Contract bonds play a crucial role in the construction industry, providing financial guarantees and risk mitigation for various projects. However, recent trends and challenges have presented a bumpy path to success for both general contractors and sureties.
The Impact of Contract Bonds on Construction Industry Challenges
General contractors are paying a higher price for operating lines of credit. Interest rates for such credit lines have been on the rise. This increase in borrowing costs adds to the overall project expenses, impacting profitability and liquidity.
Supply chain disruptions have led to material shortages, delays, and increased costs. These issues have necessitated meticulous planning, alternative sourcing strategies, and proactive project management to mitigate the adverse impacts on construction timelines and budgets.
Sourcing skilled and reliable labor has been a problem for years and has only worsened in recent times. An aging workforce, declining interest in the trades among younger generations, and increased competition for talent leave contractors facing significant labor shortages. This not only affects project timelines but also puts additional strain on project costs as contractors may need to offer higher wages and benefits to attract and retain talent.
Beyond these challenges, general contractors also face mounting soft costs. Expenses related to fuel, maintenance, insurance, and employees have all been driven up by inflation.
Navigating the Changing Landscape with Contract Bonds
The residential construction sector, which experienced a boom in recent years, is slowing. While the demand for housing remains strong, the ability to deliver projects at competitive prices becomes increasingly difficult for general contractors.
This downward trend puts pressure on residential contractors to diversify and explore new avenues for growth. As a result, many are moving into the commercial construction field which will only further disrupt an unstable pricing and competition environment. We’ve seen many jobs in the $2M to $20M range with over 10 bidders and bid spreads running wild.
The private commercial construction sector is also experiencing a shift. As the economy adjusts to changing circumstances, banks are adopting a more conservative approach in approving additional project limits, new project types, and projects in new territories. This cautious stance by banks has implications for developers seeking financing and in how sureties evaluate project risks; proof of private project funding is becoming a hard requirement rather than a simple question.
Despite the challenges faced in the private sector, public work presents a contrasting picture. Public infrastructure projects, backed by government funding, have seen a surge in activity. Investment in infrastructure development, ranging from transportation to public facilities, has been a priority in many regions. The robust public sector presents opportunities for contractors to secure projects and sustain their operations amid the challenges faced in the private sector.
When you combine these factors, the future is very clear. You need an unparalleled, partnership-minded construction insurance and surety team at your side to address this complex and ever-evolving suite of Insurance, Surety, Builder’s Risk, and Wrap-Up and Captive strategies.
For more timely updates regarding the Surety, Finance & the Construction Marketplace, contact Ken today.
Ken Fontana, Surety Manager
Cottingham & Butler’s Risk Management Division 563.587.6341 | kfontana@cottinghambutler.com
Ken began his career in the insurance industry in 1996 at the corporate offices of Horace Mann Insurance. After relocating to Wyoming, he spent several years managing corporate safety programs, insurance, and claims as the RMO for a nationally exposed company engaged in numerous state and federal contracts including operations at three military bases, the Denver Federal Center, and HUD program management. He has been a licensed insurance agent for 20 years with the last 10 focused strictly on contract and commercial surety. Ken’s relationships with the nation’s top sureties and his experience give him a uniquely well-rounded approach to your overall surety, bonding, and subcontractor default insurance needs.