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Main Contractors, Why You Should Request a Sub-Contractor Bond?

16 March 2021

 

Main Contractors (Tier 1) are often awarded large and prestigious projects and as part of the JCT or NEC contract more often than not there is a Bond requirement which they have to conform to, however it is often overlooked or not considered to look to cascade these requirements to Sub Contractors (Tier 2).

So why should you consider requesting a Sub Contractor bond on a project?

When the tender is large or requires a specialist, who is not easily replaced. 

If a large proportion of the overall contract is being awarded to one Sub Contractor or if the work being undertaken is provided by a specialist who is not easily replaced. Either of these factors should encourage the main contractor to look to protect themselves against these companies failing and having a detrimental effect on the overall project. 

Requesting a Bond from a Sub Contractor gives the Main Contractor leverage and the surety bond provides the Main Contractor with financial protection should they fail also if the works is highly specialised and there is a limited pool of Sub Contractors to get the work completed.  

If the contract contains any element of design liability.

Some Sub Contractors such as electrical, HVAC, and fire systems installers often have to provide the design and specification of the systems they are recommending, this this could have a significant impact on a projects deliverability and onward liability for the Main Contractor should there be an issue.

When the financial stability of the Sub Contractor is unknown or in question.

Surety providers carry out fairly extensive financial checks before issuing an offer to ant contractor, this is further backed up with indemnities and collateral taken by the Surety provider prior to issuing a bond. This should offer some peace of mind to the Main Contractor that if the Sub Contractor can obtain a bond then they are more likely of sound financial stability and you have the peace of mind that you have a Bond in place should they fail.

To reduce your own exposure and cost of providing the full contract bond.

One way to minimise your own costs and exposure for the full contract Bond is to insist on key Sub Contractors providing you with the same comfort of a Bond that your Employer is seeking. If you manage your own exposure to your Sub Contractors, you will be able to make savings yourself and have some reassurance also.

When your company is awarded a project and you provide the full bond you will be issuing some level of security back to the Bond provider, be it a Company Indemnity, Personal Guarantee, Cash, or other form of Collateral. However, the risk of the contract failing due to a Sub Contractor is more likely than you directly failing as the Main Contractor. Their failure on a large section of the works or niche area could have consequential effects on your ability to complete the project in accordance with your contract, ultimately resulting in a call upon your Bond and you being then asked to repay the losses to the Surety provider inline with an Indemnity or Collateral they hold.  

In short you should be at least considering and requesting Bonds in the tenders you put out to your Tier 2 Sub Contractors.

Call our specialist team now to discuss your requirements 02476 017646