Surety Outlook 2015
Things Are Lookin’ Up
The construction industry has been feeling the strain from tight budgets and lack of public spending on the federal, state, and local levels. But the boost in private spending is making the outlook for 2015 a little brighter.
The Architecture Billings index was 53 in August, demonstrating an increase in demand for design services. The highest scores were in the Northeast (58.1) and the South (55.1). Additionally, the unemployment rate for the construction industry has been declining steadily. It was down to 7 percent in September, with the addition of 3,200 nonresidential construction jobs, according to the U.S. Department of Labor.
There may be the temptation to pick up as much work as possible but this could cause businesses to overextend themselves as the economy picks up, but contractors who managed the downturn well and remain disciplined are in a good position to attain surety credit as conditions continue to improve. Here’s the outlook for capacity and availability for contractors of all sizes:
SMALL (Less than $10 million)
Surety capacity for small contractors is abundant; there is more than required. The number of programs and players is growing, and competition for this segment is high. Sureties are offering “small contractor programs” with limited underwriting information needed to qualify.
MIDDLE ($10 million – $100 million)
When commercial construction activity slowed in 2009, the national sureties developed a sharper focus on medium-sized contractors. Regional bonding companies targeted contractors at the upper levels of this range, and some new sureties formed to compete for contractors in this space. This has led to excess capacity, which may or may not continue. Contractors should look carefully for carriers and a knowledgeable broker dedicated to surety bonding who have the experience, knowledge and financial backing to successfully participate with them.
LARGE ($100 million – $250 million)
Surety capacity is readily available and at even higher levels. Sureties are competing heavily in this arena, and the financially sound contractor will not have issues in securing necessary surety credit. Loss activity resulting from the great recession has peaked and is trending downward; although there are some contractors who continue to bid too low and have an abundance of under-bid work that could affect the losses in 2015. Contractors suffering from weakened balance sheets will need to be careful not to overstretch their resources as the economy and related construction opportunities improve.
MEGA (more than $250 million)
Contractors with a strong credit profile are enjoying strong surety industry support. Project sizes are bigger than ever, so this surety capacity is a key advantage for firms acquiring new projects. More sureties are becoming active in this market, although some have yet to develop the necessary resources.
Philip E. Vega, President
Contractors & Developers Bonding