INSURANCE AND WORKERS COMPENSATION


Tools to Help Subcontractors Get Bonds in Today’s Surety Market


By Dan Huckabay, President Commercial Surety Bond Agency


Tose performing public works projects are trying to meet ever-increasing disadvantaged business participation and/or local hire requirements. As a result, this forces prime contractors to consider subcontractors outside their core relationships. AB 1701, which took effect on January 1, 2018, now makes prime contractors performing private projects liable for unpaid wages, including fringe benefits and interest, owed by subcontractors to their employees. On top of these issues, craft labor is being stretched thin, which is increasing the risk of default for those subcontractors that take on too much work. Requiring bonds from subcon-


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tractors is a great way to mitigate these risks, but many prime contractors have the misconception that small subs simply can’t qualify for bonds. Te reality is in my 20 years of being in the surety business there have never been more tools and programs available for bonding subcontractors. In fact, I would say we rarely come across circumstances when a subcon- tractor can’t get a bond. Here are a few programs and tools that can be helpful


to bond subcontractors. Identify the problem early –


Identifying that a sub isn’t set up for bonding gives you a chance to help them get in contact with a surety agent that can give them options. Generally, the more time there is, the more options there will be. For example, one of the typical obstacles is not having CPA prepared financial statements, and if enough time is given


18 March/April 2018


rime contractors are facing growing risks in today’s market with their subcontractor base.


for a CPA statement to be obtained, it can dramatically improve the odds of getting a bond and also potentially lower the premium rate that will be


charged. Credit based programs – Rather


than providing financial statements, subs can now use bond programs that are just based on their personal credit. Tere are several bond companies in the market that offer these, and they will bond jobs up to the $500,000


range. Funds control – Tis is a tool


sometimes used by surety companies where they hire a third-party to manage disbursements of the subs draws on projects. Tis not only protects the surety, but also helps ensure that the prime contractor will not get hit with claims from lower tier subs or suppliers that weren’t paid as


they should have been. Small Business Administration


(SBA) Bond Program – Te SBA program has been around for a long time, but in recent years, it has become much more streamlined and easier to work with. Te way the program works is the SBA provides a guarantee to the surety company to cover a certain percentage of any losses under bonds that are written. Te SBA charges a fee, and the bond rates are usually higher, but the SBA’s underwriting standards are more accommodating to small contractors than traditional sureties, and as a result, it can be an important tool to help subcontractors


get bonded. Bond Assistance Programs –


Alameda County, San Diego Airport, City and County of San Francisco, San Bernardino Community College District, and the City of Los Angeles currently have programs similar to the SBA that provide support for small


contractors to obtain bonding in those


localities. Splitting up the contract – Some


projects lend themselves to being split into multiple subcontracts or phases, which reduces the size of the contract the sub needs to bond. Tis is most helpful when the subcontracts would be performed one after the other. For example, a job that consists of five separate buildings being built one at a time.


Modify Contract Terms – Most


prime contractors include pass-through provisions in their subcontracts that make their subs responsible for liqui- dated damages or warranty that they are responsible to the owner for. Small subcontractors will have a hard time qualifying for projects with substantial liquidated damages or warranty periods over one year, so, modifying these provisions can help the sub’s surety feel more comfortable. For contracts that take longer than one year to complete, it can also be helpful to consider releasing a subcontractors’ retention annually.


Conclusion Te more proactive primes and subs


can be with starting the bond process early, the more options that will be available. It’s also important for primes to remember that most of these tools can have higher premium rates than their standard 1 percent or 1.5 percent reimbursable amount. Paying more is never desirable, but if it allows you to save several percent because that sub’s price is lower than the rest of the bids or the sub helps to meet an important disadvantaged business requirement, it can be worth it. Additionally, it’s always important to remember, one failed sub will cost much more than any bond premium will ever cost. 


California Constructor


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