Bid Bonds from Subcontractors – Why Not?
During the last couple of years and especially this year, subcontract failures are on the rise. With work going to contractors that are bidding with little to no profit there is simply no room for a bid or execution error these days. Unfortunately that is just a part of being in business and the impact of these errors can vary widely depending on the financial strength of the firm and whether it is an isolated problem or a business wide systemic issue.
Much work today is public or federally funded and requires the general contractors procuring the work to post performance and payment bonds. Even some commercial work is requiring the bonding of those general contractors that get selected to procure the work. Many of those general contractors in turn are requiring their subcontractors to post performance and payment bonds. This is prudent business in today's business climate as you simply do not know what firms are doing well or struggling. Long standing names in the industry are having issues just like lesser known firms.
A trend that is unfortunately picking up steam is subcontractors failing or pulling off work before they sign subcontract agreements or post the required performance and payment bonds. This can have severe negative repercussions for the general contractor as replacement subcontractors may come in at a more expensive price putting additional pressure on already tight construction budgets. A remedy that may help mitigate this risk is requiring subcontractors to post bid bonds.
Historically general contractors have a prequalification package they send to interested subcontractors on an annual basis. In the dynamic environment we are in today a yearly review of qualifications is simply to long of a time period. Financial disasters can happen a lot quicker than generals are reviewing information. In addition the simple form they provide to bond agents, sureties, or subcontractors to complete asking about bonding abilities are little more than fluff as they are not binding commitments.
If a general contractor would require a subcontractor to post bid bonds they would likely get a higher overall quality of subcontractor. In addition, the general contractor would know that a surety guarantee is behind the bid and that they are aware of the project at bid time, not just when the subcontractor requests a performance and payment bond they hopefully can secure. Additionally the general contractor in the request for bids could indicate acceptable surety parameters and then review the bid bonds that come in prior to committing to a subcontractor that cannot meet the requirements.
The general contractor would also have recourse against a subcontractor and surety company if a selected subcontractor does not enter into a subcontract. While it is hopeful the requirement of bid bonds would nullify the risk of a subcontractor not entering into a contract the risk is still present but should be significantly less than if a bid bond was not required.
As a subcontractor that qualifies for bonding you should look at a bid bond requirement as a positive sign. It should help reduce the amount of competition on a bid and more importantly remove from the pool of bidders lesser qualified firms that cannot get a surety to guarantee their work.
In addition subcontractors can get surety input early and potentially learn some valuable information from their surety partner. Some of the information your surety should be able to review and provide input/questions on include the scope of work, workmanship guarantees, efficiency guarantees, liquidated damage provisions, and indemnity provisions amongst other items. If there are terms and conditions being requested of you that are onerous this might be a more advantageous time to negotiate those terms than when you are being pressed to sign the contract. If terms are not negotiable at least you and your surety partner can make a go / no go business decision before wasting a lot of time, energy, and money putting together a bid.
While the thought of requiring subcontractors to provide bid bonds may seem outside of the industry norm it can be a win-win for the general contractor and subcontractors.