Construction projects today are growing in complexity as labor shortages, supply chain issues, and rising costs persist. As a result of unpredictable risk exposures like these, surety bonds continue to be an essential part of long-term business and risk management strategies for contractors.
Given this unpredictability, we are seeing general contractors (GCs) more frequently requiring subcontractors to provide bonds back to them, referred to as subcontractor bonds or sub bonds, even though there is no legal requirement to do so.
The subcontractor performance and payment bonds provided protect GCs from the risk of subcontractor failure on the project. This means, if there is an issue with a subcontractors’ performance, if they cannot complete a project, or if they are not paying their subs, supplier, or labor, the surety company will step in to either assist the subcontractor in finishing a project or find another subcontractor to complete the work.
To meet the growing requirements for sub bonds, subcontractors will need to ensure a strong relationship with their surety underwriter and agent.
State of the Construction Market
The construction industry is one of the key drivers of the US economy, accounting for 4.0% of gross domestic product (GDP) in 2022. In 2023, the market size of the US construction industry reached $3.0 trillion. While the industry helps to power a significant portion of the economy, labor shortages, supply chain issues, and inflation are slowing its growth.
Ever-present labor shortages lead to construction delays, drive up wages, and lower profit margins for projects. A report from the Associated Builders and Contractors (ABC) revealed that the construction workforce shortage reached half a million in 2023. ABC data also showed that the industry averaged more than 390,000 job openings each month in 2022—the highest level on record.
Supply chain bottlenecks continue to increase costs and delay project timelines. ABC’s most recent Construction Backlog Indicator showed that construction backlogs were high at 8.6 months. “Recent data indicate that wage pressures persist, which makes it more likely that interest rates, and therefore project financing costs, will remain higher for longer,” said ABC Chief Economist Anirban Basu.
As subcontractors continue to face the industry’s many challenges—such as labor shortages, supply chain challenges, higher lead times, and heightened costs—their bond program and team can serve as the lifeblood for their business.
Finding the Right Surety Partners
Finding the right surety agent is critical for helping subcontractors navigate the intricacies of the bonding process and secure surety solutions tailored to their needs.
The right surety agent is one who acts as a trusted business advisor and consultant as well as an advocate who can help articulate the story of the subcontractor so that the surety understands the company’s management and business plan. The surety producer that is the best fit will also have the experience, knowledge, and relationships for securing bonds that meet current and future needs.
Experience
Agents who specialize in construction surety bonds are experienced in contract bond requirements and bond underwriting and have a strong background in analyzing construction industry financial statements. These agents bring this experience to bear when helping subcontractors successfully prepare for the surety underwriting process. Every surety has different requirements for providing surety to subcontractors, and many are more stringent on key underwriting metrics such as net worth and working capital case requirements. The more specialized the subcontractor is, the more potential for increased underwriting requirements and limited marketplace appetite. An experienced surety agent can navigate their client through these differences.
Knowledge
Surety agents will know industry trends, the local construction marketplace, and the local economy. They will become trusted advisors to their contractor clients. Knowledge of GC and owner reputations—and payment tendencies—can be critical to a subcontractor client when considering whether to enter into a contract with a new GC or owner.
Keys to Building Relationships
Relationships with reputable surety companies provide access not only to underwriting but also to resources and advice that can help inform solutions. The marriage between subcontractor, agent, and underwriter is critical in the long term.
Building a strong relationship with their surety agent and underwriter can benefit subcontractors in many ways. Some of the key steps subcontractors should take to build a successful relationship with their surety agent include:
Maintaining regular communication. Communication is key in every successful relationship, so be proactive and timely – especially regarding financial updates, changes within the business, and job schedules. This will help to build trust and strengthen the relationship.
Knowing your partners. Subcontractors should take time to meet with their surety agent at least once a year. At a time when Zoom and Microsoft Teams meetings have become the norm, in-person meetings are ideal to foster personal interaction and connection and provide an opportunity to keep the surety agent up to date on work and financial performance and check in on growth plans.
Prioritizing transparency. Surety professionals don’t want to be surprised by company challenges. It is critical for subcontractors to be transparent with their surety agent on company changes—whether good or bad. Withholding information will compromise the relationship with the agent, and ultimately the underwriter. The sooner the surety team knows about a problem, the quicker it can be addressed.
The challenges facing the construction industry today are driving increased GC requirements (many times a condition from their surety) for subcontractors to secure sub bonds. By finding the right surety agent to help navigate the intricacies of the bonding process and by developing a strong relationship with a surety agent, subcontractors can meet the ever-increasing demands of bonding requirements, differentiate themselves from competitors, and position their company to succeed.
Mike Tresidder is the director of surety at Insurance Office of America. He can be reached at [email protected].