15 Issues Leading to Construction Subcontractors Being More Heavily Scrutinized by Bonding Companies

By Brady Cox

It might seem counter intuitive, but some Bonding Companies do not embrace the opportunity to serve subcontractors.  So what’s different about subcontractors and subcontracts?  Why do some sureties redline this entire segment of the market?

Some of the possible reasons are as follows:

The Number One Issue – Low on the Food Chain!

One complaint underwriters have about subcontractors is that they are farther down the food chain than General Contractors (GC’s) are.

GCs have a “prime” contract, meaning they work directly for the project owner and are the first recipient of cash payments.  Only then are subcontractors subsequently paid by the GC.  Subs may face delays and sometimes even harassment at the hands of GC’s.

Remember, subcontracts are all private contracts not regulated by governmental or institutional rules, even if the prime contract is so regulated. Put simply, subs have a harder time collecting their money.

14 Other Issues for Subs and Their Sureties

1. GCs may not normally disclose bid results (2nd & 3rd bidders’ figures).  This makes it difficult to evaluate contract price adequacy – a disadvantage for both the sub and surety.

2. Unregulated procurement procedures and contract administration: GCs may be aggressive in their procurement methods, pressuring subs for price concessions: “Knock their heads together.” Such practices make the subcontracts less profitable and therefore more risky for the sub and surety.  Subs can also be victimized with verbal awards and unwritten change orders.

3. Contract documents (including bond forms) may be nonstandard, drafted by GCs specifically to give strong advantages over subs and sureties.  In some cases, the normal Performance Bond transforms into a forfeiture-type financial obligation.

4. Flow-down or pass-through clauses in subcontracts force subs to assume obligations rightfully belonging to the GC. An example would be wording that makes the sub responsible for the liquidated damage amount on the prime contract if they are found to have caused a delay on the subcontract.

5. “Pay when paid” language can result in delayed payment to the sub.  “Pay if paid” can result in the sub never being paid.

6. Unbonded public work is rare, but in such cases there is no Payment Bond at the GC level to protect the sub, and liens (filed against the project for failure to receive payment) may be prohibited.

7. Indemnification: Broad-form indemnity clauses can make the sub financially responsible even if they are not at fault.

8. Delay damages: Subs may be barred from seeking financial recovery.

9. Lien waivers: When read literally, these documents may operate to waive and release claims for which the subcontractor has not yet been paid.

10. Termination for Convenience: This contract clause can enable the GC to terminate the contract and leave the sub with a series of unreimbursed expenses and lost profits.

11. Some trades perform their work late in the project, meaning the bond is carried for a lengthy period with no progress on the contract.

12. Certain trades can operate with minimal capitalization, so the field may be populated with lightly financed companies. Such competitors can drive down contract prices, making it harder for others to bond their work.

13. Financial reporting may be less sophisticated than for GCs (CPA financial statements vs. bookkeeper or QuickBooks).

14. Due to their size and circumstances, subs may lack bank support, such as a working capital line.

Conclusion

Subcontractors literally perform the majority of all construction work.  They are the backbone of the construction industry and cannot be ignored by sureties.

When it comes to bonding, subcontractors need to demonstrate that they are well-managed companies that reflect the same attributes as a successful GC.

Brady K. Cox is a Principle with the Baldwin-Cox Agency, LLC. in Dallas, TX. The agency was founded in 1990, and has always focused on providing construction bonds to contractors. Today the Baldwin-Cox Agency,LLC is one of the largest bond producers within all of North Texas.

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