Moving Forward With "Back Bonds"

The term "Back Bonds" is a variation of the expression to "bond back" a construction project

, meaning the bonding of subcontracts back to the GC. These bonds are more commonly referred to as subcontract bonds, or "sub bonds." They play an increasingly important role on construction projects due to the weak construction, banking and bonding markets.

General Contractors bond back a subcontract to protect their interests on key aspects of the overall project. The sub bond provides is a resource to assure critical work will be performed on a timely basis in accordance with the contract documents. The bonds may also be required by the GC's surety as a means of spreading the project exposure.

Laborer and Material Suppliers benefit as well. These bonds guaranty they'll be paid on the bonded project.

Subs need them, GCs and their sureties require them, and labor / material suppliers want their protection. Subcontractors and their surety agents need to know how to arrange for these important instruments.

The bonding of subcontractors is considered more difficult than bonding a General Contractor; they are lower in the food chain. Subs can be victimized by disputes between the GC and project owner. Some sureties refuse to bond subs; others limit their writings to major trades such as plumbing, electrical, and mechanical. Sureties are looking for staying power when they evaluate a subcontractor. In addition to expertise and stability, the sub must show enough financial strength to deal with delays, interruptions, and "pay when paid" contracts. Here are some ways for subs to put their best foot forward and qualify for Subcontract Performance and Payment bonds:

Let's start with the obvious leave earnings in the company. Build net worth. Protect liquidity. Don't use the company as a bank.

Undercapitalized companies can be bolstered permanently by adding additional "paid in capital." A short term fix is to loan money to the company and subordinate the debt if the surety agrees to recognize this strategy.

Open or silent joint venture between the company and its owners, or with other parties such as a former owner, major material supplier, sub-subcontractor, or mentor company.

Bank credit lines are an important financial resource. Sometimes new credit can be established based on the asset value of an upcoming contract. Specific project credit can be issued on top of existing lines or in the absence of a prior facility.

Collateral is often a painful "solution" for the contractor to swallow. Companies struggling to qualify for a bond can ill afford to take their cash out of play. Joint Checks are an inexpensive way to reduce the Payment Bond exposure. Funds Administration incurs an expense but accomplishes the same goal of easing the underwriter closer to bond approval.

Other ideas discontinue unprofitable operations, re-structure short term debt, break up the contract into sequential parts or have the GC buy material items directly (removing them from the subcontract.)

Sub bonds, which are bonds written "back" to the GC, are an important tool. It pays to understand them and know how they are obtained when needed.

Moving Forward With "Back Bonds"

By: Steve Golia

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