subcontractor surety risk

Hiring a Subcontractor? Let a Surety Take on the Risk

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Few states have experienced the construction-industry labor shortage more than Colorado. For general contractors, the problem has made finding a reliable subcontractor more difficult than usual – much more difficult.

CCIG’s Tom Patton.

Nearly 10 years after the housing bust drove an estimated 30% of construction workers into new fields, contractors everywhere are struggling to find workers. According to the National Association of Homebuilders, there were approximately 200,000 unfilled construction jobs in the U.S. last year – a jump of 81% over the previous two years.

Colorado alone will need 30,000 more workers in the construction field in the next six years, a number that does not account for those who will retire, according to a study by the Association of General Contractors.

GCs, especially smaller ones, traditionally have relied on their relationships with others in the trade in selecting a sub. The problem in a tight market is that people you know and have come to trust are often unavailable.

No one likes to turn down a job, of course, so GCs will sometimes turn to subs who they don’t know as well.

The risks in doing so are high. Does that sub have the capacity? The capital? Or the character?

A sub who fails to deliver can quickly lead to lawsuits and countersuits.

With so much at stake, it’s critical that GCs take care to do business only with bonded subs. Then, in case of a subcontractor’s failure, the risk is pushed to the surety company, not the GC.

There are three basic types of surety bonds seen in construction: bid, performance and payment bonds.

The GC typically obtains a bid bond, assuring the project owner that the GC’s bid has been submitted in good faith.

Subs (and GCs) should have a performance and payment bond, which guarantees they will complete the contract according to its terms, including price and time, and pay other subs and suppliers on the job accordingly.

Doing business with a bonded sub means they’ve been carefully vetted by the surety company.

That means their financial records have been reviewed, including how well they pay their bills, and so the risk of a default is lower.

It means their reputation, including job references, has been checked, so that problems in completing a job are less likely to crop up.

It also means that the surety company knows the sub really does have adequate cash on hand as well as a credit line to not only buy whatever supplies they might need, but also deal with unforeseen contingencies.

In the end, a GC who works with bonded subs can rest assured that the surety company’s underwriting team has done its due diligence, so that everyone’s interests are protected.

Tom Patton is a Surety Advisor with CCIG. Reach him at TomP@thinkccig.com or 720-330-7922.