Bonding Design-Build Projects - Design-Build for Water and Wastewater Projects - page 139

company's owner, may also be required to indemnify the surety. The Indemnity Agree-
ment is, therefore, a significant part of the surety's security for its bonded obligations.
The Indemnity Agreement is strictly between the contractor, any other indemnitors, and
the surety. The Indemnity Agreement does not affect the surety's obligations to an owner
under a bond.
Before a surety agrees to issue a bond, the surety performs a certain amount of due
diligence to evaluate the creditworthiness of the contractor. A surety's evaluation and will-
ingness to extend surety credit to the contractor is a strong benefit to an owner, because
it shows that the surety believes the contractor not only is capable of performing the work
but also will complete its contractual obligations and build the project.
A surety bond should not be viewed as a means to transfer risk. The bond secures the
contract, and all the terms of the bond and the contract apply. The surety does not assume
more responsibility than the contractor. An owner must still perform its obligations under
the contract before a surety is required to perform its obligations under the bond.
A surety bond is also not an insurance policy. Sureties guarantee the contractor's per-
formance of the work in accordance with the contract documents; however, they do not
insure the project or the owner against all risk of loss or liability. As a result, the owner
must still protect its own interests in the project through adequate and appropriate insur-
ance. The contractor also must provide insurance to secure the project.
Owners obtain surety bonds as a guarantee that a project will be completed. On
public sector projects, surety bonds, in the form of performance and payment bonds, are
required by legal statute, but many owners believe it is also important to obtain surety
bonds on private sector work. There are two important reasons for surety bonds.
First, bonds protect taxpayer's or lender's funds during construction. The owner is
assured that the contractor will comply with the contract terms, or the surety will honor
the contractor's obligations in accordance with the terms of the surety bond. The owner
can make payments to the contractor, per the contract terms, without fear that it will not
receive the promised construction in exchange for those payments. All parties to a con-
struction contract can, therefore, feel secure in honoring their obligations as the project
moves forward.
Second, construction is inherently risky. Owners, both public and private, usually
desire that the contractor, rather than the owner, bear most of the construction risk. Con-
tracts often require the contractor to perform the work for a stipulated sum or guaranteed
maximum price (GMP). These contracting arrangements place the price risk primarily on
the contractor. If the contractor underestimates the cost to construct the project per the
contract terms, the contractor must absorb the unexpected costs. If the contractor cannot
do so, the surety will step in to assist or to perform the contractor's obligations, depending
on the language of the bond.
Typically, surety bonds can provide the owner with responses to a contractor default
and the responses are as follows:
• Assist/supervise the DB contractor in performing
• Take over the project and perform the work
• Tender a new contractor (and often a new bond) to perform the work
• Pay the claim, up to the penal sum of the bond