Surety Outlook – 2026

Market trends

The surety market is holding steady as 2026 approaches, but there are slowdowns in the construction industry due to the national economic climate. Continued growth for the industry through the first quarter of 2026 has indications of being strong with projected increases in both staffing and profit margins that will continue throughout the year.

While claims have risen, there is skepticism on frequency and severity. With the influx of federal funding in 2025, the construction industry overall still showed signs of cooling off in certain areas.

Future contracted work for commercial, heavy industrial and institutional construction has slowly declined during the past year for firms with revenue between $30 million and $100 million.

There are bright spots that will assist in the ability to increase construction backlog. Data centers, schools, local and county buildings, LLB and DB projects will drive backlog growth. On the other side, material pricing rose steadily in 2025 (in some cases almost 50%), in part due to tariffs. In addition, tariffs reduce competition, which can increase both domestic pricing and the wait time for materials.

Success during the headwinds of surety company changes

Relet and replacement costs for struggling projects have increased due to last year's uncertainty, past losses exceeded estimates requiring updated claims and risk forecasts.

Yet construction spending remains near records. Disciplined project selection and risk management are supporting strong results, and the pipeline for new work is robust.

With smaller teams, project owners are combining tasks into bigger, longer contracts. We have issued fewer performance and payment bonds in 2025 compared to 2024, but the average contract size have increased. However, firms focused on smaller projects face fewer opportunities and intensified competition.

According to 2025 second quarter data - $900 million in direct losses incurred across the top 100 sureties stand as the second highest total for that period since 2004. That elevated claim activity underscores the need for careful due diligence before expanding geographically.

Reviewing local laws, codes, political environments, and obtaining required licenses can help prevent many problems. Assessing the quality and availability of the local labor force and ensuring a thorough process for prequalifying subs are also important.

Focusing on 2026 - Underbillings are one of the most telling indicators on a work-in-progress (WIP) schedule. When the amount of work completed exceeds, the amount billed; large underbillings, particularly in the later stages of a project, may point to unapproved change orders, slow project documentation, or challenges with cost tracking. To the surety, they can reflect overly aggressive revenue recognition and serve as an early warning sign for potential cash flow strain. We encourage maintaining regular WIP reviews, reconciling costs with billings, and communicating openly about disputes which helps strengthen the financial profile on your bonding capacity.

Increasing capacity during greater surety scrutiny

And margin is available as public and private investment is supportive.

Looking ahead to 2026, the contract surety market is healthy and stable. One item to watch in the coming year is bigger project sizes leading to larger claims. That said, there continues to be ample capacity in the marketplace and added underwriting scrutiny is occurring only on a case-by-case basis.