CRIS Surety Bonds & Construction Guarantees 2 — Questions and Answers
Question 1: Under the Miller Act, which federal construction contracts require both performance and payment bonds?
- All federal contracts regardless of dollar amount
- Federal contracts over $100,000
- Federal contracts over $150,000 (Correct answer)
- Federal contracts over $500,000
Correct answer: Federal contracts over $150,000
The Miller Act requires performance and payment bonds on federal construction contracts exceeding $150,000 to protect the government and subcontractors/suppliers.
Question 2: What is 'prequalification' in the surety bonding underwriting process?
- The surety's investigation of the contractor's financial strength, experience, and character before issuing bonds (Correct answer)
- The owner's verification of the contractor's license and permits
- The contractor's review of subcontractor qualifications
- The government's approval of a surety company's authority to write bonds
Correct answer: The surety's investigation of the contractor's financial strength, experience, and character before issuing bonds
Prequalification is the surety's underwriting process to assess the contractor's three C's — character, capacity, and capital — before agreeing to bond them.
Question 3: What is the key difference between surety bonds and traditional insurance?
- Surety bonds are regulated by the government while insurance is not regulated
- Insurance transfers risk to the insurer, while surety bonds expect the principal to ultimately reimburse the surety for any losses paid (Correct answer)
- Surety bonds only cover property damage while insurance covers all risk categories
- Insurance requires underwriting analysis while surety bonds are issued without underwriting
Correct answer: Insurance transfers risk to the insurer, while surety bonds expect the principal to ultimately reimburse the surety for any losses paid
Unlike insurance where the insurer absorbs the loss, surety bonds are a credit arrangement where the principal is expected to indemnify the surety for any losses paid on their behalf.
Question 4: When a contractor defaults on a bonded project, which of the following is NOT a typical option available to the surety?
- Complete the project using a replacement contractor selected by the surety
- Finance the defaulted contractor to complete the project
- Pay the owner the face amount of the performance bond
- Terminate the obligee's right to make a claim under the bond (Correct answer)
Correct answer: Terminate the obligee's right to make a claim under the bond
The surety's three standard response options are completion by a replacement contractor, financing the defaulted contractor, or paying the penal sum; the surety cannot extinguish the obligee's legal rights.
Question 5: What is a 'takeover agreement' in surety bond terminology?
- When the owner takes possession of the contractor's equipment after a default
- An agreement between the surety and owner authorizing the surety to complete the project after contractor default (Correct answer)
- When a larger contractor absorbs a smaller contractor's bonded obligations
- An agreement transferring bond obligations to a new project owner
Correct answer: An agreement between the surety and owner authorizing the surety to complete the project after contractor default
A takeover agreement is executed between the surety and the obligee after contractor default, giving the surety the right and obligation to arrange project completion.
Question 6: What is a 'Little Miller Act'?
- A federal law that reduces bonding requirements for small construction projects
- A state statute modeled after the federal Miller Act that requires bonds on state and local public construction projects (Correct answer)
- A provision allowing reduced bond amounts for minority- or women-owned contractors
- An act that limits the liability exposure of small regional surety companies
Correct answer: A state statute modeled after the federal Miller Act that requires bonds on state and local public construction projects
Little Miller Acts are state-level statutes that mirror the federal Miller Act, requiring performance and payment bonds on state and local public construction contracts above certain thresholds.
Question 7: Which underwriting factors are considered most important in surety bond underwriting, known as the 'three C's'?
- Cost, compliance, and completion history
- Coverage, claims, and continuity
- Character, capacity, and capital (Correct answer)
- Credentials, contracts, and cash flow
Correct answer: Character, capacity, and capital
Surety underwriters evaluate the three C's: character (integrity and reputation), capacity (experience and expertise), and capital (financial strength) of the contractor.
CRIS Surety Bonds & Construction Guarantees 2
Under the Miller Act, which federal construction contracts require both performance and payment bonds?