Brent Headley, Surety Account Executive at Anderson & Catania Surety Services LLC, explains why general contractors should ask subcontractors to post a performance and payment bond back to them.
At What Dollar Amount Should Subcontractors Bond-Back?
There are many answers to this question. If a bond-back is required by the surety company, the surety company may set the amount based on the subcontractor’s value compared to the general contractor’s contract price. For example, if the subcontractor’s value is perhaps 1/3 of the total contract, the surety company may set the bond-back amount based on this value. Perhaps the subcontractor’s portion of the work is extremely specialized, which may require a bond-back.
Any type of hazardous remediation work typically requires the general contractor receive a bond-back from the subcontractor. Some general contractors use bond-backs as a company policy and a risk transfer tool. General contractors have varying bond-back requirements based on the subcontract dollar value.
What Is the Rule of Thumb for How Much Additional Aggregate Bonding Capacity Contractors Can Gain By Asking Subcontractors To Bond-Back?
The rule of thumb is that the surety company does not increase a contractor’s aggregate capacity based on subcontractor bond-backs. The overall liability of the general contractor is still the total value of the contract. That said, requiring subs to bond-back could provide a path to favorable consideration for contracts larger than what a surety company would have originally approved for a contractor.
Will A Project Owner Pay for The Additional Costs of Subcontractors Bonding-Back?
No. The project owner already has the protection of the bond from the general contractor. A bond-back from a subcontractor would not increase additional protection for the owner.
Well, first of all, your bond to the owner guarantees payment of the obligations to subs and suppliers. So, therefore, it’s a guarantee that you’re going to pay all the material people behind the project.
The other element that sometimes people don’t realize is that your subcontractor is also covered under that payment bond that guarantees that they’re going to pay their subs and their suppliers.
So, therefore, there is a risk to you that your subcontractors may not pay. So that bond protects you there.
From the performance standpoint, you’re also looking at the fact that the subcontractor has a surety company that has underwritten the risk. So therefore, they feel comfortable with the fact that they can perform the project like they’re supposed to.
I think finally one of the big advantages also, from a bond-back standpoint, is your surety company from time to time will reduce your work on hand based on the fact that you have bond-back from subcontractors on the project. That can be a significant element because sometimes when you’re stretching program or you want to bid another project that takes you up over that work program that the surety program originally wanted to give you, it’s an advantage.