This month in our blog series we are focusing on bonds from the perspective of a subcontractor. The Cromeens Law Firm is a full-service law firm specializing in the needs of individuals and businesses in the construction industry. Our main objective is to provide results-driven representation and educate our clients in ways that maximize their growth potential. Understanding how the bonding process works can help subcontractors win profitable bids and secure their right to payment.
What are bonds in construction contracts?
You might be wondering, “Do I need a construction bond?” The answer is maybe. Subcontractors typically only obtain bonds if the general contractor requires the subcontractor to do so in order to work on a project. General contractors impose bond requirements in an effort to transfer risk downstream to subcontractors as much as possible. Risk transference is the general theme subcontractors encounter when working with general contractors—especially when there was no prior relationship between the general contractor and the subcontractor. The bigger the project and the subcontractor’s scope of work, the more likely the general contractor will require a bond. A general contractor may also require a letter from a surety indicating how much the subcontractor qualifies for before selecting a subcontractor for a particular job. Consult with a qualified surety bonding agent to ensure that you find the right surety for your project.
How do construction bonds work? A surety will request a copy of the subcontract agreement prior to issuing a bond to a subcontractor. Because the surety may ultimately be on the hook if the subcontractor does not meet its contractual obligations, it will review the subcontract agreement to ensure it is not too burdensome. For example, a surety may object to a subcontract agreement that sticks the subcontractor with all of the liquidated damages whether caused solely by the subcontractor or not.
Don’t start work until the bond is in place
If a general contractor requires a bond, it is important to secure the bond before starting work. Even if the general contractor does not require proof of the bond prior to starting, chances are the general contractor will request documentation at some point. So, why are construction bonds required? If you are unable to provide proof of the bond and you have already begun to furnish labor, technically you are in breach of the subcontract agreement. Do not get baited into letting this happen! The general contractor may keep the breach in their back pocket and use the default as an excuse to terminate and replace if deemed convenient.
Why do you need a construction bond?
A subcontractor should fully consider the implication of accepting a job that requires a bond. Oftentimes a subcontractor will enter into a subcontract agreement without thoroughly reading all of the terms and understanding the obligations it imposes. However, failure to properly negotiate a subcontract agreement could cost the subcontractor thousands. Consider consulting with an experienced construction attorney prior to entering into your next subcontract agreement so that you fully understand all of the risks.
This blog is part of our 2020 Mastering the Subcontract series. Come back each week as we deep dive and pull apart everything you need to know about a subcontract.