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Insurance - When should I bond my subcontractors?

image Eric Lesch, Principal/Bond Producer PCL Contract Bonding Agency Irving, TX

AUSTIN - As a general contractor, the margins are tight and pretty much any extra expense is too much to bear, but there are times when bonding just a single subcontractor may be worth doing. Years ago, many large general contractors used surety bonds as their primary risk management tool. Today that has largely changed with the widespread use of Subcontractor Default Insurance (SDI). However, even though SDI has started to become available for smaller general contractors, it is still not available for many small or medium general contractors.

    As a bond agent, I naturally believe that bonds are a great fit in a variety of situations and that being bondable is an indicator of a superior subcontractor.  So, in what situations would binding a subcontractor be a good choice?

Here are the top situations where I recommend using bonds:

(1) The bid spread is 10% or more - Bid spread is the #1 biggest indicator of risk. Along with largest backlog, but since you can’t always know the backlog size then bid spread is the thing you need to watch for. My recommendation is to not use the bid, but if you do then I’d require bonds.

(2) The size of job is large for the subcontractor. You checked their references and they haven’t done anything nearly this large. By very large, I mean about double their largest job that was completed in the last few years.

(3) The owner is requiring you to use their favorite subcontractor. In this case you suddenly develop a long-standing requirement to bond subcontractors. If they can get a bond they can stay, but if they can’t then you are so sorry they didn’t meet your requirements.

The first time that you use a subcontractor. This allows you to use the bonding as a first-time prequal and to protect yourself as you get some experience with them. This can be especially helpful on an out-of-town job where you don’t know any of the subcontractors.

(5) The subcontractor is in the critical path. You can’t afford to have delays with this subcontractor, and delays are fast becoming the new normal, so some protection here could be the difference between making that slim margin or a big loss.

(6) The subcontractor has not been in business for more than a couple years. The busy market has created many new companies that do not have a proven track record.

(7) Your project is very large for you, more complex than usual or in a different industry.

(8) Your project is cost plus or more profitable than normal. Can’t you afford a little extra protection for that big profit?

Discuss the bonding of subcontractors with your professional surety agent. Just like any risk management product, there are potential issues you may encounter so when you are thinking about making a claim on a bond, discuss it with your agent and keep them in the loop. They can help you identify and work through potential issues specific to your situation.
Make sure that you are using bondable subcontractors. Just like asking for a certificate of insurance, you should ask for a bondability letter. A bondability letter contains information about their bonding relationship and capacity. It should contain the name of the surety and agent, length of the relationship, size of bond line with both single and aggregate limits, and possibly information about the size of prior bonds issued. Your agent will help you review the bondability letters.
Follow your contract to the letter. The surety gets to use all the defenses present in the subcontract. If you don’t follow the terms of the subcontract, you may find the protection of the bond reduced or even forfeited.
Your surety agent is one of the least expensive resources that you have. Ask them for help any time you are having a problem and you will be surprised how many ways they can be a valuable resource for you.

PCL Contract Bonding Agency
8615 N. Freeport Pkwy, #155
Irving, Tx  75063
(972) 459-4749

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Carol Wiatrek meditor@constructionnews.net