Bonds and guarantees down the chain

Employers routinely require a performance bond and a parent company guarantee from the main contractor. Main contractors much less routinely require the same from their subcontractors.

Which is the wrong way round in terms of where the risk actually is.

Where insolvency happens

Specialist subcontractors are typically smaller, more thinly capitalised, more exposed to a single sector and far more numerous. On any given project the probability that at least one package fails is considerably higher than the probability that the main contractor does.

And the consequences fall on the main contractor, which has to complete the package and account for it upstream regardless.

What is worth taking, and when

Not on every package. On a twenty thousand pound order the administration exceeds the value of the protection. The judgement is about size and criticality.

• Substantial packages. A bond, or a parent company guarantee if there is a real parent.
• Long-lead procurement with payment in advance. An advance payment bond, or vesting with proper conditions.
• Design subcontractors. Collateral warranties, and evidence of professional indemnity cover.
• Anything on the critical path where a failure stops the site.

The commercial obstacle

Bonds cost money and the subcontractor prices them. On a competitive package that cost is visible, and the temptation is to drop the requirement to keep the price down.

That is a real trade-off rather than an error. What is an error is dropping it without recording the decision, so nobody afterwards knows whether security was declined or simply forgotten.

The smaller measures that work

Where a bond is disproportionate, other things reduce exposure at almost no cost.

• Pay for less in advance. Verify materials physically before certifying them.
• Keep retention at a level proportionate to the completion risk.
• Vesting certificates for anything fabricated off site.
• Stage payments tied to delivery rather than to order.

The register

Whatever is obtained, record it per package with its expiry. A project with eleven subcontracts, two bonds and one guarantee should be able to show that at a glance, because the alternative is discovering the composition during the week a package fails.