Why Am I Now Required to Bond Such Small Construction Projects?

Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

I received an email from a large Subcontractor client last week requesting performance and payment bonds in the amounts of $87,000 and $133,000, respectively. This client has completed projects in excess of $5,000,000 in the past and was surprised that the general contractor they were working with was requiring such a small amount to be bonded back.

I explained the potential reasons for why the general contractor may require such a small bond.  

• One reason might be with the financial uncertainty created by the COVID-19 pandemic, the prime contractor/general contractors’ bond company is looking to transfer some of the risk from the bond they provide to their prime contractor. They may set a certain limit (for example, all subcontracts over $100,000) to require the subcontractor to bond back to the prime contractor.

• A second reason might be that the prime contractor has not used a certain subcontractor in the past and wants the protection of a bond to help offset the risk. The general contractor might have selected this subcontractor based on “price” and wants the third party prequalification that the performance and payment bond provides.

• A third example could be that the trade this subcontractor supports is critical to the success of the project and the general contractor is using every tool they can to manage the risk.

Overall in 2020, we have seen an increase in the number of prime contractors requiring a bond for a small subcontract.

The good news for the subcontractor that rarely requires bonding is that the qualification process for a small subcontractor bond is relatively easy. A number of highly rated bond companies provide programs for bonding projects up to $400,000 (sometimes higher) based on the credit scoring of the subcontract company owner.

If you would like more information on how a professional bonding agent can assist in putting a single bond or a bond program in place for your company, feel free to reach out to me at (619) 937-0165 to ensure your company is getting the proper attention.