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"It is important as a public works contractor to partner with a well seasoned bond agent. The Bond Exchange has played a key role in the success of my business for the past decade. The level of service they provide is unmatched. I would recommend their services any day of the week."
Ali Navi, President
AMD Construction Group
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The Importance of Bonding Subcontractors
There is no doubt that the construction industry possesses unique and often cumbersome risks and challenges, especially with regard to project management. One of the most common issues that can arise during the course of a construction project is unanticipated problems with subcontractors. Although it is highly recommended that contractors carefully screen all subcontractors, it does not provide the level of risk mitigation, a subcontract performance and payment bond would offer.
As subcontractors play a major role in the timely and profitable completion of any given project, subcontract bonds help to reduce the burden of managing disputes and/or a subs unfortunate default.
The surety underwriting process of one’s subcontractors can act as a vital prequalification mechanism which can alleviate those not necessarily capable to perform a particular project. The surety company performs a detailed analysis of the subcontractors business with regard to their experience, specialty, average and largest projects completed and the respective profitability, current financial strength, amount of work they have on hand to guarantee the ability to finance additional projects, claims history, as well as the review of the business owners financial outlook and personal credit history.
Prior to the bidding process, contractors would be wise in collection a bondability letter from the subcontractors surety indicative that they have qualified for bonding and includes the single job and aggregate bonding capacity for which they have been approved. The Bond Exchange welcomes the opportunity to assist clients in all aspects of the prequalification process including being certain that the surety company backing the bondability letter is one of quality. Our Agents are experienced in the avenues for contacting the respective surety for validation of such letters. In addition, researching the surety company’s Federal Treasury Listing, as well as evaluating their A.M. Best Rating are excellent options.
A performance bond provides a guarantee that the subcontractor will complete the project as specified in the terms and conditions of the contract. The payment bond assures that all subcontractors and suppliers to the sub will be paid. Should a dispute arise and/or the subcontractor default on the project, the Surety will often assist in resolving the matter. Should the subcontractor ultimately be found in breach of the contract, the surety will often provide financial assistance to them to be certain the contract is complete or, they will hire a replacement contractor to finish the job. Should these options not be available to the surety during the claims process, they will negotiate and/or litigate a financial settlement with the general contractor for payment of their losses.
Upon entering into a contractual agreement with a subcontractor, it is recommended that both the original, signed and notarized performance and payment bonds be collected with the executed contract. The Bond Exchange often asked clients to provide copies of their subcontract bonds to ensure they are executed properly and can be validated with the issuing surety company.
Although a general contractor’s surety may set forth a “bond back” requirement for subcontractors based on a specified dollar value of their contract (i.e. exceeding $250,000), many general contractors initiate the requirement based on their knowledge of the value it brings to the project management process. Although experience and history with certain subcontractors may have never warranted the necessity of them being bonded, disputes and default can take place without the ability for them to be forecasted. In conclusion, it is wise to establish a corporate strategy for mandating the bonding of subcontractors.
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