Construction Business Owner, May 2007 

Most contractors are well aware that a combination of issues can create problems on any construction project. There could be financial changes in the economy, unforeseen changes in jobsite conditions, a death or illness of a key employee, rising interest rates on a bank loan, oil and materials price increases, subcontractor problems, inclement weather …. The list goes on and on.

So how can contractors position themselves to handle those risks that cannot be controlled and avoid those risks that can? Many contractors rely on surety underwriters and professional surety bond producers for their vast experience and valuable resources to avoid extreme risks and overcome challenges.

Risky Business
Because of the interdependent nature of construction, construction companies have a higher failure rate than many other types of companies. Looking at U.S. Census data from 1989 to 2002, the average rate of failure in the U.S. construction industry is almost 14 percent, while the average rate of failure for all industries is under 12 percent.

Contractor default is an unfortunate and sometimes unavoidable circumstance. According to BizMiner, an industry analysis provider, of the 850,029 non-single family building, heavy/highway, industrial building, warehouses, hotel/motel, multifamily housing and specialty trade contractors operating in 2004, only 649,602 were still in business in 2006—a 23.6 percent failure rate. Construction companies that have been in business less than one year had an even higher failure rate of 36.8 percent.

Even companies that have been in business for fifty years can fail. History has proven that old companies can fail just like new ones, and even good people can experience a business failure.
According to the U.S. Census:

• Very small firms (1 to 4 employees) have the highest failure rate
• Firms with 20 to 499 employees have the lowest failure rate
• Firms with 500 or more employees have a failure rate that falls in between the very small and medium firms

Cost of Failure
So who pays when a contractor fails? On unbonded projects, the taxpayer, construction project owner or lender does. When a project is protected with a performance and payment bond, the surety industry pays for project completion. The Surety & Fidelity Association of America (SFAA) reports that sureties have paid more than $10 billion on contract bond claims since 1992.