This is in response to a Jan. 16 column, by Joshua Levy and Bailey Steffes, called “Tools of the Trade: Avoiding subcontractor defaults.”
There is a brief mention of payment bonds but no details about the level of protection they offer to lower-tier subcontractors and suppliers.
We agree with the authors’ statement: “When a key player on a project unexpectedly goes out of business or has financial difficulty, the biggest concern for other stakeholders should be to preserve job costs and the overall budget. All money paid out must be disseminated to the lower tiers, otherwise problems will result …”
We would like to point out that the best way to manage risks associated with default is performance and payment bonds. For over a century, surety bonds have been required on public projects for that very reason.
Contract surety bonds are highly effective tools for owners and contractors to shift the risk of contractor and subcontractor failure, and for ensuring that a qualified contractor or subcontractor that is capable of completing the contract is on the job. Bonding involves a careful, rigorous and professional process in which a surety company prequalifies the contractor or subcontractor and provides assurance that the contractor or subcontractor will perform according to the terms and conditions of the contract.
A performance bond protects the owner and GC from financial risk should the contractor or subcontractor default on its contract. A payment bond protects certain subcontractors, suppliers and laborers, ensuring they will be paid subject to any restrictions and limitations imposed by statute, the contract or subcontract, or the bond.
When a bonded contractor runs into trouble, the surety often steps in behind the scenes to help prevent default, keep the project moving and keep lower-tier contractors and suppliers paid. In the event that the bonded contractor defaults, the surety takes the responsibility to deal with certain unpaid creditors, suppliers and laborers, and sees that the contract is completed. In addition, subcontractors, laborers and suppliers under the subcontract are guaranteed payment by the payment bond.
Performance and payment bonds offer protections that no other risk-management tools do. That is why surety bonds remain the best way to protect taxpayer dollars and ensure that lower-tier contractors and suppliers on the contract get paid.
— Stephanie Robichaux
communications manager, The Surety & Fidelity Association of America