Do You Need a Subcontractor Performance Bond?

When a subcontractor walks off a job mid-project, the general contractor is left holding the bag. Finding a replacement, negotiating new terms and managing the schedule impact all fall on the GC. The financial consequences can be severe, often costing far more than the original subcontract value to resolve.

This risk is real, and it raises a question worth considering before your next project kicks off: Should you require a subcontractor performance bond?

Understanding Subcontractor Financial Stress

The financial health of subcontractors across most trades has declined in recent years. Rising interest rates have increased borrowing costs. Material prices remain unpredictable. Labor is harder to find and more expensive to retain. Many subs who survived lean years are now stretched thin during busier times, unable to adjust overhead to match tighter margins.

Payment delays compound these pressures. When subs wait 50 or 60 days to get paid while their own bills come due in 30, even profitable companies can run into trouble. The result is an environment where subcontractor defaults have become a real concern for general contractors managing complex projects.

What a Subcontractor Performance Bond Actually Does

A subcontractor performance bond is a three-party agreement involving the general contractor, the subcontractor and a surety company. When a sub obtains this bond, it protects the GC from financial loss if the sub fails to complete the contracted work.

The surety company underwrites the bond after reviewing the subcontractor’s financial statements, credit history, project experience and current workload. Only subs who pass this financial vetting receive approval. This prequalification process has value on its own because it provides independent verification of a sub’s ability to perform.

If a bonded subcontractor defaults, the surety steps in. The surety might help the original sub complete the work, find a replacement contractor or reimburse the GC for completion costs. This protection matters most on larger projects where a single trade failure can create delays and cost overruns that affect the entire job.

When Bonding Makes Sense

Federal construction contracts exceeding $150,000 require prime contractors to furnish performance and payment bonds under the Miller Act. Most states have similar laws for public projects, though thresholds vary. While these requirements typically apply to prime contractor bonds, many GCs working on bonded projects also require bonds from their major subcontractors.

Beyond legal requirements, several situations call for subcontractor bonding. Working with a new sub for the first time carries uncertainty that a bond can help address. When a single trade represents a large portion of the contract value, bonding that subcontractor reduces your exposure. Specialized work that would be difficult to replace mid-project also warrants consideration.

Your own surety relationship factors into this decision as well. On larger bonded projects, your surety may ask about the bonding status of your subcontractors. Requiring sub bonds demonstrates careful risk management.

What Bonds Cost and Whether They’re Worth It

Subcontractor performance bond premiums typically run between 1% and 3% of the subcontract value. A financially strong sub with good credit generally pays less. Higher-risk contractors pay more.

Most contracts allow subs to include bond costs in their bids, passing the expense to the project. The SBA Surety Bond Guarantee Program also helps smaller subcontractors obtain bonding, with contract limits up to $9 million for non-federal work and $14 million for federal contracts.

Other Ways to Manage Subcontractor Risk

Not every subcontractor can get bonded. Not every project justifies the cost. When traditional bonds are not available or practical, other options exist.

Strong prequalification processes matter. Review financial statements. Check references from other GCs. Verify current workload. Assess experience with similar project types. Contract provisions can also help manage exposure, including joint check agreements for material suppliers and payment structures tied to verified completion milestones.

The goal is matching your risk management approach to the actual risk each subcontract presents.

Partner With Experts Who Understand Construction Finance

At James Moore, our construction CPAs work with contractors throughout Florida and the Southeast to build the financial systems that support growth and bonding capacity. Contact a James Moore professional to discuss how we can help your business.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.