Crystal Ball Says: Your Future is Full of Subcontractors
This is not meant to scare you, but it probably will. If you’re a contractor working in a union market and hiring subcontractors, the need to prequalify those subs is more important than ever. There’s a growing trend of unions pursuing a general contractor’s project-related payment bond for unpaid wages and benefits of a defunct subcontractor. This further expands the surety’s liability (and the general contractor’s) and further emphasizes the importance of an effective risk transfer mechanism for subcontractor default, or at least a subcontractor prequalification program.
Yes, it’s true that unions obtain bonds from signatory contractors that protect the union and its members against unpaid wages and benefits. However, these bonds are typically in arbitrary amounts of $10,000, $25,000 or $50,000, which in many cases falls short of the ultimate under-payment. Once the union recovers the full amount of those bonds, they look for other avenues to collect the arbitrage. When the union identifies specific projects that union members worked on during the shortfall period, they place a claim under the general contractor (GC) bond on that project. If the surety ultimately pays a claim in this instance, they’ll look for subrogation from the GC and any indemnitors for the full amount of the payment.
In general, sureties have resisted the payment of these claims and have done their best to defend their position and that of the GC. Some have been forced to pay these amounts, or in most cases, the GC is forced to step in and make these payments. It’s doubtful that any contractor has accounted for paying double wages and benefits within its initial bid for the work. It’s a straight hit to profit!
In addition, unions want their members working. This leads to an atmosphere of flexibility in the initial stages of slow payment by the signatory companies. Unfortunately, that inevitably leads to situations where the shortfall extends beyond the amount of the direct guarantee and leads right to the scenario outlined above. Whether they're simply too lenient or don’t have effective tools to catch the issue in time, it ultimately may lead back to the GC on the projects that they’ve been working on.
As GCs, the most effective way to cover that risk is to require bonds of subcontractors to cover that risk or have in place a subcontractor default insurance program (SDI). For many GCs, that’s just simply not part of the business model. If not, then some sort of prequalification program is a good place to start, but remember that it’s only a reference. Within that prequalification process, speak with the unions and the sub. They’re usually fairly open about the payment history of the signatories. Lastly, if you sense an issue with a sub, get in touch with that union again and take appropriate steps to protect yourself in case a problem arises. Remember, our ‘A’ Team is here to help.
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