Performance Bonds – Why Bond the “Mega Subcontractor”?

Many times general contractors (GC’s) sre requiring sub contractors to bond back to the GC the subcontractors portion of its work. As discussed in our last blog, while not without pitfalls, bonding subs is a useful risk management tool. Often times the GC is bonding its subs because the surety company bonding the GC is requring that GC to bond subs as a condition to provide the GC with the necessary performance and payment bonds.

The GC, in that instance can request of its surety that the requirement to bond a particular subcontractor be waived.  If the sub in question is a well known, possibly even publicly traded, bonded by the same surety company as the GC, the GC’s surety will often comply with the request to not bond a sub.

There is still a good reason to require a subcontractor bond on that “mega sub”.  Primarily, it levels the playing field a bit.  First, the “mega Sub” probably has a very low bond rate, so the additional expense is minimal.  I have seen first hand where the big subcontractor can actually bully the GC. There is the old golden rule, the party that has the gold makes the rules.  With a deep pocketed subcontractor, might not always want to compromise and do its best to play well with others.  Real life example; construction is still a people business.  We represent a GC that was having some real perfromance issues with its subcontractor.  This subcontractor was a very large company doing business in several western states.

The GC was getting nowhere with the local branch.  The local branch kept siding with its field superintendent and the GC was getting very frustrated.  The GC also as a matter of policy requires subcontract bonds on all subcontracts over $250k, no exceptions.  The GC notified the surety that it was issuing a 14 day cure notice (required by the contract prior to issuing a default notice) and within a few days, the “A” team form the corporate office was on the job, a new field superintendent was put in place and the subcontractor got back in schedule within a week.

Performance and payment bonds on even large subcontractors are something a GC should consider, especially if that sub is on the critical path.