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

The right storm of inflation, supply-chain disruptions and ongoing labor shortages is including further threat elements to development tasks in 2023.

Regardless of year-over-year development, the development trade remains to be dealing with a 400,000-plus employee deficit.^[1] On the identical time, inflation is contributing to the rising price of development supplies, and supply-chain bottlenecks proceed to have an effect on the well timed supply of essential supplies and merchandise. These stress factors threaten the worthwhile completion of development tasks, which has the potential to affect the viability of development corporations.^[2]

To remain on observe regardless of financial headwinds, private and non-private undertaking homeowners leverage surety bonds. In actual fact, 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 development tasks 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 advantage of surety bonds for personal homeowners consists of decreased probability 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

Whereas their chief purpose is to mitigate the danger of a contractor default, surety bonds supply a number of financial advantages for any bonded undertaking based on the November 2022 Ernst & Younger report “The financial worth of surety bonds,”^[3] ready for The Surety & Constancy Affiliation of America (SFAA).

There are three vital methods surety bonds add financial worth to personal and public development tasks.

1. Decrease price of undertaking completion. Within the occasion of a contractor default on a undertaking, the fee to complete it could possibly balloon considerably. In actual fact, tasks with no surety insurance coverage price 85% extra to finish than surety-bonded tasks, based on the EY report. Substantial mitigation of completion prices is pushed by the experience of a contractor’s surety. Sureties might help the contractor work via monetary hurdles on the again finish or they will make the most of their huge community of assets to finish the undertaking by different means. Greater than 90% of respondents to the EY report imagine undertaking homeowners and builders would not have the identical excessive degree of experience and assets because the surety firm to get a development undertaking to completion.
2. Decrease charge of undertaking default/nice timeliness of completion. In response to the report, 50% of householders/builders imagine tasks with surety bonds usually tend to end on or forward of schedule, whereas solely 10% say surety-bonded tasks are much less prone to end on or forward of schedule. As well as, almost 5 occasions as many property homeowners agreed that contractors put the next precedence on surety-bonded tasks within the face of economic difficulties, versus these which are unbonded. The development supervisor or architect is extra prone to be concerned in oversight of a bonded undertaking as properly, probably serving to to stop loss.
3. Decrease contractor pricing. Surety bonding reduces contractor pricing, based on 75% of householders/builders surveyed. This price discount relies on confidence that the contractor will meet its necessities for undertaking completion and cost of subcontractors that may solely be gained when a third-party is backing the contractor. Moreover, contractor pricing on surety-bonded tasks is, on common, 3.2% beneath undertaking worth.

Bonus protections supplied by surety bonds

These financial advantages give undertaking homeowners peace of thoughts on particular person tasks, however the total higher affect might come from the behind-the-scenes involvement of the surety firm itself.

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

• Character: Examines how a development firm interacts with these they do enterprise with, comparable to their suppliers and subcontractors. It additionally evaluations their credit score experiences 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 fame of the enterprise and its key executives and homeowners are carefully evaluated.

• Capability: Focuses on the group’s expertise, space of experience and the kind and dimension of labor accomplished. The surety evaluates the agency’s earlier experience based mostly on scope of labor, contract worth, location, and the undertaking homeowners. These elements are then used to guage 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 corporations have the mandatory capital to help their marketing strategy. The kinds of financing and credit score entry the corporate has are given a complete evaluation. Lastly, the surety will view the corporate’s monetary developments 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 acquire the next degree of oversight throughout the undertaking timeline from the underwriting crew. As soon as a contract is executed and a bond is issued, the surety will monitor the undertaking for any vital adjustments throughout its lifecycle that might enhance threat to the undertaking: Examples of how the surety may match with the contractor in the course of the course of a undertaking embrace:

• Evaluating undertaking priorities and fostering dialogue about changes that will should be made
• Analyzing engineering and architectural plans and mediating any disagreements
• Aiding in managing the contractor/proprietor relationship
• Serving to 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 solutions on priorities within the new threat panorama
• Working with the contractor to chart a revised strategy to resolve any points earlier than they turn out to be claims

Surety bond underwriters and claims professionals usually work quietly behind the scenes, holding 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 one more 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 or not it’s a public company who routinely engages within the development and surety procurement course of or a personal 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.

Attain out to the IAT surety crew to be taught extra about how a surety bond might help see your subsequent undertaking via to completion and reduce your threat.

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

[2] Related Basic Contractors of America “2022 Building Inflation Alert,” February 2022.

[3] The Surety & Constancy Affiliation of America “The financial worth of surety bonds,” November 2022.

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