It’s no secret in the construction industry that government projects require more than regular projects. Taxpayer dollars fund government contracts, which makes it paramount to protect every new investment. One of the ways government agencies protect taxpayer dollars is through the use of Surety Bonds. Since 1890, every government-funded construction project requires a Surety Bond. However, with the current geo-political landscape, private companies are rethinking their needs to protect their investments. Not even more than two years ago, private companies wouldn’t even think of requiring their contractors to hold a Surety Bond. The added costs didn’t make sense. Contractors valued their reputation and wouldn’t think of producing work that would require a Surety Bond. However, today, more private companies require Surety Bonds to protect their investments.
The Cost of Doing Business
Private companies have made a habit of making sure that their costs stay as low as possible. Construction is, and always will be, one of the largest start-up costs of a new business. Since the pandemic, these costs are now at record highs. These costs aren’t only in materials, which are currently up 212% in the past 3 years. Delayed supply chains slow down the process, which creates bottlenecks in an industry where time is money. A trickle-down effect from these costs raises the prices across the board. This increases litigation costs, capital calls, and financing costs. All of this results in a rising number of abandoned or delayed projects, as well as clouds on title and foreclosure. Building real estate used to be a safe investment. Now, construction projects appear to be riskier with every passing day.
The labor market has also not been kind to the construction industry. Subcontractors are fed up with supply chain issues, material shortages, and increased material costs. In response, an increasing number of subcontractors are abandoning projects before completion. Many times, quotes that were more than sufficient a few years ago barely cover half of the job. Subcontractors are losing money and just can’t afford to finish a project.
Private Companies Now Require Surety Bonds
For all of these reasons and more, private construction companies are now requiring Surety Bonds from their contractors. These Surety Bonds should help prevent subcontractors from walking off projects. These contractors just can’t finish projects due to rising costs. Surety Bonds work as insurance for the clients who hire contractors. These financial instruments help protect companies in the event that a contractor can’t afford to finish a project or uses unsafe or low-quality materials and shady practices to save money.
The most common Surety Bonds that private companies require from their contractors are Performance Bonds and Payment Bonds. Performance Bonds protect investors if a project is abandoned. They also protect the public in the instance that the construction company cuts corners or doesn’t perform the job to regulatory satisfaction. Payment Bonds ensure that all parties, including subcontractors, are paid according to their contract. The landscape of private companies requiring these types of bonds doesn’t bode well for the construction industry. It means more construction projects are no longer the safe investment they once were.
The pandemic pricing is still alive, but slowly subsiding. Lumber reached a high of $1400 in March and is now down $400 since March. However, supply lines and shortages still plague the industry, which is keeping the price high. It will be years before anything gets back to normal, and one thing is clear, Surety Bonds are here to stay. Private companies just can’t afford to not protect their investments.