Bonds are often a forgotten part of the construction process. However, they’re generally required in most situations and this is certainly true when considering subcontractor payment bonds. These are different from the subcontractor performance bonds but payment and performance bonds are often both needed for protection and for a range of benefits.
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Subcontractor Payment And Performance Bonds Explained
Through a performance bond, a specific contractual agreement is set up between a surety and a subcontractor. The surety guarantees to arrange for the fulfillment of a subcontract if the subcontractor is unable to complete the agreed work for whatever reason. This is designed to provide protection for the contractor.
In contrast a subcontractor payment bond is a contractual agreement between a surety and a subcontractor for a particular project. It is designed to ensure that the cost of the labor and materials used and contracted for by the subcontractor are paid in full.
As such, this bond is designed to protect and benefit the lower tier subcontractors and their suppliers. If the subcontractor cannot pay, then lower tier claims are resolved through the subcontractor’s payment bond. So, while the contractor benefits indirectly it is mainly designed to benefit the labor and suppliers used.
In setting up this bond, a significant level of risk now moves to the subcontractor’s surety.
Benefits Of Subcontractor Payment Bonds
There are many advantages to having these types of surety bonds in place. For a contractor, it helps ensure that the best subcontractors are chosen. There will always be a pre-qualification process handled by the surety. This will be used to determine the financial strength of the potential subcontractor. They will explore everything from character and experience to actual ability to complete the work. The surety will even dissect the work the subcontractor has completed on unrelated projects. They will examine every aspect and ensure that there is not a significant level of exposure from these unrelated contracts.
In doing so, the Surety will quickly help contractors discover the subcontractors who are not qualified enough for a particular project and as such should be ruled out. Alternatively, they may simply not have the financial strength to support a particular project. All this information and more can be revealed by the surety.
As well as this, sureties will typically require the subcontractor to indemnify the surety for any losses caused through the bond. This is handled through a formal contract. Typically, indemnity will be required by shareholders of a corporation and also the corporation as a whole.
If the subcontractor and the subcontractor’s shareholders do complete a general indemnity agreement, then corporate assets and the individual assets for the shareholder are put at risk. This will be the case if the surety does need to pay a claim on the bond. For this reason, if the subcontractor does face financial issues, then they will be inclined to focus more on bonded jobs.
This can be beneficial for the contractor. The contractor can then make sure that the subcontractor continues to work on the bonded jobs, due to the leverage they hold over them.
Of course, another benefit for the subcontractor is that they can avoid the potential risk of being sued by low tier subcontractors. Instead, the surety will guarantee that they are provided with the payments they require for the contracted work. This can provide peace of mind to the contractor and ensure that there are no issues further down the road.
While a performance bond is generally seen as a standard requirement, construction payment bonds are often considered to be optional. As such, it will be the decision of the contractor whether they believe this is a necessary option.
Pinnacle Surety Delivers
We are an award winning agency who have helped ensure that countless contractors have been able to set up the contract bonds that they require. Our contract bond process is fast to provide you with a superior solution that you can trust. We ensure that the checks are thorough and work hard to guarantee you have all the information you need about potential contractors. We aim to make sure that you can find a contractor that is able and financially suitable for a particular contract. Any surety bond will require professional expertise. With twenty years of experience on the market, we are ready to aid you in this complex process.
Bid Bonds Negotiations
Subcontracts are typically negotiated and as such general contractors will not typically need bid bonds. Instead, the general contractor will request a bond prequalification letter. His will provide information on the subcontractor’s present bond capacity.
Be aware there is a growing trend for bid bonds to be required now for general contractors. For this to occur a subcontractor must be prequalified.
First Step in Bonding a Subcontractor
The first step in bonding a subcontractor will be speaking to a surety bond company. It’s quite possible that if you have surety in place already, they actually require your subcontractors to be bonded. As such, it is vital that you investigate this possibility. It’s possible that the subcontractor that you have chosen has never used a bond before. If that’s the case, then you will need to put them in contact with a surety and ensure that they pass through pre-qualification.
We can handle this and will investigate experience, financial strength, exposure to other contracts and ability to complete the subcontracted work. Be aware that some surety’s will include clauses that allow them to withdraw under certain circumstances. In cases like this, there is no security provided by the bond. Make sure that you do research the surety that you have decided to use. Be aware that whether you are looking for subdivision bonds or setting up bid bonds, all securities aren’t equal. Make sure it has a high rating and can provide the quality level of your expectations to write the bonds you need.
If you are interested in arranging surety bonds as a contractor or potentially learning more about subcontractor bonding, please make sure you contact us today.
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