Last year our market outlook was entitled “The Good, the Bad and the Ugly”. As we now reflect back on 2010, we are struck with the following. The “good” news is that there were far fewer contractor defaults and failures than anyone anticipated. The “bad” was the intense level of competition for an ever decreasing amount of work. Ugly can best describe lack of available work in 2010.
After consulting with a number of surety markets, we see 2011 as a critical year for contractors and their surety partners. The number one observation heard, is the expectation for increased contractor failures particularly in the small general, and subcontractor segment. This increase is driven by a decreasing amount of work, as well as lower margin work that has been acquired over the course of the past two years. The general consensus among the surety markets, however is a sense of encouragement that the industry has not suffered the losses anticipated a year or two ago. Additionally the overall economy is improving, albeit modestly. The public works area will continue to be under tremendous pressure due to budgetary issues. Private works is not expected begin a significant rebound until mid 2012 and slowly at that. The housing market appears to be stabilizing and getting better. A few bright spots for contractors continue to be in the military, healthcare and a limited amount of educational work. These opportunities come with a price however, which is the proliferation of delivery methods (MATOC, MACC, design build, lease/leaseback, etc.) required to perform this work.
The largest projects (over $350,000,000.) are relatively abundant however require considerable capital or joint venture participation. This segment is subject to continued tightening of contract terms and conditions as well as risk transfer to the contractor and away from the owners. Close scrutiny and review of contracts and specs is the norm and not the exception. Surety capacity for contractors in this segment, who are strong financially, is not an issue.
The market for subdivision bond business will continue to be limited, mirroring the real estate development business.
The surety industry will face considerable challenge in 2011. Underwriters are anticipating an increase in claims and as such will move quickly to minimize their risk. While there have been new surety markets established in 2010, the overall underwriting process will require closer scrutiny of a contractors financial condition.
Your surety relationship is critical to your economic survival in 2011. As surety only brokers our focus is on understanding the marketplace and assisting contractors acquire the surety credit necessary. We encourage frequent communication with your broker and surety underwriter. Avoid financial surprises, particularly negative ones, at all cost.
Philip E.Vega, President
Contractors & Developers Bonding