Keep your construction business safe from subcontractor defaults

If you’re already in the construction business, then you know that you need construction general liability insurance as well as a Contractor License Bond. But did you know that there are other bond products that can keep your business safe from subcontractor defaults?

Even though you probably have already developed sound business practices that help identify qualified subcontractors, sometimes a project requires an even higher level of risk management.

Subcontractor Performance Bonds

If you’ve ever bid on a government project, then you probably already know what a performance bond is. But if you haven’t, a performance bond is a guarantee to the owner that the work in the contract will be performed. A formal contract is required. Usually, a performance bond costs about 1%-3% of the contract amount.

Not only can performance bonds be purchased for the general contractor, but many general contractors require their subcontractors to get performance bonds as well. Subcontractor performance bonds are project specific and are limited to the scope of work of that subcontractor. The bond amount is usually equal to the amount of the contract between the subcontractor and the general contractor.

Subcontractor Payment Bonds

Just as you contract out portions of your project, a subcontractor may also use subcontractors. What happens if the new subcontractor you’re working with doesn’t pay their subcontractors? Well, you might be liable for those payments. A way to protect your company is to require that the subcontractor get a payment bond for their own subcontractors.

Pros and Cons of Subcontractor Bonds

The downfall to requiring your subcontractors to get bonded is that it may cause an unwanted added expense to the entire project. Those costs are usually passed off to the general contractor.

But the benefits usually outweigh the negatives. Obviously, if you’ve been using a subcontractor for years, the last thing you expect is a dispute or for the subcontractor to default. With bonds in place, if that does happen, then it is much easier to get the dispute resolved. The surety company will often step in and provide negotiation support, or if need be will provide the means to get a replacement contractor.

If you live in Sacramento or anywhere throughout California and would like more information about bonding or insurance for contractors, fill out our online Business Insurance quote form and we can get you started in the right direction.