Construction projects today are growing in complexity as labor shortages, supply chain issues, and rising costs persist. The unpredictability of risk exposures like these makes surety relationships an essential part of long-term business and risk management strategies for contractors.
STATE OF THE INDUSTRY
In 2023, the market size of the U.S. construction industry is predicted to reach an estimated $3.0 trillion. This massive industry makes up a significant portion of the U.S. economy, accounting for 5.1% of all U.S. nonfarm payroll employment and 4.0% of gross domestic product (GDP) in 2022. Even as the industry helps power the economy, lack of skilled workers, challenges along the supply chain, and rising inflation are slowing its growth.
Labor shortages continue to plague the industry, leading to project delays, driving up wages, and lowering of profit margins. According to the Associated Builders and Contractors (ABC), the construction workforce shortage topped more than half a million this year. Data from ABC also revealed that the construction industry averaged more than 390,000 job openings per month in 2022, the highest level on record, while unemployment in the sector of 4.6% was the second lowest on record.
Supply chain bottlenecks, while easing since the pandemic, continue to increase costs and delay project timelines. ABC’s most recent Construction Backlog Indicator shows that construction backlogs continue to be at the upper end of historic levels at 9.2 months. The Associated General Contractors of America (AGC) reports that long lead times also remain for electrical equipment and construction machinery.
Rising inflation rates have slowed, but costs for some materials remain high. According to the AGC, “Cement, lumber, plywood, and asphalt coatings are some of the materials showing persistent price increases.”
As contractors continue to deal with the fallout from labor shortages, supply chain disruptions and rising costs, they will no longer be able fall back on the paycheck protection program or employee retention credit bailouts.
Finding a trusted surety broker and developing a strong relationship with him or her is critical for helping contractors secure and maintain the bond program they need to position them for success, especially as they work through challenging times.
THE RIGHT SURETY TEAM
Finding the right surety agent is critical for helping contractors navigate the intricacies of the bonding process to 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 contractor 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 specializing in construction surety bonds have the experience and background in analyzing and understanding construction contractor financial statements. Many surety agents have previously worked for a surety carrier as an underwriter. This experience helps contractors successfully prepare for the surety underwriting process. Every surety has different requirements for providing surety to contractors. An experienced surety agent can navigate their client through these differences to find the best fit for their needs.
- 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 surety market trends is also essential for understanding underwriting practices. The surety agent will continuously ensure their clients have the best program and are placed with the right company.
- Relationships: Relationships in the surety industry are everything. Relationships with reputable surety companies provide access not only to underwriting but also to resources and information that can help inform solutions and advice. The symbiotic relationship between contractor, agent, and underwriter is critical in the long term.
Relationships extend beyond just the underwriter and agent. Having a skilled agent who has strong relationships with respected construction savvy accountants, attorneys, bankers, subcontractors, suppliers, and other industry professionals can prove to be invaluable when needed. Need to establish a better bank line? Need to know if certain contractors have a good reputation? Need legal advice on a contract dispute? These can all be answered by a professional surety agent who has strong relationships with respected construction-oriented professionals in these fields.
BUILDING RELATIONSHIPS
Building a strong relationship with their surety agent and underwriter benefits contractors in two major ways. It allows for risk management planning that ensures bond programs support evolving business needs (think size, scope, geography, etc.), and it can help contractors meet their long-term operational and financial goals.
Some of the key actions contractors should take to build a successful relationship with their surety agent and underwriter include:
- Maintaining communication: Regular communication is part of every successful relationship, and contractors’ relationships with their surety agent are no different. Proactive, timely communication related to financial updates, changes to the business, and performance on jobs helps build trust, sets clear expectations, and helps ensure bond capacity is aligned with growth goals.
- Knowing your partners: Contractors should take time to meet with their surety team at least once a year. In an ever-evolving time where Zoom and Teams meetings are becoming the norm, in-person meetings are ideal to foster personal interaction and connection and provide an opportunity to keep the surety up to date on work and financial performance and check in on growth plans.
- Being transparent: It is important for contractors to be transparent with their surety partners, whether company updates are good or bad. Surety professionals realize that issues are going to come up but don’t want to be surprised by them. Withholding negative information is a sure way to compromise the relationship with the agent and underwriter. The sooner the surety team knows about a problem, the quicker it can be addressed and resolved.
CLOSING THOUGHT
The challenges facing the construction industry today make it more important than ever for contractors to find the right surety agent to help successfully navigate the intricacies of the bonding process. By developing a strong relationship with this surety agent, contractors will gain an advocate and consultant who can help set their company up for success.
About the Author:
Mike Tresidder is the director of surety at Insurance Office of America. He can be reached at michael.tresidder@ioausa.com.
Modern Contractor Solutions, December 2023
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