Surety Companies Looking for Greater Sense of Security
The construction industry today has changed dramatically from what it was just five years ago. Surety companies need a greater sense of security than ever before which is apparent in their request of both contractors and their agents. As a team of professionals we all want the same thing….success. Getting a job today can be tough and getting a job and having it turn out profitable can be even more challenging.
When a general contractor signs a contract with an owner, total responsibility for the project is assumed by the general contractor. This includes performance of the contract and payment to all subcontractors and suppliers. This seems logical and routine, but what if a subcontractor doesn’t perform as agreed or doesn’t pay his subcontractors or suppliers? Such a scenario occurs regularly these days which tends to raise the level of anxiety with surety underwriters.
So how can a contractor maintain a level of comfort with the surety company and for their own business? One way is to utilize a joint checking arrangement and carefully reviewing subcontractors’ billings so they don’t become overbilled on a project. This may add some level of security, but it’s not a foolproof method.
What about bonding the subcontractor?
With the fierce competition in the bidding process today some general contractors may think bonding a subcontractor is an added cost that may lose them jobs. Consider the cost of a subcontractor’s failure versus bond premium. It could be substantial. Bonding a subcontractor is protection for a general contractor and offers a certain amount of comfort knowing there is a viable process of recovery if/when things go badly.
Surety companies are requesting bonds of subcontractors more and more and for good reasons. A surety company prequalifies a general contractor and can also prequalify a subcontractor. One cannot assume because a subcontractor successfully completed a previous job the next job will also be successful. The next job may be the one that extends the subcontractor beyond his own capacity and there could be other jobs “in trouble”.
Bonding of a subcontractor transfers the risks of the subcontractor failure to perform and pay bills to the surety company. There is plenty of risk in the construction industry. Make it a good business practice to transfer risk whenever possible.
