Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
We often receive questions from our contractor clients regarding if/when they should require a subcontractor to provide the protection of a performance & payment bond for a project. Although the premium charged for the bond will add cost to the project – on many occasions the benefit of the bond will far outweigh the cost. Here are several benefits that might assist in your decision:
The subcontractor would have gone through a prequalification process of the surety. The surety will evaluate the subcontractor’s financial strength, experience, and ability to perform the work. This can be extremely valuable if you have never worked with this subcontractor on past projects.
Provides protection that the subcontractor will pay their suppliers and lower tier subcontractors. The payment bond transfers the risk of these payments to the subcontractor’s surety.
If the subcontractor has a critical role in the overall completion of the project or a special expertise - the bond can protect against additional costs or delays due to a default.
Your bond company may require you to obtain subcontractor bonds when a trade exceeds a certain parameter (for example: $500,000) as a condition of the program they provide.
We recently supported a contractor client on a project that was two times larger than any project they had completed in the past. The decision to bond back the three largest subcontractors made the bond company comfortable enough with this transfer of risk to support the project.
We have other clients that have suffered subcontractor losses in the past and now require subcontractor bonds on all their projects.
If you would like more information on the bonding of subcontractors, please contact me at 619-937-0165 or mgaynor@ranchomesa.com.