Changes in the surety market have created opportunities for construction companies across the nation to achieve controlled and sustainable growth. 

A construction company must establish a strong network with legal and accounting professionals in order to be successful, but building a relationship with a surety bonding company places a contractor in a caliber of its own. Bonding capacity and prequalification transform businesses and help them prosper. 

Industry experts agree: Now is the time to either establish or grow a relationship with a surety bonding company. 

“With so much surety capacity available, creditworthy companies can find surety capacity on acceptable terms, and there is very little differentiation among the small, middle and large segments,” says Ross Fisher, chair of The Surety & Fidelity Association of America Board of Directors and senior vice president of specialty commercial for The Hartford.  

Small
The small contractor market remains highly competitive. With the expansion of the Small Business Administration’s (SBA) Surety Bond Guarantee Program, there has never been a better time for small, emerging and disadvantaged firms. The program increased the guarantee percentage for its Preferred Surety Bond Program from no more than 70 percent to no more than 90 percent; increased the Quick Bond Application from $250,000 to $400,000; and guarantees bid, payment and performance bonds for contracts up to $6.5 million (and up to $10 million with a federal contracting officer’s certification). 

“In my 44 years in the surety industry, I have never witnessed as much surety capacity and availability for small contractors as we now have,” says Howard Cowan, president of the National Association of Surety Bond Producers and principal of Cowan-Hill Bond Agency. “Small contractors will be able to grow their
companies.” 

“Now is a perfect time to establish your first bonding line, even if you do not immediately need it,” says Scott Paice, vice president and head of surety operations with FCCI Insurance Group. “Just like a bank line of credit, the best time to get one is when you don’t need it. If you establish some surety credit history now, it will be readily available when opportunities arise.”

“The expansion of the SBA Surety Bond Guarantee program and various credit-only-based underwriting programs provide small contractors with additional options to obtain surety credit,” says Steve Dorenkamp, vice president and claims manager for Merchants Bonding Company. 

Adds Paice: “The bad news is the increased number of bidders that can now obtain bonding; even the ones that you didn’t think would, or should, qualify. Not all contractors deserve to be bonded. A significant part of a surety’s value and responsibility is in the prequalification process.” 

Medium
The landscape of the medium market remains equally robust and competitive. As savvy companies incorporate bonding strategies into their business plans, many can move from the small to the medium market. The key to this transition is not to expand too quickly. Taking on a project too complex, or outside the firm’s scope of expertise, can damage the construction company’s ability to successfully transition into the larger market. 

“Middle market surety availability has grown as small contractor markets have expanded their capacity. This has been driven by strong results and favorable reinsurance terms. Due to consistently favorable loss ratios, surety capacity has expanded in the middle market as insurance carriers continue to invest in highly profitable lines of business, such as surety,” says Antonio Albanese, vice president and head of surety for Nationwide Insurance Company. 

“There appears to be no end in sight for qualified contractors to find sufficient surety capacity,” adds Michael Cifone, senior vice president of surety underwriting for Hudson Insurance Group.  “Capacity remains available in the specialty surety markets for contractors that have weak balance sheets, and successful contractors have an opportunity to increase capacity and improve terms and conditions. Contractors that struggled during the past year will also find surety support in this market.”

Mike Specht, vice president of surety for Insurica, adds, “There is more than adequate capacity available for folks in the $10 million to $100 million annual revenue range. If you’ve developed a solid relationship with your surety, there’s a good chance it will stretch for you.”

Large
Opportunity for growth abounds in the large market, but as projects become increasingly complicated, so does the risk. 

“With a lot of capacity and construction volume robust during the last five years, it’s a buyer’s market for surety bonds. The biggest issues facing contractors are finding the labor and supervision to successfully manage multiple projects. A professional surety agency that is well-versed in construction, including a reputation of integrity working with underwriters, can be a tremendous asset,” says Mike Mitchell, vice chairman and principal of Graham Company. 

“There are many surety providers for programs under $250 million. Programs in excess of this range have fewer options on a sole or co-surety basis,” says Kevin Waldron, senior vice president and director of construction for Chubb. 

“There are certain sectors, such as oil and gas and health care, where the amount of work is increasing and larger contractors are taking advantage of that,” adds Dorenkamp. “Underwriters are being challenged with creative delivery systems, such as public- private partnerships.”

Losses
Unforeseen circumstances can force even the most experienced and established contractor into default. Overall, there remains a downward trend in losses throughout the industry. 

“Surety losses are down as contractor capacity and backlogs increase. There is a slight increase in delay notices related to the lack of skilled labor,” Dorenkamp says. “Owners and general contractors supplementing labor and withholding contract funds (or assessing liquidated damages) to overcome delays will constrain cash flow and result in surety performance and payment bond losses.” 

“Contractors are benefitting by managing backlog, bonding back subcontractors and identifying onerous contract terms,” Cifone adds. “Mitigating risk involves identifying and minimizing risks in project execution, understanding contract terms and working for the right owners. Concerns to attract and retain qualified workers grow as the construction workforce ages.”

“While contractor defaults may be somewhat lower than anticipated, subcontractors need to be cautious of contract provisions that allow general contractors to supplement your labor forces to expedite the job schedule and then send you the bill at a later date,” Paice says. 

A strong, competitive market coupled with changes to the SBA Bond Guarantee Program means that construction companies are poised to grow into the future. Taking advantage of the opportunities to establish or expand a relationship with a surety company can empower construction companies to create controlled and sustainable growth. 

Bryan Surcouf is communications manager for The Surety & Fidelity Association of America. For more information, email bsurcouf@surety.org