Many contractors who do work in the greater Nashville area and surrounding counties will probably need to rely on subcontractors to do much of the work on a building, residential home or other project that the contractor has been awarded.
When things go well, this economic arrangement makes sense. But Tennessee construction contractors always have to worry that their subcontractors may not pull through.
They may not complete the work they agreed to do for any number of reasons, including financial distress. Likewise, subcontractors may not pay their workers, material suppliers or others.
In these cases, the contractor may be left holding the bag.
Without proper financial protection in place, resolving an issue that really was a subcontractor’s problem can at best mean a job turns out not to be as profitable as hoped. At worst, these issues cause serious financial and legal hardships for contractors.
Construction bonds offer protection from a subcontractor’s misconduct
A subcontractor with financial stability can obtain a construction bond from a bank or insurance company. Both of these businesses routinely sell surety bonds, including construction bonds.
Basically, the bond will provide that if a subcontractor fails to live up to its contractual obligations, then the bonding company will step in and either pay the contractor up to the amount of the bond or make sure the subcontractor’s obligations get met.
Frequently, a contractor will ask for both a performance bond and a payment bond. The first supports the subcontractor’s promise to complete the work. The second applies if a subcontractor does not pay its bills.
A contractor will want to think carefully about whether and how to put a bonding requirement in its agreements with contractors. They should also deliberate what sorts of bond language they are willing to accept. Both contracts could have serious legal consequences.
Likewise, a contractor may want professional legal help should it need to demand payment from a bonding company.