Findings from a recent report from Ernst & Young (EY) titled “The Economic Value of Surety Bonds” found that both public and private construction projects protected by surety bonds had lower rates of contractor default, lower cost of completion in the case of default, and were finished faster than unbonded projects. This report, conducted in collaboration with the Surety & Fidelity Association of America (SFAA), included analysis that quantifies the benefits of surety bonding throughout the life cycle of a construction project. Below, get insight from SFAA’s Peter Roth, vice president of communications, marketing and research, on key report findings, advice for business owners regarding bonding and more.
What economic value do surety bonds offer?
They provide multiple benefits throughout the entire life cycle of a construction project. These benefits include the following:
- Bonded projects cost less than unbonded projects. Seventy-five percent of project owners report that surety bonding reduces contractor pricing by an average of 3.2%.
- Unbonded projects default 2.5 to 10 times more often than bonded projects.
- Bonded projects have a lower cost of completion. Unbonded projects cost 85% more upon default and take at least two times longer to complete.
- One hundred percent of construction default experts interviewed reported sureties have the expertise, tools and resources to complete a project after a default occurs, and owners do not.
- Five times as many project owners reported that bonded projects are more likely to be completed on time or ahead of schedule, and contractors prioritize bonded projects more than unbonded ones.
- Payment protections for workers, subcontractors and suppliers if the general contractor defaults.
- Bonds pay for themselves. The cost savings on bonded projects outweigh the costs of bonds.
Why should a contractor consider surety bonding?
Surety bonds can be the difference between getting a job or not. By obtaining a bond, a contractor demonstrates their ability to execute a contract with a high-quality standard due to the thorough prequalification process that comes with the surety. Surety bonds make larger, more lucrative projects attainable for contractors who demonstrate consistent performance.
But the partnership between surety companies and contractors goes beyond a single financial transaction. If contractors encounter difficulty completing projects, they can look to surety providers for expert assistance and resources to get projects back on track.
How do surety bonds impact public and private projects? Do the impacts differ for each sector?
Whether taxpayers or private owners foot the bill, surety bonds provide savings and risk management protections — default or no default.
Surety bonds are required by law for most federal and state projects across the country because of the protections and savings they provide, and many private developers require them for the same reasons. Private and public project owners alike understand the value in the risk management and cost-saving benefits surety bonds provide.
Recent findings from EY’s “The Economic Value of Surety Bonds” report show that unbonded projects are more likely to default than bonded projects. Can you explain the contributing factors?
Surety bonds ensure contractors are appropriately vetted in the prequalification process to confirm relevant work experience with similar projects; sufficient workforce and expertise to undertake the entire backlog of expected work; and the financial ability to manage a project through completion, paying all workers, subcontractors and suppliers.
Why do bonded portfolios generally outperform unbonded portfolios?
Three primary factors contribute to the strong performance of a bonded portfolio versus an unbonded portfolio:
- Improved or lower contractor pricing.
- Lower rate or likelihood of default by contractors.
- Lower cost of completion upon default and necessary completion expertise.
Do certain types of projects benefit more from surety bonding? Why or why not?
Projects large and small, complex and straightforward, carry risks; therefore, all benefit from the protections and cost savings surety bonds provide. The more complex and costly a project is, the more risk it has, and the more it will benefit from a surety bond. That holds true for all construction types — roads, water systems, schools, hospitals, hotels, etc.
Has the Infrastructure Investment and Jobs Act (IIJA) impacted the surety industry? How could surety bonds affect contractors seeking infrastructure projects?
Undoubtedly, the IIJA will have an enormous impact on the construction and surety industries and infrastructure development across the country. The bill will distribute $1.2 trillion of federal funding into construction projects across the country, which will be matched by at least the same amount in state funds. Most, if not all, of these projects will require contractors to be bonded at either federal or state threshold levels and will provide substantial new opportunities for contractors to expand their businesses.
With so many new projects being approved and proceeding, large amounts of federal and state taxpayer money are on the line. Surety bonds can help contractors complete these projects responsibly and efficiently, so communities reap the benefits of public investments; taxpayer dollars are spent wisely; and there is protection for workers, subcontractors and suppliers in the case of default.
What advice do you have for construction business owners when it comes to surety bonding?
Suppose you have never been bonded or want to understand how to expand your bonding capacity better. In that case, we offer the SFAA/NASBP Contractor Bonding Education & Mentoring Program — a free program that helps small, new, emerging, minority-owned and disadvantaged contractors learn how to qualify for surety bonds. The program is 100% online and can be completed on your schedule in one to four hours. Upon completion, you can enroll in the program’s mentoring phase, which provides one-on-one mentoring with leading surety industry experts.
In addition to this resource, we encourage contractors to contact a bond producer or surety company to discuss your specific business objectives and begin a relationship with these resources.
Is there anything else you’d like to share with our readers?
Readers can download the complete EY study and communications toolkit at surety.org/suretyprotects.