Private developers now requiring surety bonding for construction contracts, as contractor defaults escalate

Since the end of the Great Recession, many small and midsize contractors have become much more likely to encounter requirements to provide surety bonding as a condition of approval for a construction contract, according to several surety and construction risk management experts.

Already mandated for most types of public contracts, requests for surety bonds have grown increasingly common among private developers seeking to protect their investments, as contractor and subcontractor defaults in the middle market continue to rise amid sluggish recovery in the construction industry, experts said.

Still, even with market conditions firming, experts said small and midsize contractors with consistent performance histories, realistic views of their own capabilities and, most importantly, strong financial footing should be able to leverage the surety market in pursuit of public or private work, experts said.

“There are quite a few surety underwriters that are willing to entertain surety bonds for contractors at the $5 million to $10 million level,” said Erik Johansson, the Irvine, Calif.-based senior vice president of Willis North America's surety practice. “What's probably key at this point in the game is cash on hand and, obviously, that's going to be a challenge to a new entrant into the marketplace.”

During the past three years, fewer project opportunities have led contractors to compete for projects at drastically reduced profit margins than had been the industry norm just a few years ago, experts said, leaving contractors with less operating capital to cover the cost of even routine project delays. The result has been a creeping, yet predictable upswing in the number of construction companies rendered unable — or in some cases, unwilling — to deliver on contracted work, experts said.

“In some situations, subcontractors are just walking off job sites,” said Drew Brach, Grand Rapids, Mich.-based surety practice leader at Marsh Inc. “We had one instance not long ago where the subcontractor didn't even go bankrupt, and it cost the contractor more than $500,000 to replace that company. They just decided that they couldn't make any money on the job, and walked off.”

Read More: