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  • Risk Management: The Importance of Bonded vs. Non-Bonded Subcontractors


    We have entered an unprecedented time for the construction industry. Stricter standards in the banking industry as a result of the foreseeable rising default levels should be a clear sign that bonding is vital to the risk management of every project moving forward.

    With the fierce competition involved in securing contracts, the most important thing for every general contractor to consider is the risk involved with each project. The importance of bonded vs. non-bonded subcontractors goes beyond financial backing- the process mitigates risk and reduces the likelihood a default will occur.

    How is this so? When a general contractor requires a subcontractor bond for a particular project, the process involves a third party (bonding company) that prequalifies the subcontractor for the specific job at hand and knows the company’s capabilities. This risk assessment is done best by a bonding company because the company can reduce the time and resources needed to mitigate risk. In addition, a bonding agent can provide the security of financial backing by a surety; something that can’t be done by an in-house risk assessment team. Additional benefits include higher-quality subs and a limited number of subs bidding each project if a pre-bid bonding requirement is established.

    What subs should be bonded? A general contractor should always bond, at minimum, the critical path trades. It is prudent to bond these subs in order to mitigate risk and keep the project on track. Oftentimes, general contractors think a cost savings can be realized if the contract does not require a subcontractor bond. Unfortunately, if a subcontractor bond is not required, there is no guarantee that the project will remain on schedule in the event a default occurs. Costly delays can occur if there is a need to bring a new subcontractor on board mid-project. Although the GC bond covers the contractor’s portion of the agreement, it does not reduce liability or mitigate the risk involved should a subcontractor default.

    What’s next for the surety industry? Tightening of lending in the banking industry has led the surety market to tighten standards as well. Sureties are expecting to experience rising defaults, and because of this, will be getting tighter and tighter with their bonding, according to Margie Morris, Vice President of Guignard Company, a local bonding agency. “Because of this decrease in surety availability though, GCs can be guaranteed they are getting the best of the best if they require their subs to be bonded,” said Morris.

    For more information about surety bonds, contact the National Association of Surety Bond Producers (NASBP) at 202.686.3700 or visit www.sio.org.

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