Surety bonds for construction contracts

418 Pages·2000·19.628 MB·English

by  Russell, Jeffrey S

Surety Bonds
for Construction Contracts
JEFFREY S. RUSSELL
The University of Wisconsin—Madison
ASCE
PRESS
American Society of Civil Engineers
1801 Alexander Bell Drive
Reston, Virginia 20191-4400
Abstract: This book aims to demystify the complex field of suretyship for construction contracts by
describing and analyzing each element of the surety bonding process in basic terms for contractors,
owners, design professionals, construction accountants and attorneys, and other construction industry
personnel. It is the only comprehensive book on surety bonding as it relates to construction contracts
written from the perspective of contractors, sureties, and owners. The book outlines the basic players
in the surety relationship, what each can expect at every stage of the bonding process, how to properly
structure key documents, and what a contractor should look for in a surety and an independent surety
agent. In addition to exploring the numerous facets of the bonding relationship, the book moves
through many of the subtitles of this complex endeavor, including the surety's role in prequalifying
contractors and why an owner might consider requiring, or even waiving, surety bonds. To help
elucidate the interworkings of suretyship, numerous examples and extended case studies drawn from
the experience of professionals working in the industry, as well as sample bond forms and surety
documents, have been included. Finally, this work covers such issues as international guaranty,
reinsurance, surety and Design/Build, and trends emerging in the surety market.
Library of Congress Cataloging-in-Publication Data
Russell, Jeffrey S.
Surety bonds for construction contracts / Jeffrey S. Russell,
p. cm.
Includes bibliographical references and index.
ISBN 0-7844-0426-7
1. Insurance, Surety and fidelity—United States. 2. Contractors—Bonding—United States.
I. Title.
KF1228.R87 1999
346.73 '08684-dc21 99-049594
Any statements expressed in these materials are those of the individual authors and do not necessarily
represent the views of ASCE, which takes no responsibility for any statement made herein. No
reference made in this publication to any specific method, product, process or service constitutes or
implies an endorsement, recommendation, or warranty thereof by ASCE. The materials are for general
information only and do not represent a standard of ASCE, nor are they intended as a reference in
purchase specifications, contracts, regulations, statutes, or any other legal document. ASCE makes no
representation or warranty of any kind, whether express or implied, concerning the accuracy,
completeness, suitability, or utility of any information, apparatus, product, or process discussed in this
publication, and assumes no liability therefore. This information should not be used without first
securing competent advice with respect to its suitability for any general or specific application.
Anyone utilizing this information assumes all liability arising from such use, including but not limited
to infringement of any patent or patents.
Photocopies. Authorization to photocopy material for internal or personal use under circumstances not
falling within the fair use provisions of the Copyright Act is granted by ASCE to libraries and other
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provided that the base fee of $8.00 per chapter plus $.50 per page is paid directly to CCC, 222
Rosewood Drive, Danvers, MA 01923. The identification for ASCE Books is 0-7844-0426-7/00/
$8.00 + $.50 per page. Requests for special permission or bulk copying should be addressed to
Permissions & Copyright Dept, ASCE.
Copyright © 2000 by the American Society of Civil Engineers,
All Rights Reserved.
Library of Congress Catalog Card No: 99-049594
ISBN 0-7844-0426-7
Manufactured in the United States of America.
CONTENTS
Acknowledgments ix
Preface xi
PART I THE BIG PICTURE
Chapter 1: Surety Bonding: Who Benefits 3
Chapter 2: Definition of Suretyship 7
Chapter 3: History of Suretyship 9
Corporate and Individual Sureties Diverge 10
PART II THE SURETY RELATIONSHIP
Chapter 4: The Key Players 15
Owners 15
Contractors 16
Sureties 16
Independent Surety Agents 17
The Relationships Between Underwriters, Claim Personnel and
Independent Surety Agents 21
Chapter 5: Surety as Risk Management 23
Chapter 6: Insurance and Suretyship 25
Chapter 7: Reinsurance and Co-surety 29
The U.S. Treasury and Single Bond Limits 30
Reinsurance Treaties 31
PART III TYPES OF SURETY BONDS
Chapter 8: Bid Bond 37
Chapter 9: Performance Bond 39
Chapter 10: Payment Bond 41
Chapter 11: Maintenance Bond 45
Chapter 12: Other Surety Bonds 49
Supply Bond 49
Completion Bond 49
Dual Obligee Bond 50
Non-Contract Bonds 51
in
PART IV THE UNDERWRITING PROCESS
Chapter 13: Overview of Underwriting Process 55
Chapter 14: Sequence of Events: A Contractor's Perspective 57
Chapter 15: Surety Underwriting Criteria 63
Character 63
Capacity 64
Continuity 68
Chapter 16: Capital and Financial Review 73
Financial Data Considerations 73
Financial Analysis 79
Chapter 17: Bond Cost 97
Contract Price 97
Contract Type 98
Stipulated Contract Length 99
Example Premium Computations 101
State Insurance Departments 102
Bond Payment Terms for Contractors 102
Payment and Performance Bond Cost 103
Maintenance Bond Cost 103
Chapter 18: Underwriting Case Study 107
The Underwriting Process: Action Reviews PCC 108
Conclusions and Decisions 120
Lessons 122
PART V SURETY BOND CLAIMS
Chapter 19: Considerations in Handling Surety Bond Claims 125
Surety's Rights, Remedies, and Defenses 125
Five Steps of Surety Participation in Contractor Default 127
Special Concerns and Effects of Bankruptcy Upon Surety 159
Chapter 20: Contract Surety: Effective Claim Management 163
Maintenance Bond Claims 164
Claim Case Study: The Defaulting of PCC 165
Claim Case Study: The Defaulting of Zimbrick International 178
PART VI PRACTICAL CONSIDERATIONS REGARDING
THE SURETY INDUSTRY
Chapter 21: Alternatives to Surety Bonding 185
Waiver of Bonds 185
Individual Sureties 186
Self-Surety 187
Cash Equivalent 188
Letters of Credit 188
IV
Chapter 22: International Guaranty 193
Surety Bonds and Letters of Credit in an International Context 195
Chapter 23: Aggregate Industry Performance 199
Reasons Postulated for Loss Experience 214
Chapter 24: Sources of Information Pertaining to Sureties 219
Chapter 25: Surety and Design/Build: The Future 223
History 224
A More Thorough Underwriting 225
Contractor's Liability Insurance 227
Chapter 26: Special Surety Concerns and Industry Trends 229
Warranties and Maintenance Bonds 229
Competition Among Sureties and Contractors 230
Private Market 232
Hazardous Waste and Superfund Legislation 233
Small- to Medium-Sized and Disadvantaged Firms 234
Miller Act 238
Transfer of Ownership 239
Chapter 27: Summary 241
Glossary 243
Appendices 247
Appendix I. Sample General Indemnification Agreement:
Old Republic Surety 249
Appendix II. Sample Bid Bond Form: AIA Document A310 255
Appendix III. Sample Performance Bond Form: AI A Document A312 259
Appendix IV. Sample Payment Bond Form: AIA Document A312 265
Appendix V. Sample Maintenance Bond Form: Fidelity and Deposit
Company of Mary land 271
Appendix VI. Specimen Clauses for Bid, Performance, and Payment
Bonds 275
Appendix VII. Sample Contractor Questionnaire Used by Surety:
National Association of Bond Producers 279
Appendix VIII. Sample Report of Independent Certified Public
Accountants and Financial Statements Audit of Example
Contractor, Inc. 287
Appendix IX. Sample Dun & Bradstreet Reports 305
Appendix X. Sample Robert Morris Associates Reports 313
Appendix XI. Listing of Surety Association of America Contract
Types 317
Appendix XII. Underwriting Case Study Documents: Prometheus
Construction Company, Inc 323
Appendix XIII. Effective Claim Management: Clem Winter, C. Winter
Enterprises, Inc 363
Appendix XIV. Common Disputes Arising From Surety Contract
Bonds 381
Appendix XV. Sources of Information About Suretyship 385
V
References 389
Index 397
About the Author 401
VI
Now faith is being sure of what we hope for and certain of
what we do not see.
Hebrews 11:1
vn
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ACKNOWLEDGMENTS
I want to express my gratitude to the University of Wisconsin-Madison
College of Engineering, Department of Civil and Environmental Engineering for
the freedom and flexibility to pursue my research interests. It is in great part due
to the academic and administrative support I have received at this institution that
the following work was written.
The material presented is based, in-part, on research funded by the
National Science Foundation (NSF) and on papers published in various American
Society of Civil Engineers (ASCE) journals. I greatly appreciate the opportunity
and support from both NSF and ASCE.
Many thanks go to Mr. Brewer Stouffer, who played a critical role in
pulling all of the material together and editing the manuscript. Without his
continued persistence and dedication, this endeavor could not have been
accomplished. I am also deeply grateful to Mr. Dennis Wine, an industry
professional who provided extremely thorough and insightful critique of the
project. I also acknowledge Mrs. Susan Brunsell, who provided continuous help
and technical support.
A special acknowledgment goes to Mr. Clem Winter for providing
invaluable information and assistance on Chapter 7: Reinsurance and Co-surety
and throughout Part 5. Surety Bond Claims. Mr. Winter has hands-on surety
claims experience and knowledge through almost 40 years spent in the field and
offices of a primary surety and a major surety reinsurer. He now serves as a
surety claims consultant and expert witness on surety claims cases and is
President of C. Winter Enterprises, Inc. and Surety Financial Services, LLC of
Wichita, Kansas. In addition to providing information, Mr. Winter put the author
in touch with numerous industry experts who provided further critique and insight
in the complex surety relationship.
My thanks goes out to these and many others too numerous to mention for
their help and commitment in making the completion of this project possible. To
my family, especially, who invested their time and energy and encouraged me to
pursue my dreams—my father, Mr. Ronald F. Russell; my mother, Mrs. Georgia
A. Holmes; my uncle, James C. Russell; and my wife, Vicki, and our children,
Nicole, Jacob, Matthew, and Rachel—I thank you deeply for the unconditional
love and support you continue to show.
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