Bonding for Small Jobs

Even if you're a relatively small subcontractor, you may occasionally be asked to post a bond. It's not so complicated. July 20, 2011

In all the years I've been doing this, I've never been asked for a bond. Now a GC we started working for is asking for bonds on any job over $25K. How many of you regularly provide bonds? What is the typical rate you pay? Do you get asked for bonds on jobs that small? The biggest job we've done has been $440K and no bonding required.

Forum Responses
(Business and Management Forum)
From contributor C:
On 25k? Are you serious?

I was just covered by a long time customer under their bond on a big project - have you checked their strength out?

From the original questioner:
No, but they are one of the biggest GCs in the country. They approached us about doing several small jobs, less than $50K each. I've checked with two other shops I know that have done work for them and never had any more of a problem getting paid than with any other GC.

From contributor R:
It is unusual to be asked to bond a job that small, but not unheard of. Some of the larger national companies we deal with require bonds for all of their projects no matter how small, and others have a threshold for instances $200,000 and up. Few of our local customers require bonding unless they are very unsure of a subcontractor, or unless their customer requires it. In New Mexico there is now a law that all public work contracts over $125,000 must be bonded.

What I am finding out through harsh experience at the moment is that bonds are increasingly difficult to get, especially for subcontractors, and especially if you had a bad year last year like we did. In a sense, being required to provide a bond on a $25,000 job is a good thing, because it's probably doable if you can show any kind of financial strength, and it will look good on your record for next time if the job goes well. Don't start work without it, because if you do, it will be far more difficult to get it once you've gotten started. I could go on and on - I thought I knew it all, but I learned a great deal in the last two weeks.

From the original questioner:
The last two years for us have not been good, but we continue to pay our bills. We did manage to break even last year, but I don't think that is likely to impress anyone. Last year's sales were just 58% of 3 years ago sales. They just landed the bonding thing on us this afternoon after telling us we were low bidder and essentially have the job. But no signed contract. This isn't the first job we've done for them and had no problems in the past. But we have just been working with them a relatively short time. Pricing on commercial work has been really cutthroat. We are seeing a few more jobs for bid, but few bigger ones. The small jobs are being bid on by kitchen cabinet shops at prices of less than double materials (my cost of materials, and I think they typically pay more than we do).

From contributor S:
We are on our first bonded job. It is $750k. We have performed jobs as high as $4 million without bonding. The GCs are trying to just cover themselves more than ever because subs are bidding, like you said, less than cost. This will just cover the GCs.

We also have a project that requires a lien waiver from any supplier/vendor of ours on purchases of $500 or more. Now you know how many different vendors sometimes are required. This is on a monthly basis. What a pain.

We were asked last year to bond a job. We told the GC that actually we should get a bond from them (yes, from the GC). The GC questioned why. We simply explained that due to the 90 day schedule, we figured we would be done prior to any draw being paid. We delivered almost $900k of a $1mil project before receiving one dime. Ha.

If a GC is doing their due diligence monitoring invoices, then they really have no risk. It is us that assume a hefty risk. I have also heard of GCs seeking a bond on people that have a dumb low number. Hopefully this is not your case.

From contributor D:
It varies from state to state, but in Oregon we have to post a bond on a yearly basis as part of our state builder's license requirements. So the GCs ask for a certificate of insurance, my agent sends them a certificate so they get a discount on their liability insurance rates when all the subs are insured and bonded. Sounds like they are asking for a performance bond valued specifically for each job. This may pay off if you default before completion, so in essence it is insurance for the GC.

From contributor A:
You add the cost of the bond to the price. I bet for a small amount it's in the 2-3% range. For 25k if you have that much in assets and pay your bills, you should be able to do it. Your insurance broker should be able to do this for you. Then make sure you present the bill to the GC or have the bonding company bill the GC direct.

From the original questioner:
We got a callback on the bond from our insurance broker. We can get a bond up to $1 million tomorrow for about 4%. I thought there would be more of a hassle than that!

From contributor A:
If they will bond you to 1M, then they should be charging no more than 2% at higher amounts. I don't know the rate at 25k.