If you’re a general contractor, you know the right subcontractors can mean the difference between a smooth job and a million headaches. While a surety company won’t tell you how to run your business, there are certain aspects of subcontracting we take into account when underwriting a surety bond. After all, we need to be certain that you can complete your contract, and a GC’s success hinges on hiring good subs. So here are four questions to keep in mind the next time you select a subcontractor:
1) Are you properly vetting your subcontractors?
If you don’t already have a policy in place, establish a formal vetting process for qualifying your subs. At a bare minimum, call their references. Also ask to see a copy of their financial statements to make sure they have the capital to finish the job. They should have the skills and experience to perform the job, and the manpower and financial resources to complete it.
Check the résumés of your subs’ project managers as part of your prequalification. If you are satisfied with a PM’s resume, specify that they be kept on the subcontract from start to finish. Many times we hear that a subcontractor has promised to put its “A Team” on a project only to find later that it hired an unknown project manager to run the job.
Think about the questions we would ask you on a bond application. Those are the same ones you should be asking your subs. Have they done this type of job before? Do they have the right equipment? Do they have the labor they need? What's their cash flow? How are their receivables? Do they have other projects that must be completed before yours? Is this a larger job than normal for them? To avoid problems down the road, do your due diligence before you hire your subcontractors. And remember, you can never ask too many questions!
2) Is the subcontractor familiar with the territory?
If a subcontractor isn’t familiar with the territory, that could be a concern. If they’re using labor that isn’t in the territory, that could become an issue, too. Whenever contractors go into a new territory, we like to be sure they are prepared for that market. A GC may want to use a subcontractor it knows, but the sub may not be familiar with the market or the labor in that market. This can be a real problem, given the current shortage in skilled construction labor. So make sure your subs are familiar with the territory. More on red flags for contractors.
3) Who are your critical-path subs?
How much of the work will be performed by critical-path subcontractors? Chances are, it’s a large percentage of the job. These subs can make or break your project. If they’re unable to complete their work or don’t perform to the specifications in the contract, it can severely impact your ability to finish the job on time and on budget. In some cases, if a key subcontractor were to fail, the entire project might be in jeopardy. It’s essential that these subs be thoroughly vetted.
4) Are your subcontractors bonded?
Make it a point to ask if your specialty and critical-path subcontractors are bonded. In fact, your surety company may very well insist that certain subcontractors be bonded before they will bond you. You may have long-standing relationships with some of your subcontractors and be reluctant to ask them to get bonded. That’s understandable, but bonding is an added assurance that they will meet the requirements of their contract. When subcontractors are bonded, it gives you the ability to make a claim if they fail. And, unfortunately, one of the biggest reasons a job fails is because of subcontractors. A job may be out of territory for them or a much larger job than they’ve worked on before. Bonding them helps reduce your exposure.
Carefully selecting the right subcontractors can make your life a lot easier. As the old saying goes, a business is only as good as its people. Hire good subcontractors, and it can make all the difference in the world. For more advice on bonding subcontractors, or anything regarding surety and growing your business, contact an appointed agent, or reach out to an Old Republic Surety branch nearest you.
Dan Pope is the Senior Vice President of Underwriting. Dan is responsible for continuously improving our underwriting philosophy and appetite as well as fine-tuning our underwriting operations. Prior to joining Old Republic, Dan held various positions in the in surety field for over 25 years, most recently as Vice President and Senior Underwriting Officer for National Accounts at Zurich Surety. Dan started his career with Westfield Insurance Company as a surety underwriter. After passing the Ohio Bar, Dan moved to Liberty Mutual Insurance as a Surety Claims Counsel. Dan returned to underwriting when he joined Zurich Surety as a Senior Underwriting Officer. While at Zurich, Dan performed various roles underwriting and managing Middle Market contract accounts as well as a portfolio of National Accounts largely in the Western states.