| The term "Back Bonds" is a variation of the | | | | forward and qualify for Subcontract Performance and |
| expression to "bond back" a construction project, | | | | Payment bonds: |
| meaning the bonding of subcontracts back to the | | | | |
| GC. These bonds are more commonly referred to | | | | 1. Let's start with the obvious - leave earnings in the |
| as subcontract bonds, or "sub bonds." They play an | | | | company. Build net worth. Protect liquidity. Don't |
| increasingly important role on construction projects | | | | use the company as a bank. |
| due to the weak construction, banking and bonding | | | | 2. Undercapitalized companies can be bolstered |
| markets. | | | | permanently by adding additional "paid in capital." A |
| General Contractors bond back a subcontract to | | | | short term fix is to loan money to the company and |
| protect their interests on key aspects of the overall | | | | subordinate the debt - if the surety agrees to |
| project. The sub bond provides a resource to assure | | | | recognize this strategy. |
| critical work will be performed on a timely basis in | | | | 3. Open or silent joint venture between the company |
| accordance with the contract documents. The | | | | and its owners, or with other parties such as a |
| bonds may also be required by the GC's surety as a | | | | former owner, major material supplier, |
| means of spreading the project exposure. | | | | sub-subcontractor, or mentor company. |
| Labor and Material Suppliers benefit as well. These | | | | 4. Bank credit lines are an important financial |
| bonds guaranty they'll be paid on the bonded | | | | resource. Sometimes new credit can be established |
| project. | | | | based on the asset value of an upcoming contract. |
| Subs need them, GCs and their sureties require them, | | | | Specific project credit can be issued on top of |
| and labor / material suppliers want their protection. | | | | existing lines or in the absence of a prior facility. |
| Subcontractors and their surety agents need to | | | | 5. Collateral is often a painful "solution" for the |
| know how to arrange for these important | | | | contractor to swallow. Companies struggling to |
| instruments. | | | | qualify for a bond can ill afford to take their cash out |
| The bonding of subcontractors is considered more | | | | of play. Joint Checks are an inexpensive way to |
| difficult than bonding a General Contractor; they are | | | | reduce the Payment Bond exposure. Funds |
| lower in the food chain. Subs can be victimized by | | | | Administration incurs an expense but accomplishes |
| disputes between the GC and project owner. Some | | | | the same goal of easing the underwriter closer to |
| sureties refuse to bond subs; others limit their | | | | bond approval. |
| writings to major trades such as plumbing, electrical, | | | | 6. Other ideas - discontinue unprofitable operations, |
| and mechanical. Sureties are looking for staying | | | | re-structure short term debt, break up the contract |
| power when they evaluate a subcontractor. In | | | | into sequential parts or have the GC buy material |
| addition to expertise and stability, the sub must show | | | | items directly (removing them from the subcontract.) |
| enough financial strength to deal with delays, | | | | Sub bonds, which are bonds written "back" to the |
| interruptions, and "pay when paid" contracts. Here | | | | GC, are an important tool. |
| are some ways for subs to put their best foot | | | | |