The construction industry has been an ever-changing environment during the last decade as it adapts to the rise and fall of the market. Project owner demands and requirements have increased.
With all these changes in play, it becomes a fair question whether bonding subcontractors is still an important part of the business. The answer is a resounding yes. As the construction industry changes, so do risks.
The primary purpose of a surety is to financially protect the obligee (in this case, the general contractor) if the principal (subcontractor or supplier) does not fulfill contractual obligations. With the changes in the market, there are new reasons that this promise is so vital for contractors.
Increased competition in the marketplace presents more than one factor to the changing construction climate. During the recession, construction was one of the hardest hit industries. Although still recovering, the industry has yet to see conditions equivalent to what they were before the fall of the market. Demands of owners have changed and become surprisingly stringent. More responsibility than ever falls on the heads of contractors from the expectation to finish uncompleted designs to the need to lower overhead costs significantly to stay competitive. With increased responsibility comes an increased opportunity for risk.
The likelihood of subcontractor default is a scary, but relevant, factor in construction. A recent risk study conducted by the Associated General Contractors of America and FMI places subcontractor default as one of the three highest risks in construction. Other major risks include highly detailed and onerous contract language and a shortage of skilled laborers.
Some subcontractors have not adjusted to today’s market and as a result may not have the skilled labor needed for the job or the ability to bid competitively. That may leave the remaining subcontractors with more work than they can handle, leaving them open to default.
A surety bond can help combat these risk factors. The surety will prequalify the subcontractor and protect the contractor from financial loss if the subcontractor fails to live up to its contract. Before a subcontractor can be bonded, it must undergo scrutiny of its financial condition, ability to perform the work and experience.
Contractors are in many ways in a more precarious position than they were 10 years ago, with more liability risks being tossed to them every day. However, the risks are manageable. With proper management of these risks, contractors can know that they are protecting their business. One of the best ways to mitigate subcontractor risk is with a surety bond.
Yannis Legakis is a Partner at Skyline Risk Management, located in Queens, NY. Skyline is an Insurance, Surety and Risk Management agency, with a specialty in construction, whose clients range from 3MM to 200MM in annual sales.
Mr. Legakis has more than 15 years in the construction insurance and bonding space, with three of those years working as a controller for a construction company, which gave him an invaluable overall view from both the agency side and the contractor side. He has authored several nationally published articles on the topic of Prevailing Wage Fringe Benefit Programs and Accounting. Mr. Legakis graduated from Penn State University in 1996, with a BA in Health Policy Administration.
For more information about mitigating the risk of subcontractor default with a surety bond contact Skyline Risk Management, Inc. at (718) 267-6600.