One trend in the construction business is joint ventures. These ventures have become increasingly common in recent years as construction projects continue to get bigger and bigger. As size grows, so does complexity, and many construction companies find themselves in need of help.
What is a Joint Venture in Construction?
Enter the joint venture. Instead of passing on a lucrative job they cannot handle alone, a company enters into a partnership between one or more other construction outfits to take on a large commercial job.
These partnerships ensure companies can share risks while increasing their expertise and expanding their market reach. Often, it's a win-win for all involved. When entering into joint ventures, the key is covering each other's bases.
For example, let's say you have one giant construction company in Las Vegas. This company has the resources, experience on massive projects, and ability to bond whatever is necessary. Although this company typically stays in their area, there's a huge development going on in Grand Junction, Colorado.
Next, you have a local construction company in Grand Junction. They aren't big enough to handle this project alone. They simply don't have the experience handling big developments like this one, nor do they have the bonding capability. However, they do have the local knowledge and expertise.
A joint venture could form between these two companies to tackle the huge project. The local company can provide the local knowledge and manpower. The huge company provides the expertise, planning, and bonding capacity. It's a win-win for all involved.
What is a Subcontractor Bond?
Why is bonding capacity so critical to these joint ventures? First, it's important to understand what a subcontractor bond is. A subcontractor bond is an explicit contractual agreement that guarantees the completion of a subcontract by a surety, if the original subcontractor fails to complete the full scope of work for the project.
Owners know that requiring every subcontractor to be bonded on large projects ensures their protection against any downside risk that a contractor fails to perform work they were hired to do. Once obtained, these bonds make sure the labor is completed in a faithful and honest manner.
Why Owners Prefer Subcontractor Bonds
Many owners and project planners require any subcontractor to be bonded before beginning to work together. While contractors can use subcontractor default insurance to transfer risk, many prefer bonds for a number of reasons.
One of these reasons is using a surety to investigate the capacity, character, and ability of any subcontractor. Through detailed underwriting, the surety will be able to note exactly what a contractor is capable of. This removes the vulnerabilities for many owners when hiring for large projects.
Subcontractor default insurance also encompasses a catastrophic insurance policy. This means high deductibles, co-pays, and more. A subcontractor bond covers extra costs and offers no resistance to getting the job done. These bonds cover 100% of the entire scope of the project for the contractor. As an owner, you'll never have to be worried about only getting a percentage of that.
Subcontractor Bonds & Security
Owners tend to prefer subcontractor bonds to all else these days. The reasons listed above were just a few of the many reasons bonds beat out default insurance on large construction projects, especially joint ventures.
Due to the surety underwriting, these bonds tend to foster a relationship of trust between owners and subcontractors. And as anyone in the construction industry can attest to – a relationship built on trust has a much better chance of lasting than most built in the industry.
If you have questions about Joint Ventures & Sub-Contractor Bonds contact Skyline Risk Management, Inc., (718) 267-6600 to voice your concerns.