I wanted to discuss performance and payment bonds where a project is being overseen by a general contractor and that contractor elects to have his subcontractors provide performance and payment bonds as well, which is commonly referred to as bonding back in the construction world. That means that the general contractor or construction manager has been awarded a project. In this project, they are going to oversee the development of the project and the subcontractors they hire will also be required to provide performance and payment bonds. General contractors require this at times so that they can reduce their own risk. If the general contractor has to execute a performance and payment bond for their own contract, having their sub-trade contractors provide their own performance and payment bonds reduces their risk.
We have seen general contractors obtain bonding capacity that is exponentially larger than their current bonding line when their subcontractors are bonded as well — because the surety, from a risk perspective, is more comfortable when a large portion of the underlying contract that they are guaranteeing is also bonded. In addition to limiting your risk, this is a way to increase your bonding capacity. Some surety companies will write a bond with a discounted bond premium when the subcontractors provide performance and payment bonds. It’s a topic certainly worth discussing with my office or your bonding agent.
A downside of having subcontractors obtain their own performance and payment bonds is the increased contract cost. Although bond premiums are relatively small compared to the profit margin that is associated with contracts, it is still an additional cost. It is best to look at every scenario individually and determine whether or not having your subcontractors provide performance and payment bonds is feasible.
If you decide to have your subcontractors provide their own payment and performance bonds, a question that has come up is, where do you start? When the contractor is bidding on your project, they should contact their bonding agency and request a “good guy letter” which is also commonly referred to as a “sunshine letter.” This should state the name of the surety (not the agency). This letter shows the ability of the company bidding on the project to obtain a bond. Another common question is whether to have all of the subcontractors bonded or only the main trade contractors. There are pros and cons to both scenarios and the cost is generally the determining factor.
When it comes to performance and payment bonds, contact us for our expertise!
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