Bonds offer protections and economic benefits for both the public and private construction sectors.

This post is part of a series sponsored by IAT Insurance Group.

The perfect storm of inflation, supply chain disruptions, and labor shortages is adding additional risk factors to construction projects in 2023.

Despite year-over-year growth, the construction industry still faces a deficit of more than 400,000 workers.^[1] At the same time, inflation is contributing to the rising cost of building materials, and supply chain bottlenecks continue to affect the timely delivery of critical materials and products. These pressure points threaten the cost-effective completion of construction projects, which has the potential to affect the viability of construction companies.^[2]

To stay on track despite economic hurdles, public and private project owners take advantage of bonds. In fact, bonds have provided this guarantee to the federal government since the enactment of the Miller Act of 1935, which requires bonds for federal construction projects in excess of $150,000. Many states have a version of the Miller Law commonly known as the Little Miller Laws.

Similar to the government contracting space, a key benefit of bail bonds for private homeowners includes a lower likelihood of default, since contractors have been pre-qualified by a bail bond company and can rest assured that the project will ultimately be completed, even if the bonded contractor is unable to do it on their own.

3 Financial Protections Provided by Bail Bonds

While their primary purpose is to mitigate the risk of a contractor’s default, surety bonds offer several economic benefits for any surety project according to Ernst & Young’s November 2022 report “The Economic Value of Surety Bonds.”^[3] Prepared for The Surety & Fidelity Association of America (SFAA).

There are three significant ways that bonds add economic value to public and private construction projects.

Lower cost of project completion. In the event that a contractor fails to deliver on a project, the cost to complete it can increase significantly. In fact, projects without collateral insurance cost 85% more than projects with a bond, according to the EY report. Substantial mitigation of completion costs is driven by contractor warranty experience. Warranties can help the contractor overcome financial hurdles or they can use their extensive network of resources to complete the project through other means. More than 90% of respondents to the EY report believe that project owners and developers do not have the same level of expertise and resources as the surety company to complete a construction project.
Lower project default rate/greater chance of completion. According to the report, 50% of owner/developers believe that projects with bonds are more likely to be completed on or before schedule, while only 10% say projects with bonds are less likely to be completed on schedule. scheduled or earlier. Additionally, nearly five times as many homeowners agreed that contractors prioritized bonded projects over financial distress compared to non-bonded ones. The construction manager or architect is also more likely to be involved in overseeing a bond project, which could help prevent losses.
Lower Contractor Prices. Bonding lowers contractor prices, according to 75% of surveyed owner/developers. This cost reduction is based on confidence that the contractor will meet your requirements for project completion and payment from subcontractors that can only be obtained when a third party supports the contractor. In addition, contractor prices on bonded projects are, on average, 3.2% below project value.

Bonus Protections Offered by Bail Bonds

These economic benefits provide project owners peace of mind on individual projects, but the biggest overall impact may come from the behind-the-scenes involvement of the surety company itself.

During the underwriting process, the collateral underwrites the contractor using the three C’s:

Character: It examines how a construction company interacts with those it does business with, such as its suppliers and subcontractors. It also checks their credit reports to see if bills are paid on time, their claims history, and whether they’re involved in lawsuits. In short, the reputation of the company and its key executives and owners are closely evaluated.

Ability: It focuses on the organization’s experience, area of expertise, and the type and size of work performed. The guarantee evaluates the previous experience of the company based on the scope of work, the value of the contract, the location and the owners of the project. These factors are then used to evaluate new bond applications.

Capital/competition: Dig into the company’s finances, including evaluating the profitability of the current and previous project. Are earnings maintained from start to finish? The bond evaluates the balance sheet and determines if the companies have the necessary capital to support their business plan. The types of financing and access to credit that the company has are thoroughly reviewed. Finally, the guarantee will look at the company’s financial trends and whether they are pointing up or down.

Guarantors also act as business consultants and advisors. With a bond, owners and developers get a higher level of oversight throughout the project schedule from the underwriting team. Once a contract is executed and a bond is issued, the bond will monitor the project for significant changes during its life cycle that could increase risk to the project: Examples of how the bond can work with the contractor over the course of a project include:

Evaluate project priorities and encourage discussion about adjustments that may be needed.
Analyze engineering and architectural plans and mediate any disagreements.
Assist in the management of the contractor/owner relationship
Help understand the need for a new strategy in case risks change throughout the project
Advise on the significance of any issues that arise and make suggestions on priorities in the new risk landscape.
Work with the contractor to map out a revised approach to resolve any issues before they become claims.

Bail bond underwriters and claims professionals often work quietly behind the scenes, keeping the project on track in the face of challenges that threaten to bring a project to a halt. For example, if a contractor runs into unforeseen financial difficulties during the project, the surety company can step in (at their discretion) and keep the contractor afloat financially to ensure the completion of the project without incurring losses or the need to hire another contractor.

With a surety bond and prequalification from a contractor, project owners can minimize their risk and manage their budgets. Whether you are a public agency routinely involved in the construction procurement and guarantee process or a private owner looking for a solution to mitigate risk, the EY study provides a compelling, fact-based discussion. about the economic value that these risk mitigation tools provide.

Get to the IAT Bail Bonds Team to learn more about how a bond can help you complete your next project and minimize your risk.

[1] Associate Builders and Contractors “October Construction Jobs Increase by 1,000, Says ABC” November 4, 2022.

[2] Associated General Contractors of America “Construction Inflation Alert 2022”, February 2022.

[3] The Surety & Loyalty Association of America “The economic value of sureties”, November 2022.

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