Surety Bonds Offer Protections and Economic Benefits to Both Public and Private Sector Construction

This publish is a part of a collection sponsored by IAT Insurance Group.

The excellent storm of inflation, supply-chain disruptions and ongoing labor shortages is including extra threat elements to building initiatives in 2023.

Despite year-over-year progress, the development business continues to be dealing with a 400,000-plus employee deficit.^[1] At the identical time, inflation is contributing to the rising value of building supplies, and supply-chain bottlenecks proceed to have an effect on the well timed supply of vital supplies and merchandise. These strain factors threaten the worthwhile completion of building initiatives, which has the potential to influence the viability of building corporations.^[2]

To keep on observe regardless of financial headwinds, private and non-private undertaking homeowners leverage surety bonds. In truth, surety bonds have offered this assurance to the federal authorities for the reason that enactment of the Miller Act of 1935, which mandates bonds for federal building initiatives exceeding $150,000. Many states have a model of the Miller Act generally known as Little Miller Acts.

Like the federal government contracting area, a key good thing about surety bonds for personal homeowners contains decreased chance of default since contractors have been pre-qualified by a surety firm and might take consolation that the undertaking will finally be accomplished, even when the bonded contractor is unable to take action by itself.

3 financial protections offered by surety bonds

While their chief aim is to mitigate the danger of a contractor default, surety bonds provide a number of financial advantages for any bonded undertaking in keeping with the November 2022 Ernst & Young report “The economic value of surety bonds,”^[3] ready for The Surety & Fidelity Association of America (SFAA).

There are three important methods surety bonds add financial worth to non-public and public building initiatives.

1. Lower value of undertaking completion. In the occasion of a contractor default on a undertaking, the fee to complete it may possibly balloon considerably. In truth, initiatives with no surety insurance coverage value 85% extra to finish than surety-bonded initiatives, in keeping with the EY report. Substantial mitigation of completion prices is pushed by the experience of a contractor’s surety. Sureties can assist the contractor work via monetary hurdles on the again finish or they’ll make the most of their huge community of sources to finish the undertaking by different means. More than 90% of respondents to the EY report consider undertaking homeowners and builders shouldn’t have the identical excessive stage of experience and sources because the surety firm to get a building undertaking to completion.
2. Lower fee of undertaking default/nice timeliness of completion. According to the report, 50% of householders/builders consider initiatives with surety bonds usually tend to end on or forward of schedule, whereas solely 10% say surety-bonded initiatives are much less prone to end on or forward of schedule. In addition, practically 5 occasions as many property homeowners agreed that contractors put the next precedence on surety-bonded initiatives within the face of economic difficulties, versus these which are unbonded. The building supervisor or architect is extra prone to be concerned in oversight of a bonded undertaking as nicely, probably serving to to forestall loss.
3. Lower contractor pricing. Surety bonding reduces contractor pricing, in keeping with 75% of householders/builders surveyed. This value discount relies on confidence that the contractor will meet its necessities for undertaking completion and fee of subcontractors that may solely be gained when a third-party is backing the contractor. Furthermore, contractor pricing on surety-bonded initiatives is, on common, 3.2% under undertaking worth.

Bonus protections provided by surety bonds

These financial advantages give undertaking homeowners peace of thoughts on particular person initiatives, however the general better influence might come from the behind-the-scenes involvement of the surety firm itself.

During the underwriting course of, surety underwrites the contractor utilizing the three Cs:

• Character: Examines how a building firm interacts with these they do enterprise with, corresponding to their suppliers and subcontractors. It additionally opinions their credit score reviews to see if payments are paid in a well timed method, their claims historical past, and if they’re concerned in lawsuits. In brief, the repute of the enterprise and its key executives and homeowners are carefully evaluated.

• Capacity: Focuses on the group’s expertise, space of experience and the kind and measurement of labor accomplished. The surety evaluates the agency’s earlier experience primarily based on scope of labor, contract worth, location, and the undertaking homeowners. These elements are then used to judge new bond requests.

• Capital/competency: Digs into the financials of the corporate, together with analysis of present and prior undertaking profitability. Do earnings maintain from inception to completion? The surety evaluates the stability sheet and determines if firms have the required capital to help their marketing strategy. The forms of financing and credit score entry the corporate has are given a complete evaluate. Finally, the surety will view the corporate’s monetary tendencies and whether or not they’re pointing up or down.

Sureties additionally act as consultants and enterprise advisors. With a surety bond, homeowners and builders achieve the next stage of oversight throughout the undertaking timeline from the underwriting staff. Once a contract is executed and a bond is issued, the surety will monitor the undertaking for any important adjustments throughout its lifecycle that might improve threat to the undertaking: Examples of how the surety may match with the contractor in the course of the course of a undertaking embody:

• Evaluating undertaking priorities and fostering dialogue about changes which will have to be made
• Analyzing engineering and architectural plans and mediating any disagreements
• Assisting in managing the contractor/proprietor relationship
• Helping perceive the necessity for a brand new technique ought to the dangers change over the course of the undertaking
• Advising on the importance of any points that come up and making strategies on priorities within the new threat panorama
• Working with the contractor to chart a revised strategy to resolve any points earlier than they grow to be claims

Surety bond underwriters and claims professionals usually work quietly behind the scenes, retaining the undertaking going within the face of challenges that threaten to halt a undertaking. For instance, if a contractor runs into unexpected monetary misery in the course of the undertaking, the surety firm might step in (at its discretion) and hold the contractor afloat financially to make sure undertaking completion with out incurring loss or the necessity for an additional contractor to be sourced.

With a surety bond and a contractor’s surety prequalification, undertaking homeowners can reduce their threat and handle their budgets. Whether it’s a public company who routinely engages within the building and surety procurement course of or a non-public proprietor searching for an answer to mitigate threat, the EY examine supplies a compelling, fact-based dialogue of the financial worth these threat mitigation instruments present.

Reach out to the IAT surety staff to be taught extra about how a surety bond can assist see your subsequent undertaking via to completion and reduce your threat.

[1] Associated Builders and Contractors “October Construction Employment Ticks Up by 1,000, Says ABC,” November 4, 2022.

[2] Associated General Contractors of America “2022 Construction Inflation Alert,” February 2022.

[3] The Surety & Fidelity Association of America “The economic value of surety bonds,” November 2022.

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Construction