Secrets of Bonding 155: The Double Bonding Conundrum
This is America. Everyone is entitled to their opinion. But on the subject of Double Bonding (Contract Surety) we will not all agree.
So here are the facts. You will decide if this is a great idea or just a waste.
What is Double Bonding?
Also called “back bonding,” an example would be when both a subcontract and a chief (directly with the project owner) construction contract are bonded. The chief contractor is the General Contractor (GC).
The GC gives some of the work to trade contractors such as the plumbing, electrical and HVAC. These firms may be required to give a subcontract bond to the GC guaranteeing their work. In turn, the GC provides a bond that covers everything. In other words, it too covers the plumbing, electrical and HVAC. That’s the “double” part. Sounds pretty dopey so far, right? Why would anybody do that?
Turns out this occurs often. Depending on your viewpoint, it may seem helpful / basic, or just a waste of money. Let’s estimate it and you decide.
Why Love It:
With double bonding in place, material suppliers to the sub may offer better prices, since they will now be covered under a payment bond.
Subs that have been approved by a surety may perform better, which benefits the owner.
Third tier subs and suppliers may not be protected by a payment bond unless double bonding is in place. The GC’s bond may not go down to the third tier (sub of a sub.)
Many GCs have a policy to automatically bond subs over a certain dollar value. This is intended to assure delays and unpaid bills are avoided.
Subcontractors with a surety may have an advantage when pursuing new work. These are important credentials that prove they have passed the underwriters scrutiny and have the backing of a specialized guarantor.
The surety may find it easier to sustain the GC bond if major subs are bonded.
Obtaining the GC bond may be a mandatory requirement of the contract. However, the sub bonds, though not required under the chief contract, do directly assistance the GC. The GC / chief contractor is the beneficiary, and the possible claimant of such bonds.
The most important reason: It is possible that the GC’s surety may insist that major subs be bonded as a condition of supporting the GC. This can be the meaningful to acquiring the contract.
Why Hate It:
The owner doesn’t need sub bonds because the GC’s bond already covers all the work.
The owner may also be forced to bear the related costs if the sub bonds were expected. If they were not, the charges may come out of the GC’s profits.
In a competitive situation, the related costs could cause the GC to lose the project.
Sub bonds may help GC with their surety, but they do not reduce the cost or dollar value of the GC’s bond.
Love it or hate it, double bonding is sometimes done voluntarily, or it may be stipulated by the GC’s surety. There is no denying that the concept is important – so important that in some situations both the GC bond and the sub bonds are written by the same surety. Why would they do that?!