The surety bond producer may help a contractor obtain surety bonds, and provide business advice, management consulting and technical expertise. The producer is an integral part of the contractor's external advisory group, which may also include attorneys, bank officers, and auditors. By using his/her specialized knowledge of the construction industry, the producer assists the contractor in preparing for the surety company's rigorous prequalification process. As a contractor develops a strong business relationship with a surety bond producer, a relationship will also develop between the contractor and surety company. A good surety company and surety bond producer will help a contractor maintain and increase its surety capacity.
Licensed Surety Companies in Indonesia
As stated above, the ground on which surety companies may issue surety bonds in construction works and trade financed by APBN is the decision of the Minister of Finance KMK RI no. 761/KMK.013/1992. In addition, the ground on which surety companies may issue customs bonds is the decision of the Minister of Finance KMK RI No. 108/KMK.01/1995. However, these ministerial decisions do not contemplate and elaborate the principles and procedures of issuing such surety bonds, but as called by the Minister of Finance, the principles per se should refer to the principles of insurance businesses set out by Law No. 22 of 1992.
Things You Should Know About Surety Bonding
An owner wants a contractor who runs a well-managed, profitable enterprise, keeps promises, deals fairly, and performs obligations in a timely manner. Prequalification of the contractor for a surety bond provides these assurances to the owner. The owner also wants protection in the event the contractor, for some reason, defaults on the contract. Surety bonds provide that protection.
1. The surety company's financial resources are used to back the contractor's commitment to completing the contract, thus enabling the contractor to acquire a contract with an owner. The owner receives guarantees from a financially responsible surety company licensed to transact suretyship that the contract will be fulfilled. Unlike other types of insurance, which maintain deductibles and charge premiums based on the probability of expected loss, surety companies do not expect a loss. The surety bond premium is a fee for underwriting or prequalifying the contractor.
2. The surety company's rigorous prequalification of the contractor protects the owner and offers assurance to the lender, architect, and everyone else involved with the project that the contractor is able to translate the project's plans into a finished project. Surety companies and surety bond producers have been evaluating contractor and subcontractor performance for more than a century. Their expertise, experience, and objectivity in prequalifying contractors is one of a bond's strongest attributes. Before issuing a bond, the surety company must be fully satisfied, among other criteria, that the contractor has:
experience matching the requirements of the contract;
the ability to obtain the necessary equipment to do the work;
the financial strength to support the desired work program;
an excellent credit history; and
an established bank relationship and line of credit.
3. Construction is a very risky business. According to Dun & Bradstreet's Business Failure Record, an average of 10,000 contractors fail each year, leaving a trail of unfinished private and public construction projects. Surety bonds offer assurance that the contractor is capable of completing the contract on time, within budget, and according to specifications. Specifying bonds not only reduces the likelihood of default, but with a surety bond, the owner has the peace of mind that a sufficient risk transfer mechanism is in place. The risks of construction are shifted from the owner to the surety company. If the owner declares the contractor in default, the surety then investigates.
4. Contractor default is an unfortunate, and sometimes unavoidable, circumstance. In the event of contractor failure, the owner must formally declare the contractor in default. The surety will conduct an impartial investigation before taking any action to avoid taking away the contractor's legal recourse in the event that the owner improperly declares the contractor in default. When there is a proper default, the surety's options often are spelled out in the bond. These options may include the right to re-bid the job for completion, bring in a replacement contractor, provide financial and/or technical assistance to the existing contractor, or pay the penal sum of the bond.
5. The cost of a performance bond is a one-time premium, which typically ranges from 0.5-2% of the contract amount, depending on the size and type of the project and the contractor's bonding capacity. There is often no charge for the bid bond, and the payment bond may be issued at no additional charge when issued in conjunction with a performance bond.
6. To bond a project, the owner specifies the bonding requirements in the contract documents. Obtaining bonds and delivering them to the owner is the responsibility of the contractor who will consult with a surety bond producer.
7. Contract surety bonds:
assure project completion;
assure a qualified contractor on the project;
guarantee that the laborers, suppliers, and subcontractors will be paid;
relieve the private owner from the risk of financial loss arising from liens filed by unpaid laborers, suppliers, and subcontractors;
smooth the transition from construction to permanent financing by eliminating liens on private projects ;
help the contractor grow by increasing construction project opportunities and offering assistance and advice;
provide intermediaries - the surety company and surety bond producer - to whom the owner can air complaints and grievances;
lower the cost of construction in some cases by facilitating the use of competitive bids; and
Screen out unqualified contractors and irresponsible competition.
Surety bonds are an integral part of the construction process and should be considered by every owner undertaking such a risky venture.
Surety Bonds v Bank Letters of Credit
Although surety bonding is a part of the insurance industry, it shares some characteristics of bank credit. The surety company's primary obligation is not to lend the contractor money. Rather, the surety company's financial resources are used to back the contractor's commitment to completing the contract, thus enabling the contractor to acquire a contract with an owner.