Subcontractor Bonding: An Essential Risk Management Strategy

Subcontractors play an extremely important role in the construction industry. When hiring them, general contractors are able to diversify, and in many cases, significantly improve the overall skill set of their crew for various construction projects. In addition, there is significant cost savings associated with hiring subs on a per-project basis.

However, the construction industry tends to involve considerable risk … especially when it comes to hiring subcontractors. Although there are many benefits, there are also many concerns surrounding third-party laborers. If, for example, a subcontractor fails to successfully complete tasks necessary to complete a project, it can cause significant delays (not to mention expense) for the job, the primary contractor, and the client. A general contractor should work to avoid this scenario at all costs, but of course, that’s sometimes easier said than done.

To assess the qualifications of any given employee, regardless of industry, can be a difficult task, but in construction, a poor choice of subcontractors can create huge liability. General contractors don’t always have the time or resources to thoroughly research a sub’s background, or more importantly, the ability to monitor a subcontractor’s backlog. If a subcontractor happens to encounter a problem project, it is likely that it will impact progress on all of their work.

Contract surety bonds are the best option to help mitigate some of the risk associated with hiring subs. With the appropriate bond(s) in place, the risk of losses generated by a subcontractor default can be passed on to the surety company, saving the general contractor from cash flow, and project profit disasters, but also from the enormous amount of time and expense involved to investigate and resolve the default.

Benefits of Bonding Subcontractors

Transferring the risk of subcontractor default to the surety company is not the only benefit of surety bonds, however. When subcontractor performance and payment bonds are required:

• • General contractors have reassurance that they’ve hired qualified subcontractors because the bonded subs will have successfully passed a thorough evaluation and qualification process by the surety company. The pre-qualification and approval processes improve the overall quality of subcontractor bids, and eliminates problems that may occur with lesser quality or unqualified subcontractors.
• • The contractor is protected from paying twice for the same work if the subcontractor fails to pay their subs and/or suppliers.
• • Prime contractors with established subcontractor bonding programs are generally viewed favorably by their own surety company.

Common Construction Bonds

The two most common surety bonds in the construction industry include Payment Bonds and Performance Bonds:

• • Performance bonds help assure the subcontractor is qualified to perform the work, and protect the prime contractor (obligee) from ultimate financial risk should the subcontractor (principal) default or fail to perform the job according to the terms and conditions of the contract.
• • Payment bonds assure that specified laborers and suppliers associated with the project will be paid.

The Cost of Bonds

Bond rates will vary depending on the type of construction requiring the bond, and the financial strength of the subcontractor. Surety bonds can cost from one-half of one percent to three percent of the total contract amount depending on the project specifics.

At Surety Support Services, Inc., bid, performance, and payment bonds are our specialty! We’ve provided surety programs for contractors across the United States for over 30 years, with an emphasis on small emerging firms and specialty trades. We have the talent and expertise to establish an appropriate surety program to meet the unique needs of your business, and offer proven solutions to compliment your growth goals. Please contact us today to get started on a bonding program that best suits your business: 866-385-7760