When a subcontractor is required by a prime (general) contractor to provide performance and payment bonds, it is commonly referred to as ‘Bonding back’. The prime contractor is the party with the contract with the owner, and responsible for the completion of the work, including its subcontractors. To mitigate risk, a prime will require the subcontractors to bond back to them, even though they have been required by the owner to post a 100% performance and payment bond. Why? Because companies go out of business.
Bonding back is nothing new, but the Great Recession did cause many general contractors, and surety companies of the general contractors, to reassess its risk mitigation and qualification practices of its subs. In the public works arena, the Miller Act requires the prime contractor to provide a performance and payment bond for projects over a given dollar amount. The prime contractor is not required to make its subs bond back to them; they choose to require this. Some generals and have it their policy to require subs to bond back no matter the dollar amount. Others require bond backs at certain dollar amounts, or certain critical path trades. And primes that bond back choose to do so, because they understand that many subcontractors were beat up severely during the last downturn, and most are still recovering.
If a subcontractor has posted a bond to the prime and starts to fall behind on payments to its subs and suppliers, or has performance issues, the prime contractor does not have to take on this burden. It can and will make a claim against the subcontractor’s bond and get the sub’s surety company involved. Remember, the prime contractor is responsible for the entire contract, including its subcontractor’s performance, so without bonding back subs the prime is left with less recourse.
Of course, requiring subcontractors to bond back comes with additional costs and eats into the profit margin of the prime contractor. Prime contractors account for this additional cost and understand the alternative of a subcontractor defaulting on the project can be devastating.
Last week, Aaron Blankenship of Travelers Bond & Financial Products wrote a great article for Property Casualty 360 on this same issue. Click here for the article. Or if you have questions about how to require subcontractors to bond back, feel free to reach out and we’d be happy to help.