Bonding Subcontractors, Benefits, Pitfalls and Other Considerations

Often times subcontractors are required to provide performance and payment bonds to a general contractor.  The commonly referred to as “sub bonds”, this practice adds a layer of protection to the general contractor by providing some assurances that the sub contractor’s suppliers and sub contractors will be paid and that some financial assistance will be provided by the surety in the event the sub contractor needs to be replaced on a project.

Questions we commonly hear from the general contractor include “if we require sub bonds, will we increase our bonding capacity dollar for dollar?”  For example, suppose a general contractor has an established bond line of $10 million, if that general requires sub bonds of say $2mm, does that provide an additional $2mm in bonding capacity to the general? The short answer is no.  Even though the general required sub bonds, this fact alone deos not relieve the general contractor of it s management responsibilities for that sub, does nothing for the cash flow of the project and ultimately, the general is still responsible for the performance of the sub contractor.

That said, a general contractor that bonds its sub contractors as a matter of policy, the surety company may very well stretch the bond program a little more as bonding subs is a sign that a contractor is risk averse.  Conservative, risk averse general contractors are favorites of the surety bond underwriters.

The primary purpose of surety bonding pre-qualification.  As such and general contractor may think that requiring sub bonds is a sound substitute for doing its own sub contractor pre-qualification.  Surety bond underwriters are stuck in an office looking at paper.  They may make a few reference calls and such, but the underwriters are by no means qualified to access individual job risk.  The general contractor is in a much better position to reference a sub contractor and access if the prior experience of a sub contractor matches the work the GC is considering hiring the sub to perform.  Some pre-qualification of the sub contractor by the general contractor is still a good idea, even when sub bonds will be required.

Finally, sub bonds will not eliminate the delays and disruptions to a project that non-performance of a key sub contractor will inevitably cause.   If a general feels a sub contractor is not performing in accordance with the contract and makes a claim, the surety company will have to investigate the claim, this will take time.  While there is no doubt the financial impact to a general contractor will be significantly lessened because of a sub bond, chances are there will still be job delays and other distributions  even with performance and payment bonds on the defaulted sub contractor.

Next issue we will discuss the benefits of sub bonding even when the subcontractor is much larger and better established than the general.  There are still some pretty compelling reasons to bond this sub.