Subcontractor Bonds on GC/CM Projects

Many states permit the use of public works contracting methods different from the traditional Design-Bid-Build model.  These alternative models include Design-Build, Job Order Contracting, and General Contractor/Construction Manager (also known in some states as CM at Risk or CM/GC).

Mandatory or Discretionary Bonds:  Under Washington State's General Contractor/Construction Manager (GC/CM) law, the contractor is required to obtain a payment and performance bond from all subcontractors with a subcontract amount over $300,000 [RCW 39.10.380 (3)].  At the contractor's discretion, they may require a payment and performance bond from subcontractors with a subcontract amount of $300,000 or less.

Who Pays for the Bonds?  Who pays the cost of such subcontractor bonds?  One of the more complex areas of GC/CM contracting is the various cost categories that comprise what is known as the Total Contract Cost.  

Required Bonds Included in the MACC:  Because subcontractor payment and performance bonds are required by law for subcontracts over $300,000, the cost of these bonds should be included in the bids submitted by the subcontractors and becomes part of the Maximum Allowable Construction Cost (MACC) that is negotiated between the public agency and the contractor, often before any subcontract bid packages are advertised.

Discretionary Bonds Included in Overhead and Profit:  When a contractor decides to require a subcontractor with a subcontract of $300,000 or less to obtain a payment and performance bond, it represents a risk mitigation strategy and business decision of the contractor.  Therefore, in my opinion, the public agency should not directly pay for such payment and performance bonds.  Instead, the cost of these bonds should be included in the contractor's overhead and profit amount, which is actually bid by the contractor as part of the GC/CM selection process.   In Washington State, this overhead and profit cost category is know as the Percent Fee.

State Law Silent on Who Pays for Discretionary Bonds:  Washington State law does not specifically dictate how subcontractor payment and performance bonds for projects of $300,000 or less should be paid for, and there may be difference practices and opinions on this issue.

Practical Tips:

• Address in RFP:  Regardless of the decision made by a public agency about how the cost of bonds for subcontractors with subcontracts of $300,000 or less should be paid for, the Request for Proposals document issued by the public agency should clearly address the agency's position on the cost of these bonds so that all contractors will be pricing the project on the same basis, and to help ensure smooth administration of the project.

• Include Cost Breakdown on Subcontract Bid Form:  In order to ensure that the cost of the subcontractor's payment and performance bond for subcontracts of $300,000 or less is appropriately tracked and paid for, such subcontract bid packages should include a separate line item for subcontractors to bid for the cost of the bonds.  If the public agency allocates these bond costs to the Percent Fee, by including the costs on the subcontract bid form, the public agency can ensure that these costs are not rolled into the Maximum Allowable Construction Cost (MACC), but are separately identified as a cost that the contractor bears as part of the Percent Fee.

Mike Purdy's Public Contracting Blog 

© 2011 by Michael E. Purdy Associates, LLC 

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