One of my firm’s clients contracted with an electrical subcontractor on a project that was close to 90 percent electrical work. As the prime contractor, our client was bonded on the project; however, the electrical sub was not. Consequently, when the sub failed to perform and was defaulted, our client had to take money out of his own pocket to hire another, more expensive electrician. If the original electrical contractor had been bonded, our client could have made a claim against the subcontractor’s bond.
If you are a contractor that has to bond a job, I strongly encourage you to demand that your major subs bond back. By requiring your primary subs to obtain performance and payment bonds for their portion of the work, you significantly reduce your risk. In fact, some sureties are also recommending that general contractors obtain bond guarantees from subs as a way to reduce the GC’s ultimate bond exposure.
Bonds and the subcontract
When requiring payment and performance bonds from your subs, it is critical to follow these guidelines as they relate to the subcontract:
- Assure that the bond is written for at least the full subcontract price. Remember, the surety’s liability is limited to whatever is in the bond. If you have a million-dollar contract but the bond is for only half a million dollars, your recourse will be restricted.
- Make sure the bond is unconditional. The vast majority of bonds are unconditional, especially on public jobs. On private jobs, however, conditional payment bonds can be issued, which means that the bond is only in play if the owner pays the general contractor. If you are the GC, you want the bond to be unconditional.
- Verify the bond is written on an acceptable form. Also check that the bond is issued from a surety licensed where the project is located.
- Specify that the subcontractor provide the original bond within a short period of time from contract signing (usually 10 to 30 days). It’s imperative that you obtain a copy of the signed bond. Without a signed copy, you may not have any rights under the bond.
- Determine how change orders will impact the amount of the bond. This is vital so that the amount of the bond always matches the value of the subcontractor’s contract.
No one wants to deal with the fallout of a subcontractor default, but as the prime contractor you need to be prepared for this eventuality. Work with your construction law advisors to understand critical claim and notice requirements and be ready to take action if needed.