Rancho Mesa's Alyssa Burley and Director of Surety Matt Gaynor discuss if/when a contractor should require a subcontractor to provide a performance and payment bond for a project.

Show Notes: Subscribe to Rancho Mesa's Newsletter.

Producer/Director/Host: Alyssa Burley

Guest: Matt Gaynor

Editor: Megan Lockhart

Music: "Home" by JHS Pedals, “News Room News” by Spence

© Copyright 2023. Rancho Mesa Insurance Services, Inc. All rights reserved.

 Transcript

Alyssa Burley: Hi, this is Alyssa Burley with Rancho Mesa's Media Communications and Client Services Department. Thank you for listening to today's top Rancho Mesa news, brought to you by our Safety and Risk Management Network, Studio one.

Welcome back, everyone. My guest is Matt Gaynor, director of the Surety department at Rancho Mesa. Today, we'll discuss if and when a contractor should require a subcontract to provide a performance and payment bond for a project. Matt, welcome to the show.

Matt Gaynor: Good morning, Alyssa. Great to be here.

AB: We're happy to have you. So we have great clients and I know that they rely on you and your team for surety advice, particularly when they are trying to decide if they should require a subcontractor or to get a performance and payment bond as a layer of protection. So what are the benefits of requiring this type of bond when it will actually add some cost to the project?

MG: One benefit is the subcontractor prequalification process completed by their surety. The surety will evaluate the sub-contractors’ financial strength, experience and ability to perform the work. This can be extremely valuable if you've never worked with a subcontractor on past projects. Another benefit is the protection that the subcontractor will make payment to their suppliers and lower tier subcontractors. The payment bond transfers the risk of these payments to the subcontractor surety. This can be very important since we see more claims on the payment bond rather than claims on the actual performance of the contract. And last but not least, if the subcontractor has a critical role in the overall completion of the project or has a special trade expertise, the bond provides protection against additional cost or delays due to a default.

AB: Okay, so when requiring a sub to get the performance and payment bond, you know that the surety has done their due diligence. Therefore, the subcontractor is likely going to fulfill the contract.

MG: That's correct. And I'm glad you used the term likely. Since we do have claims on some bond to projects.

AB: Yeah. So are there scenarios where a contractor will be required to ensure their subs have these bonds?

MG: That's a great question. Your bond company may require you to request subcontractor bonds when a trade exceeds a certain threshold. For example, as part of your agreed program, they might require all subs with contracts in excess of $500,000 to provide a bond back to you. In fact, we recently supported the contractor client on a project that was two times larger than any project they had completed in the past. The decision to bond back to three largest subcontractors made the bond company comfortable enough with this risk transfer to support the project. Otherwise, they probably would not have signed off on the request.

AB: Alright. So could a contractor decide to enable a policy that requires all their subs to get performance and payments bonds on all their projects?

MG: This is another example of transferring a major portion of the risk on a project. Some contractors make it a point to bond back all their subcontractors. This can often be a reaction to a past project where a subcontractor defaulted or went bankrupt and the client did not have the protection of a bond.

AB: Okay. So we could see that potentially. So, Matt, if listeners have questions about their bond program, what's the best way to get in touch with you?

MG: So I can be reached at (619) 937-0165 or mgaynor@ranchomesa.com.

AB: Alright. Well, Matt, thank you so much for joining me in StudioOne.

MG: Thanks Alyssa. Enjoy your day.

AB: This is Alyssa Burley with Rancho Mesa. Thanks for tuning into our latest episode produced by StudioOne. For more information, visit us at rachomesa.com and subscribe to our weekly newsletter.