In the construction industry, the relationships between general contractors and subcontractors are crucial for the success of their construction projects. General contractors will hire a subcontractor to perform the special skills required for their projects. However, the general contractor and owner face increasing risks if the subcontractor doesn’t perform or finish the project, especially as the project value increases. Therefore, the general contractor will require the subcontractor to obtain and provide a surety bond that guarantees a subcontractor’s performance and fulfillment of contractual obligations to the general contractor. It’s a form of insurance that provides financial protection if the subcontractor fails to complete the project or doesn’t meet the agreed-upon standards.
Requirements for Subcontractors
While obtaining bonding can enhance subcontractors’ reliability, reputation, and credibility to win more and bigger projects, it can also present significant challenges. Below are some of the difficulties subcontractors may face when trying to secure a surety bond.
- Financial Requirements: Surety bond providers usually require subcontractors to demonstrate financial stability, which can be challenging for smaller subcontractors or those with limited financial resources. Bonding companies often assess factors like credit history, cash flow, and net worth, posing barriers for subcontractors, especially startups or those with a history of financial difficulties. For larger projects, a bonding company may require a financial review or audit. Without accurate and timely financial reporting, securing a bond becomes more difficult for subcontractors.
- Lack of Experience or Track Record: Subcontractors without an extensive track record or experience in similar projects may struggle to obtain bonding. Surety companies prefer to work with subcontractors with a proven history of successfully completing projects.
- Bonding Capacity: Surety bond providers set limits on the amount of bonding they are willing to provide to subcontractors. This capacity is based on factors such as financial strength and past performance. If their bonding capacity is limited, subcontractors may face difficulties obtaining bonds for more significant projects.
- High Cost: Surety bonds come with a cost, typically a percentage of the bond amount. The price can vary depending on the subcontractor’s financial strength, project size, and bonding history.
- Complex Application Process: Obtaining a surety bond can be complex and time-consuming. Subcontractors must submit extensive documentation, including financial statements, work history, resumes of key personnel, and project details. Navigating this process can be challenging, particularly for subcontractors without dedicated administrative resources.
How Can Calvetti Ferguson Assist
Obtaining bonding can be challenging for subcontractors due to strict financial requirements, such as maintaining clean and accurate books. Calvetti Ferguson can help by providing transactional and corporate accounting support, including monthly financial reporting, reconciliations, accounts payable, and accounts receivable. If a surety contract requires a financial review or audit, our assurance professionals, who have extensive experience in the construction industry, can assist. Reliable and timely financial reporting allows subcontractors to bid on more jobs and maintain accurate records.
Our firm deeply understands the construction industry and is actively involved in organizations like the Construction Financial Management Association (CFMA), Construction Industry CPAs and Consultants (CICPAC), Houston Contractors Association, and the Surety Associations of Dallas/Fort Worth and Houston.
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Calvetti Ferguson works with middle-market companies, private equity firms, and high-net-worth individuals nationwide. Regardless of the complexity of the compliance, assurance, advisory, or accounting needs, our team is ready to help you. Please complete the form below, and we will follow up with you shortly.