Resources & Insights

Is the Soft Surety Bond Market About to Harden?

January 26, 2017

Total U.S. construction starts this year are expected to grow 5 percent to $713 billion, according to the latest Dodge Construction forecast.

surety bonds
CCIG’s Tom Patton.

That’s far slower than the 11 percent increase seen in 2015 and yet much healthier than Dodge’s revised 1 percent estimate for 2016.

This suggests a few things. For starters, we’ll see more job growth in the sector in coming months. It also hints at more state and local bond measures that pay for highway and other big public works projects, something the new president has advocated. And, finally, it’s a clear sign that any contractor thinking about boosting their bonding capacity should get moving now.

In fact, we may be at the peak of a soft surety market at the moment.

Strong profits, cheap reinsurance and competition in the surety underwriting business have worked to contractors’ advantage over the past few years. But that could be changing and underwriting guidelines could become stricter. In other words, the sooner you act, the better the terms are likely to be.

If you’re a contractor, a surety bond gives you an edge over non-bonded contractors, signaling clearly that your company has the financial wherewithal to tackle a job and fulfill your obligations. This is especially important on public projects where taxpayers’ dollars are at risk.

In deciding whether to issue a bond, the surety will review the contractor’s financial statements, capacity to perform, organizational structure, management, trade references, credit history and banking relationships.

So, what should you do if you’re a construction business owner interested in chasing more and bigger projects?

Your bond limit is largely a reflection of your firm’s working capital, net worth and debt. Simply put, the stronger your balance sheet, the greater your aggregate limit, or dollar value of the work that a surety company feels comfortable bonding.

Here are five steps you can take to get that balance sheet in the best shape possible:

  1. Get aggressive about collecting accounts receivable.
  2. Minimize under-billings by reasonably over-billing contracts.
  3. Defer stockholder withdrawals.
  4. Defer major equipment purchases.
  5. Avoid using your bank line to purchase equipment.

All of the above will help you bolster your liquid assets and present your company in the most favorable light possible. Having the right broker is also important. Most insurance agencies offer bonds as an add-on service but, unfortunately, they’re often not experts in bonding.

Tom Patton is a Surety Advisor with CCIG. Reach him at or 720-330-7922.

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