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

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

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.

The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.

 

I Sent a Bid to the General Contractor, Now Where Is My Contract?

I Sent a Bid to the General Contractor, Now Where Is My Contract?

I Sent a Bid to the General Contractor, Now Where Is My Contract?

By Ed Krum

So your company has submitted a bid to the general contractor; now what?  Well if you followed the suggestions from the last post:

1. Let the general contractor’s estimator know in advance that your company intends to submit a bid, especially if you haven’t worked with them before.  A phone call is best.

2. Communicate with the general contractor’s estimator prior to bidding.  Here are few good things to communicate:

a. Estimator, did you notice “so and so” about the project?

b. Estimator, the architect is doing it this way and we can save money by doing it this way and we will get the same result.

c. Estimator, here is a list of similar projects that our company has completed.

3. Send in your bid with enough time for the estimator to call you with any questions he/she might have.

4. Call the estimator to check if he/she received your bid and answer any questions.

5. Wish them luck.

This will give you something to refer back to as past communication.  In all likelihood, you sent your bid to all the general contractors that submitted proposals for the project, and this communication will increase your chance of getting the project.

At this point, there are a couple pieces of information that you need: first, the general contractors with the three lowest bids, and second, how your firm’s bid compares to the others.

Once a project bids, it can be some time before a notification goes out stating to whom the owner intends to award the project.  Since most projects go through some type of evaluation process, allow anywhere from a few days to a few weeks for the process to play out.

The other factor in how your firm’s bid compares to others is a tricky question of what is ethical and what is not.  Trying to get a tabulated bid tab showing the dollar amount of each of your competitions’ bids before the project has been awarded to a subcontractor could be seen by some as unethical, as it gives the firm an unfair advantage to negotiate with the awarded general contractor.

The best approach is to develop a relationship with the general contractor so that your firm can get a seat at the negotiation table regardless of what your bid was.  Spend time reviewing your firm’s bid now that the project has bid; go back and see if there are ways to cut costs, also known as sharpening your pencil.

Few negotiations end up with both parties getting everything they are asking for, so be prepared to give up something and know what you are willing to give up before you sit down.  Most importantly, you want to convince the general contractor that your firm is easy and a joy to work with.

Ed Krum, Senior Estimator for Triune, is a highly accomplished, multi-talented project  manager, with over 25 years of commercial construction experience.  He is a skillful and highly regarded in value engineered, conceptual, competitive, negotiated and  design/build estimates.

The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune).  Any and all rights reserved.