Regardless of experience, every commercial construction project comes with some degree of risk. When it comes to costly projects, we know it’s extremely important for GC’s and clients to protect themselves, especially when juggling multiple subcontractors to manage different areas of the project. Construction bonding is one sure way for GC’s to protect investments in the event a subcontractor doesn’t perform the work or otherwise fails to honor the obligations within their contract.
For GC’s managing complex construction projects, partnering with bondable subcontractors is an essential part of managing risk. Below, we’ll explain the importance of construction bonding, and why working with a bondable subcontractor can actually have significant benefits for both GCs and subcontractors.
What Is Construction Bonding?
Construction bonding plays a crucial role in protecting all parties involved in a commercial construction project. Put simply, bonds help to financially guarantee that a contractor or subcontractor delivers on their contractual obligations. Bonds are legally binding tri-party agreements between GCs or project owners (bond oblige), subcontractors (bond principal), and a surety company that issues the bonds. The purpose behind the bond is to financially protect the bond obligees. In other words, they essentially guarantee compensation if the subcontractor violates their contract either by not performing or causing significant damages or losses.
In the event a claim is brought against the bond, the surety company will cover the bond and pay the GC, but the subcontractor is ultimately on the hook to repay the surety company.
While it may seem like working with a bondable subcontractor is exclusively in the best interest of the GC, becoming bondable can also help subcontractors establish or improve their reputation within the local industry. Because bond claims are usually a last resort way to resolve a serious issue or recover financial costs. A lack of claims against a subcontractor combined with a strong track record can actually help build credibility in the marketplace.
Types Of Construction Bonds
Not all construction bonds work the same way — there are different construction bonds for different project risks. Below are the four most common types of construction bonds:
- Bid Bonds: Bid bonds protect GCs in the event a subcontractor pulls out of the project after their bid was selected. Its purpose is to cover the time lost and additional costs associated with evaluating new project bids. Federal law requires a bid bond for any project over $100,000. Some states may have laws around bid bond requirements as well.
- Performance Bonds: These bonds help protect GCs from poor performance by helping ensure a subcontractor sees the project through to completion. It also obligates subcontractors to follow all necessary laws, regulations, and industry standards throughout the duration of the project.
- Payment Bonds: Payment bonds obligate the subcontractor to pay its workers, suppliers, and also be on the hook for financial damages that occur during the project.
- Contractor License Bonds: Contractor license bonds guarantee the subcontractors will work in accordance with the law, obtain all necessary state licenses, and perform their contractual obligations in an ethical manner. They are similar to performance bonds; however, contractor license bonds are not project-specific.
Who Pays For A Construction Bond?
Subcontractors are required to pay a small premium of the bond amount to the surety company. The total bond amount is determined by the general contractor, and the surety company will assign a small percentage based on the subcontractor’s qualifications. For most subcontractors, that fee is 1% to 3% of the total bond amount. However, keep in mind a company’s credit score plays a significant role here. Companies with poor credit profiles can expect to pay significantly more.
Why Partnering With A Bondable Subcontractor Is Important
The benefits of partnering with bondable subcontractors can’t be understated. Below are three reasons why GCs often look to prioritize partnerships with bondable subcontractors:
- Financial Protection: Even if you’re working with a trusted subcontractor, things can and do go wrong. Protecting your financial interests is important, but so fulfilling your client’s deliverables. Working with a bondable subcontractor can give you extra peace of mind.
- They Are Pre-Qualified: The surety (the company backing the bond) will actually do a lot of the legwork involved with pre-qualifying a particular subcontractor before the bond is issued. The company will evaluate the subcontractor’s experience, financial, experience, and overall ability to perform the work. If a surety company has pre-qualified a subcontractor, think of it as a stamp of approval. This can save a GC a significant amount of time during the bidding process.
- They Keep Subcontractors Engaged: In the event that a subcontractor experiences financial trouble, the surety bond could mean the organization’s assets and shareholder assets could be on the line. As a result, bondable subcontractors are more likely to prioritize bonded projects over any unbonded projects when forced to deliver on any remaining work.
When dealing with large construction investments, managing risk is an important part of a GC’s job. Bonds are a tool that can be used to do just that. By working with a bonded subcontractor, GCs can be sure they’re working with a qualified partner, and if things do go wrong, there is a path to recover damages. Subcontractors can also use them as a mechanism for growing a strong reputation.
If you’re a GC looking for a bondable subcontractor that specializes in building envelope solutions in California, contact us at Unique Building Group. With over 30 years of experience, no construction project is too complex for our team of industry professionals.