Surety Bond Professionals is a family owned and operated bonding agency with over 30 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your construction bonding needs.
What Is the Transportation Infrastructure Finance and Innovation Act?
The Transportation Infrastructure Finance and Innovation Act (TIFIA) was signed into law in 1998 and reauthorized by the Fixing America’s Surface Transportation (FAST) Act of 2015. It established a federal credit assistance program operated under the auspices of the U.S. Department of Transportation to provide financing for certain surface transportation projects that DOT considers to be of national or regional importance. These may include projects to construct, expand, or upgrade highways, railways (primarily passenger lines, but also some used to transport freight), intermodal freight transfer facilities, or port terminals. Only projects valued at $10 million or more are eligible for TIFIA financing.
Qualified state and local governments, transit authorities, transportation companies, and public/private partnerships (P3s) can apply for loans, loan guarantees, or standby lines of credit. TIFIA offers 35-year fixed-rate loans with no prepayment penalty and the option of deferring payments until five years after substantial project completion. Interest is at the Treasury rate and does not begin to accrue until funds are drawn. The maximum loan amount is 49% of eligible project costs.
The Infrastructure Investment and Jobs Act amended TIFIA so that private sector and P3 projects with TIFIA financing now are subject to payment and performance bonding. (Public-sector projects have been subject to the bonding requirement since the 1935 passage of the Miller Act.)
Why Are Surety Bonds Required?
Surety bonds provide financial protection for project owners against financial loss resulting from a contractor’s violation of the construction contract. When such a loss occurs, the project owner (the bond’s “obligee”) can file a claim against the bond and be compensated for the monetary damages. Different types of construction bonds provide protection against different contractual violations.
Types of Construction Surety Bonds
The two mandatory construction bonds are performance bonds and payment bonds.
Performance bonds protect the obligee against financial harm caused by the contractor (the bond’s “principal”) failing to complete a project according to the terms of the contract. One common reason for default is the contractor becoming insolvent due to inaccurate cost forecasting and/or poor financial management.
Payment bonds ensure that subcontractors, workers, and suppliers are paid in accordance with the construction contract. If the principal fails to pay them, they can file a claim against the bond and be compensated for their loss. Read more about performance and payment bonds here.
Depending on the nature and scope of the work involved, project owners may also require other types of construction bonds, such as bid bonds, supplier bonds, site improvement bonds, maintenance bonds, and so on.
How Construction Bonds Work
Construction bonds are guaranteed by a “surety”—the third party to the legally binding surety bond agreement, along with the obligee and the principal. When a principal is approved for a construction bond, the surety is agreeing to extend credit to the principal if that’s what it takes to pay a valid claim.
Although the terms of the surety bond legally obligate the principal to pay all valid claims, the surety typically will pay a claim on the principal’s behalf, essentially lending the claim amount to the principal. The principal then must repay the surety or risk being sued by the surety to recover the claim amount (plus legal fees and court costs!). This practice ensures that the claim is paid promptly, as guaranteed, and gives the principal some time to gather the necessary funds to repay the surety, perhaps in installments over a certain period of time.
How the Cost of a Construction Bond is Determined
Because of the possibility that the surety will have to take legal action against the principal to recover the funds paid to a claimant, construction bonds are subject to underwriting. The underwriters’ risk assessment will determine whether an application for a construction bond is approved and what premium rate the principal will pay if a bond is issued.
The underwriters will look closely at a bond applicant’s financial strength, industry experience, any prior claims history, and personal credit score. A highly qualified and creditworthy applicant is presumed to present lesser risk to the surety and therefore is assigned a lower premium rate. Someone with lesser credit is a greater risk to the surety, which warrants a higher premium rate.
If you have never been subject to construction bonding before or wish to further grow your company and surety program, now is the time to establish a relationship with a reliable surety provider.
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