety experience. SFAA represents its member companies in matters of common interest before various federal, state, and local government agencies.

National Association of Surety Bond Producers 1828 L St. NW, Suite 720 Washington, DC 20036-5104 (202) 686-3700 | Fax (202) 686-3656 www.nasbp.org | info@nasbp.org The National Association of Surety Bond Producers (NASBP) is the international organization of professional surety bond producers and brokers. NASBP represents more than 5,000 personnel who specialize in surety bonding; provide performance and payment bonds for the construction industry; and issue other types of surety bonds, such as license and permit bonds, for guaranteeing performance. NASBP’s mission is to strengthen professionalism, expertise, and innovation in surety and to advocate its use worldwide.