Modern Contractor Solutions November 2024 - 16

management solution
RISK MANAGEMENT
Surety Bonds to Protect
Your Success
what contractors should know
By Marty Moss
A
s construction spending in the
U.S. continues to expand-
especially bolstered by investment
in transportation and public utility
infrastructure-contractors must balance
the wealth of project opportunities with
countervailing forces.
Margins are still under pressure from
inflation's impact on costs, and an always
litigious environment makes it essential to
thoroughly go over RFP's and contract terms
before the bidding stage to guard against
potential risks. Weighing the rightness of
prospective new projects has never been
more important, along with adequately
evaluating whether subcontractors are
sufficiently qualified.
For contractors that expect to grow and
continue their success, it is essential to fortify
their surety program. Establishing a bonding
program is integral to that success, not just
to protect owners and customers, but the
business, too. It can provide the capacity to
bid on larger projects, help grow the project
backlog, and avoid last-minute fire drills when
securing a bond.
Right now, the surety market is under
some pressure itself. Many re-insurers, which
provide support to primary insurers, are taking
heavy losses due to inflation, rising interest
rates, and contractors that are biting off more
than they can chew. The battered re-insurers
are passing these costs back down to the
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NOVEMBER 2024
primary insurers, which is leading to stricter
underwriting in some cases and possible
changes in terms. This makes it even more
important for contractors to brush up on
their familiarity with surety bonds and to find
ways to streamline the underwriting process
without cutting corners.
IMPORTANT ROLE
A surety bond is a guarantee that a company
or individual will deliver on an obligation.
Bonds are required of contractors, suppliers,
subcontractors, and project owners to
minimize risk, required by law for all public
construction projects in the U.S. and
many in Canada.
There is a rising need for surety bonds
on private projects, as owners and lenders
look for added protection against growing
risks posed by rising interest rates and costs
and labor shortages. A survey of private
construction contractors conducted by the
Surety & Fidelity Association of America
pointed to other benefits:
* More rigorous prequalification and
review was performed by bonded
projects (96%) versus non-bonded
ones (61%).
* Nearly five times as many respondents
prioritized bonded versus non-bonded
projects during financial difficulties.
* Bonded projects tend to be finished
ahead of schedule, five times as many
public and private owners said.
Other benefits include a reduction in
risk of project default, ensuring business
continuity, and providing technical and
financial assistance. Surety bonds also make
the transition from construction-to-permanent
financing easier by eliminating liens, and they
can even lower construction costs through
improved bidding competition.
TYPES OF SURETY BONDS
The three most common surety bonds for
construction are:
Bid bonds, required for some projects
(typically government), are necessary to
submit your bid. It ensures you will meet
certain requirements, like entering into the
contract in a certain timeframe and providing
performance and payment bonds. It also
demonstrates a business' financial standing,
helping it prequalify for larger and more
complex projects.
Performance bonds are the most common
type, a guarantee that work will be completed
according to a contract's specifications. It's
a recourse against defaults, whether by a
principal or a subcontractor (which are often
required to secure them).
Payment bonds guarantee the principal will
pay all subcontractors, laborers, and suppliers
under the contract.
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Modern Contractor Solutions November 2024

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