Bonding Subcontractors

I sell bonds for a living, so it is easy to assume that the purpose of this argument is self serving.  While this would not be a totally misguided opinion, we have seen are several disturbing trends of late that make me believe all General Contractors should re-visit their bonding requirements and all subcontractors should be prepared to bond – even those that never required bonds in the past. 

“We joint check all our subs.”  This is probably the second most common reason we hear for not bonding subcontractors.  While I applaud this control measure, it is not a substitute for sub bonding.   The most obvious flaw in this strategy is the lack of performance guarantees.  The cost of bringing in another subcontractor to complete the work can be substantial.  Also, no competent contractor is going to warranty the work already in place.  Joint checks do not cover payroll, payroll taxes and benefits required of prevailing wage jobs.  While I am sure all Generals require copies of the certified payrolls, we have recently seen a marked rise in wage claims.  Finally, while you may be issuing joint checks, not all Generals are doing so.  This means your subcontractor’s supplier may decide to stop supplying your subcontractor, hence disrupting your job. 

Pre Qualification is the real job of the surety company.  To assume that if a bonded subcontractor goes broke the General will not have any impact on the flow and profitability of the job would an erroneous conclusion.  Bonded or not, the loss of a subcontractor on a project is going to disrupt the job and probably cost the General Contractor some dollars.   The sureties do a fair job of pre-qualifying contractors.  By requiring the bond, you know a surety company has thoroughly evaluated the subcontractor and is willing to put its capital at risk to support that contractor. 

Bondability letters are useless (see issue 2); don’t think for a minute that because you got a bondability letter, a surety has used the same level of diligence in prequalification.  Sureties (and surety agents) do not make any money issuing pre-qualification letters.  As such, little time is going into the underwriting of the account for that letter.  Furthermore, the letter will always contain enough disclaimers that they really are of little value. 

We are in the midst of a major economic contraction, lead by the financial sector, with construction pulling up close behind.  The old way of doing business just does not work.  We are in a hyper-competitive environment, and it is creating many danger zones where none existed just a few short years ago.  So take a conservative approach to your future jobs.  Continue to pre-qualify your subs, and if they are a large part of the project or on the critical path, definitely require a sub bond.