Construction Surety Trends & Market Outlook

Brian Whipple: 

Yeah, you're right, Don. In the surety marketplace, we always say that some things change every five minutes; for us, things change every 50 years. It really took the COVID crisis for us to start relying more heavily on electronic bonds, and that was 2020, so only 20, 30 years too late. That said, I think there are some unique things we're seeing in the marketplace, maybe products that have been around a little while that we're seeing more of. For instance, SDI insurance (subcontractor default insurance). There are some larger general contractors that are relying on SDI insurance far more to protect themselves from subcontractor default than your typical bonding back programs, where the subcontractors provide the GC's bonds. Instead, they're buying an insurance product that protects them against the default of the subcontractor. In my opinion, they don't get quite as much protection with that. But then again, it is an innovative and slightly new product we see out there. I think the marketplace will continue to see significant growth over the next five to 10 years simply based on the amount of infrastructure spending that we're going to see. We've obviously seen the infrastructure bills that have been passed, and that money's been somewhat slow to come out in certain areas, but we do see trends in things like rural internet access. That's going to result in significant projects to bring the internet to rural areas, which will result in significant bond needs for a lot of growing contractors. We see things like the state of the bridges, especially in the northeast, but really all over the country, where bridges have significant issues and need to be upgraded. That's going to be a significant area of growth within the bonding community. I think there's a lot of consistency with the industry, but there are certainly going to be some new and different things coming down the pike over the next five to 10 years.

Don Hoffman:

One thing we see with a lot of clients is that these very large subcontractors are starting to require bonds from their second and third tier subs. And the bonding companies say, "Look, we want you to reduce your risk; we're carrying all the weight if you default on a job, so we want this spread around."  

Brian Whipple: 

What's good for the goose is good for the gander. If a GC has to provide a bond and their subcontractors provide them bonds, I think to a certain level (we usually say it's about $250,000 and up in subcontract costs), it makes sense to really examine: should our subs bond us back?  Requiring second and third tier subcontractors to have bonds does two things: It protects you because you are holding a bond, and if they don't perform, you're able to assert your rights under that bond. As a contractor, you're sure you will discount a significant amount of your bonded liability if it is bonded back to you by your subcontractor. For example, if you put a $10 million bond in place, but you're getting $5 million of that back from your subcontractors, the surety still looks at it as a $10 million obligation, but they know in the back of their minds that a significant portion of that doesn't pose much risk to them because they have a bond in place. So, it is a really good risk management plan. 

Don Hoffman: 

Brian, I have two more questions for you. It's all good to talk about bonding and everything we can do to help people get bonds and be there as their partner supporting their company. But what advice do you have for people if there's a dispute or a claim under a bond? What do you tell your clients to do? 

Brian Whipple: 

That's a great question. The first thing you want to do is get your surety company involved as soon as possible. That's for a few reasons. Number one, they have experience in handling potential claims. They've seen these things before. In addition, they have teams of attorneys and folks internally that can help you fight those claims. And number three, they're going to be able to clarify for you what direction you should move: whether you should fight this, whether you should pay it, or whether you should find some middle ground. And so, it is really important to get your surety involved right away. I think identifying where the problem is coming from and having clear communication, not only with your surety but with whoever is bringing the claim on the bond, is also very important. That communication should not only be clear, but it should also be in writing because a lot of these disputes (as contractors note) don't get settled for two, three, or five years. You want to have all those things in writing when a claim arises to be able to rebuild the timeline down the road.

Don Hoffman: 

Thank you. We've been through many cycles. You've been doing this a long time, and bonding companies, just like every other industry, go through phases, right? Sometimes bonding companies are very open, and the restrictions are minimized in great economic times; they're a little more flexible. And then when challenges occur, and they start having defaults, claims, and they have to step up and start paying millions of dollars of bills, bonding companies start clamping down. What do you see in the current market out there for bonds right now? Are we in a period where bonding companies are feeling, "Oh, this is great, we're going to be more flexible in issuing bonds," or are they concerned about the financial conditions of the companies more than ever, where they're watching very closely and being more restrictive? What are your thoughts about the current market? 

Brian Whipple: 

Yeah, it's a great question. I think that if we look at the overall state of the market, I still describe it as relatively soft, meaning terms and conditions are not as penal as they have been at other times in history. There is capacity in the marketplace for contractors to access capital. But there is quite a bit of trepidation I think right now with where the industry potentially is going. You had these periods in 2020, 2021, and 2022 where there were contractors that were really supported in many ways by government money; you had PPP money, you had loan forgiveness, and you had a number of different programs that helped support contractors’ balance sheets. All of those are gone, so at this point, companies have to be making money on their own. They're not going to get any more handouts. I think we have started to see at least signs of concern on balance sheets for certain contractors. I think that the architectural indexes of the last six to 12 months have been trending downward, which typically means that another six to 12 months from now, there may be less work out on the street. But that's also balanced by what we talked about earlier: the spending of the federal and state governments that do tend to support a number of contractors in that arena. I wouldn't describe it as a particularly concerning market, but I think that a lot of surety underwriters have their eyes wide open to what could be coming here in the next couple of years, and they're certainly keeping an eye on it. 

Don Hoffman: 

All right. Look, I appreciate that, and I feel the same as you do about where the market stands. Overall, I think this has been a very good conversation. I appreciate some of the thoughts out there, and we certainly are here to help with other questions or things that might occur. Brian, a big thank you to you for helping with your valuable insight and sharing this with our clients and friends in the community.

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