Construction Bond for Subcontractors: What Sub-Tier Bonds Are and How They Work

A construction bond is a three-party agreement. The surety company backs the bond, the principal (you, the subcontractor) promises to meet certain obligations, and the obligee (often the general contractor or project owner) is the party protected if those obligations are not met.

For subcontractors, the bonds most often discussed are subcontractor performance bonds and payment bonds. A performance bond is generally meant to give assurance that your scope of work will be completed under the subcontract terms. A payment bond is generally meant to give assurance that your own suppliers, laborers and lower-tier subs will be paid.

A bond is not insurance for your business. If a claim is paid, the principal is typically expected to reimburse the surety. That is why surety companies usually look closely at a subcontractor's experience, financial strength and ability to handle the work.

Traditionally, a general contractor includes bonding language in the subcontract or bid documents. The sub is asked to provide a bond for all or part of the subcontract, and the required form, amount and timing are spelled out by the contract or the project.

To obtain the bond, subcontractors have usually worked with a surety agent or broker who submits an application to one or more surety companies. The package often includes things like financial statements, work-in-progress information, references and a description of the project. Exact requirements vary by surety, state and project.

Some subs have also relied on alternatives where the general contractor allows them, such as other forms of security. Whether any alternative is accepted depends entirely on the project owner, the general contractor and the contract terms.

The right independent surety agent may help you read the bond requirement in your subcontract and understand what is actually being asked for. They may explain the difference between bid, performance and payment obligations, and what the bond form says before you sign.

A first conversation is generally an information-gathering visit. The agent may ask about your trade, the types and sizes of jobs you have done, your financial records, your current backlog and your relationships with banks and accountants. Come with the subcontract or bid documents if you have them.

Helpful questions to ask include: What documents will the surety likely want to see? How long does the process typically take? What happens if the project changes in scope? How might I prepare for larger bonding needs over time? An agent can discuss possibilities, but no agent can guarantee approval or a particular bonding capacity.