Matt Donovan
Regional Vice President, Contract Surety
Nationwide

Contract surety underwriting relies on a disciplined financial analysis framework that helps underwriters evaluate a contractor’s ability to complete bonded projects reliably and profitably. To gauge both financial and operational strength, underwriters focus on core metrics that reveal liquidity, leverage, profitability, and workload management—each essential to assessing risk and setting appropriate bond programs. Liquidity remains a foundational measure. Underwriters rely heavily on the current ratio and analyzed working capital to determine whether a contractor can sustain project cash demands and absorb disruptions. Strong liquidity supports short-term performance and directly influences a surety’s willingness to extend or expand single and aggregate bond limits.

Profitability metrics provide insight into operational discipline. Gross and net profit margins and return on equity help underwriters determine whether a contractor’s estimating, project management, and cost control practices are producing consistent and reliable results. Contractors with stable margins tend to demonstrate greater predictability and a lower risk of job-related losses. Sureties diligently review margin trends across multiple work-in-progress schedules to evaluate bidding accuracy, cost controls, and overall execution capability. Underwriters also evaluate leverage, most commonly through debt to equity ratios, to assess long term financial stability and vulnerability to economic shifts. Conservative leverage levels indicate a contractor with borrowing capacity & financial resilience during downturns.

These metrics, combined with regular backlog analysis & growth forecasts, as well as other analysis of trends help underwriters determine whether a contractor’s workload is appropriately sized relative to its financial base and serve as indicators of project level risk and management effectiveness. These metrics enable underwriters to make well-informed, responsible bonding decisions.

How does a contractor’s existing workforce and recruitment, training and retention programs impact its ability to obtain bonding?

Tina Hawkins
Vice President, National E&C Deputy Group Leader
Chubb

A contractor’s workforce is a primary indicator of its capacity to perform, and performance is fundamental to securing and maintaining surety bonding. Sureties evaluate not only financial strength, but also the operational infrastructure that supports consistent project execution. An established, experienced workforce signals that a contractor possesses the in-house resources necessary to pursue, manage, and successfully complete work.

Structured recruitment, hiring, and training programs demonstrate intentional investment in talent. In today’s market, skilled labor shortages remain a significant issue. Contractors that prioritize high-quality training and retention create a foundation for the successful execution and delivery of their backlog. Proven expertise, unified project controls, and a “One Team” approach directly influence profitability and reduce project completion risk. These factors reinforce the surety provider’s confidence in the contractor’s ability to grow in a deliberate and controlled manner.

The retention of senior leadership and experienced field personnel further reflects stability at all levels of the organization. These actions help to build trust with both the contractor’s surety provider and their customers. Sureties closely evaluate the character of a contractor, including its leadership, core values, and succession planning. Continuity from within strengthens long-term operational performance and supports the responsible expansion of job size and program growth.

Ultimately, a strong and established workforce translates to sustained performance. Consistent results, an aligned culture, and disciplined growth enhance a contractor’s reputation and financial profile. These qualities all lead to stronger surety support and the ability to secure and maintain bonding capacity.

Can regular communications with surety providers help construction firms access larger bonding capacity and more favorable terms?

Jason Dettbarn
Senior Vice President-National Contract Surety Leader
Merchants Bonding Company

Yes, when it’s strategic.

Contractors ready to grow often face the same challenge. You’re prepared to pursue larger projects, but your ability to compete depends on your bonding capacity. Capacity doesn’t expand with ambition alone, though. It expands when confidence is built through communication.

Some firms only contact their surety when financial statements are due or a bond is urgently needed. That reactive approach means underwriters have to make decisions with limited context, which can result in conservative limits or tighter terms. So, growth gets constrained not by capability, but by uncertainty.

The more proactive path? Viewing your surety as your risk partner and trusted guide, working with them to prepare for your pursuit of larger work. That kind of preparation is more than simply sharing financials; it’s discussing pipelines, target project size, hiring plans, equipment investments, and capital strategy. It’s about identifying potential hurdles like working capital strain, geographic expansion, or margin compression.

These early and transparent conversations can reduce uncertainty and increase flexibility. Consistent contact establishes credibility which, over time, can support higher single job limits, larger aggregate programs, and more favorable terms for you.

Bonding capacity is built on trust. Contractors who communicate proactively and treat bonding as an intentional part of their growth strategy are the ones who build it.

Paul Kennedy
Vice President, Contract Surety
IAT Surety, a division of IAT Insurance Group

The short answer is yes. I’m a firm believer that working with agents and brokers who actively facilitate communication with the surety is critical to long-term success. A surety’s role is to understand, as thoroughly as possible, how a contractor operates. That includes everything from people management and cost controls to project selection, risk tolerance, and overall decision-making.

The more insight a surety has into how a contractor approaches its business – and what drives its risk decisions – the easier it becomes to offer meaningful support and increased capacity. Operating in a vacuum doesn’t benefit either party. Open dialogue provides the context needed to evaluate opportunities effectively.

This is especially important when a contractor pursues larger projects or enters new markets. When a surety understands the thought process behind those moves, it builds confidence and makes it easier to support those opportunities.

Equally important is a contractor’s willingness to discuss challenges. Construction is inherently risky, and issues are inevitable. Sureties understand this. What matters most is transparency – being upfront about problems, outlining corrective actions, and showing how similar issues will be prevented. That level of honesty builds trust.

Communication goes both ways. The strongest relationships are collaborative. Contractors who tap into the experience a surety brings – gained from working with many clients – gain valuable perspective. At its best, that shared insight helps contractors make informed decisions and positions both parties for long-term success.

What should contractors know about the three Cs (character, capacity and capital) used to evaluate contractors for surety capacity?

Meghan McArdle
Vice President, Contract Surety
Arch Insurance Group Inc.

The three Cs—Character, Capacity and Capital—comprise the core framework underwriters use to extend credit and evaluate bonding qualifications. A good surety relationship is based on trust and the belief that all parties will honor their obligations. Trust is built through face-to-face meetings, regular communication, and timely and reliable financial reporting. Providing timely financial statements and work-in-progress schedules that reflect financial stability and operational abilities demonstrates a commitment to transparency. Accurate financial reporting establishes your capital base.

Capacity is derived from proven operational capabilities and project performance over time. Capacity can often be expanded if key underwriting concerns like owner selection, project management abilities, and sub-contractor risk are reviewed and positively evaluated.

While each characteristic is fundamentally important, it’s imperative to understand that each “C” isn’t created equal. You need to take a holistic approach to comprehending their application. Character is first because without it, the assessment of Capacity and Capital are secondary. In many instances strong character can offset a thin capital base or capacity push. Measurable financial benchmarks can be established to increase capital over time to meet capacity requirements. Capital and capacity can also expand with the right long-term strategic plan. However, a strong capital base and positive job performance cannot overcome questionable character traits. Sureties will be more inclined to increase capacity when there is a history of financial stability, operational dependability, and adequate risk mitigation, along with open communication. All are tools contractors can use to build trust and establish a strong bonding relationship.

How does an owner exiting a construction business impact the amount of bonding capacity that a surety is willing to extend?

Henry W. Nozko Jr.
President
ACSTAR Insurance Company

An owner exiting from a construction business could have an effect on the amount of bonding capacity its surety will extend.  The consequence will range from little to no effect, to a major ramification including a potential withdrawal of support by the surety.  Let’s assume the existing owner is an indemnitor and will no longer provide personal indemnification to the surety.  Let’s also assume the exiting owner is one of several owners and the exiting owner does not have an active role in operating the company, and the exiting owner is not a significant source of financial support as an indemnitor.  Additionally, the buyout of the exiting owner is not funded by the Company.  This situation would likely have little or no effect to the bonding program provided by the surety.

However, a more transformative situation could have a much greater impact on the surety program.  Assume the exiting owner is the major shareholder and the major operating manager of the company, and will no longer act in that role.  Assume the company will be purchasing and financing the ownership shares held by the exiting owner.  This type of arrangement most likely will impact the surety program significantly.  The program size might be reduced.  The program cost might by increased.  Other, less desirable underwriting terms may be applied by the surety and possibly the surety program could be withdrawn.

There are of course many variations of the above examples.  It is best to advise your surety of a pending ownership change prior to closing.  At a minimum, the surety will appreciate the heads-up and might offer minor tweaks to the transaction that could be beneficial to the resulting surety program.  Circumventing advance disclosure will, at a minimum, be less enthusiastically received by,and strain the relationship with the surety, upon its discovery of the event. 

How does an owner exiting a construction business impact the amount of bonding capacity that a surety is willing to extend?

Brock Masterson
COO—Surety Division
Crum & Forster

Personal relationships are key to strong, lasting surety partnerships between the surety, contractor, and agent. An owner’s departure can disrupt the status quo, so the surety must assess the contractor’s expertise and leadership to maintain stable capacity. The contractor will also need to maintain sufficient financial strength to continue to qualify for surety credit, which will require thoughtful financial planning tied to any sale of ownership. These material underwriting items require strategic review and communication between all parties to ensure there is no interruption in surety capacity.

It will be important for the surety to understand how management and culture of the company will be perpetuated with new leaders. Is there a long-time employee who has been groomed for an executive role, or will it be necessary to hire externally? Does the company have a formal continuity plan? Building formal plans for management perpetuation will allow for continued surety support.

Relatedly, how will the owner’s departure impact the company financially? Is there a formal buy/sell agreement in place that allows for equity to be repurchased over time or financed via life insurance? Proper planning will allow the contractor to maintain the necessary capital and liquidity needed to properly manage their business with limited reliance on outside financing that could impair the company in the event of operational stress.

By regularly discussing these strategic decisions with the agent and surety, contractors can ensure they retain a stable surety program during an ownership change.

SEE ALSO: PROVE IT: WHAT SURETY UNDERWRITERS SEEK IN CONTRACTORS

The post Executive Insights 2026: Leaders in Surety Bonding and Insurance first appeared on Construction Executive.

A range of surety underwriters recently weighed in on what they are seeking in contractors as the industry moves into its next phase.

CHANGES AND TRENDS

Many of the changes shaping today’s market are multifaceted. Brent McAllister, global head of surety underwriting for Zurich Insurance, sees what he describes as “profound” shifts.

“Driven in part by megaprojects such as data center and infrastructure work, the U.S. construction industry is navigating profound changes, where success will depend on managing escalating contract values, labor shortages and continuity risks,” McAllister says.

“At the same time,” he adds, “overall project backlogs continue to grow due to larger project values driven by rising input costs. These increases have resulted in the need for much larger bonding programs as contractors seek additional surety capacity.”

However, support is not automatic.

“Top sureties will prioritize their support of increased bonding programs for contractor clients with consistent profitability track records who maintain strong liquid financial resources,” McAllister says. “When contractor balance sheets trail backlog growth, forward-looking surety underwriting requires much deeper risk assessment of profitability trends, outlook for profit retention and the likelihood of balance sheets catching up to extended surety programs.”

Shawn Scott, chief underwriting officer, contract East, for Liberty Mutual Surety, says contractors are entering 2026 in a strong position.

“As we begin 2026, our contract clients are exceptionally well-positioned to capitalize on the accelerating wave of megaprojects reshaping the construction landscape,” Scott says. “Many contractors are entering the year with strong backlogs and a deep pipeline of high-quality bidding opportunities. Margins and growth prospects remain robust, driven by sustained investment in infrastructure, data centers and related power projects.”

Still, the landscape is evolving. “Clients are reporting fewer locally sourced projects and increasingly crowded bid lists for work under $25 million,” Scott says, a dynamic that calls for “discipline and strategic alignment.”

Cost pressures remain significant. “Cost inputs remain high due to limited subcontractor availability, higher material prices and rising labor costs with uneven skill levels,” Scott says. “As a result, resolving client issues is becoming increasingly expensive.”

Paul Nebraska, vice president for construction services at Travelers, says infrastructure funding remains a driver—but is shifting.

“Big federal programs like the Infrastructure Investment and Jobs Act have boosted demand for contract bonds over the past several years,” Nebraska says. “However, with IIJA spending decreasing in 2026, the market is watching how state and local programs, as well as other federal initiatives such as the Inflation Reduction Act and CHIPS and Science Act, sustain demand across different segments.”

He describes conditions as uneven. “Inflationary pressures on labor and materials and ongoing supply chain fluctuations can influence surety support, capacity and contractor risk profiles,” Nebraska says. “These factors shape bond access and capacity dynamics for contractors of all sizes, impacting both merit shop and union contractors alike.”

Shawn Weppelman, assistant vice president of surety for Brunswick Companies in Cleveland, Ohio, says he is seeing “an increasing number of general contractors requiring bond backs from their subcontractors.” He also notes that “in states such as California and Texas, solar-related projects continue to represent a significant portion of the work, while infrastructure spending remains steady.”

Tariffs have introduced additional uncertainty. Weppelman says that contractors have largely adapted by applying strategies and protections developed during the COVID-era supply-chain disruptions.”

Nebraska adds that while the same underwriting fundamentals apply to contractors of all sizes, differences do exist.

“For contractors working on smaller jobs or requiring transactional bond types, digital and AI-supported underwriting is increasingly helpful,” he says. “More thorough financials are required for larger bid and performance bonds.”

KEY FACTORS TO CONSIDER

Contractors pursuing bonding must prepare across multiple fronts—from company-specific financial practices to broader industry risks.

Financial statement quality remains foundational. “For multi-million-dollar deals, surety companies typically require CPA-prepared or CPA-certified financial statements,” Weppelman says.

As with any rule, there can be exceptions.

“In some cases, bonds may be approved using internally prepared statements if they are accurate and well supported,” he says. “However, this often requires additional work to ensure the financials are properly structured and presented before submission to the surety for review.”

Tax strategies also matter, particularly for contractors without an established surety track record. “Because surety underwriting places significant emphasis on working capital and equity, contractors seeking bonding must strike an appropriate balance between tax efficiency and maintaining a strong balance sheet,” Weppelman says.

Personal credit of ownership is another underwriting consideration.

“Poor or neglected personal credit can materially impact bonding capacity and, in some cases, may be the primary reason a contractor is unable to obtain bonds,” Weppelman says.

Tim Holicky, senior executive underwriter for The Hartford’s construction central bond team, cites rising material costs, talent retention challenges and labor constraints as additional industrywide pressures.

Labor shortages are driving “growing pressures,” he says, compounded by “the retirement of experienced project leaders and the ongoing challenge of managing turnover within project teams.

“At the same time, contractors are being asked to deliver larger, faster and more complex projects under increasingly unfavorable contractual risk allocations,” Holicky says.

Together, those forces can stretch companies thin. “It becomes easy for firms to become overextended, especially when accelerated schedules create significant cash-flow strain,” he says.

McAllister echoes the labor concern. “Labor continues to be the largest constraint to further growth for contractors of all sizes and across sectors,” he says, citing management staffing, project managers, engineers and craft labor shortages.

As a result, “sureties are increasingly prioritizing contractor clients who have built solid pipelines of skilled craftspeople and supervisory staff ready for roles of greater responsibility,” McAllister says.

Succession planning also is rising in importance. Holicky frames the issue directly: “What happens to the business if something happens to the founder, owner or visionary who has held the organization together?”

Identifying and developing the next generation of leaders—and establishing a clear ownership transition plan—have become pressing issues, he says.

McAllister adds that as contractors confront aging ownership, many lack succession plans. “We have seen a variety of exit plans, including private equity, ESOPs, family transition and strategic buyers, which can lead to complex financial structures requiring sureties to adapt their support,” he says.

“We encourage our clients to proactively formalize management and ownership succession plans to ensure business continuity and sustained surety support.”

Nebraska emphasizes that underwriting fundamentals remain consistent.

“Sureties are focused on the same risk fundamentals for both merit shop contractors and union contractors: financial health, backlog quality, management capability and the contractor’s ability to execute their business plan,” he says.

THE “C”LASSICS

Despite evolving trends, surety underwriting continues to rest on three classic pillars: capital, capacity and character.
Capital—the strength and quality of a contractor’s financial position—remains central.

“The strength and quality of the contractor’s financial statements” are key, Weppelman says. “And the larger the bond request, the greater the need for bonding expertise.”

Holicky puts it bluntly. “Sureties expect contractors to approach the development of their balance sheet with the same thought and discipline they apply to building a project,” he says. “At the core of a strong balance sheet is cash, because most contractor failures ultimately stem from running out of it.”

He cautions against overreliance on overbillings. “Many contractors rely heavily on the ‘bank of overbillings,’ using project owners’ funds to finance ongoing work,” Holicky says. “While this can support liquidity, it’s important to remember that overbillings must eventually be reinvested into the project. What appears as excess cash today is often a future obligation.”

He also stresses controlling overhead. “Every dollar saved on overhead expense increases your working capital and net worth by the same amount,” he says.

And discipline matters. “Contractors must be “disciplined enough to say no to additional work when it threatens their financial stability,” Holicky says.

“Ultimately, contractors succeed to the extent that they earn consistent profit at the project level,” he adds. “The income statement is simply the aggregation of profit and loss across all jobs. This makes it essential for contractors to focus on cash flow, cost control and margin management on each individual project.”

When it comes to capacity, Holicky notes that modern contractors must demonstrate management of far more than field operations.

Responsibilities now include “commodity management and forecasting, logistics and scheduling, legal and risk management, accounting, economics and cash-flow control, as well as human resources and benefits administration,” he says.

“That demonstrates that today’s contractors must operate as sophisticated business enterprises, not just builders. That sophistication is operational capacity in surety underwriting.”

Sureties also evaluate risk appetite. “That appetite becomes evident in project-selection discipline and go/no-go decision processes,” Holicky says.

Increasingly, contractors are aligning project selection with preconstruction teams to assess market fit, backlog strategy, risk profile, margin expectations, delivery method, owner reputation, subcontractor availability and internal capacity before pursuing work.

Nebraska advises contractors to pursue logical growth. “Contractors hoping to undertake significantly larger project sizes than their previous work experience may challenge their ability to secure corresponding capacity,” he says. “Underwriters like to see repeatable performance, so contractors should aim for a logical progression of project size and scope rather than making big jumps that can strain capital and capabilities.”

Weppelman notes that sureties apply heightened scrutiny when a bond request involves a project more than twice the size of the contractor’s largest completed job.

In such cases, contractors should clearly explain contract value drivers, including inflation, material cost composition, comparisons to similar completed projects and relationships with the obligee and key subcontractors.

The third and final pillar, character, speaks to professionalism and trust.

Weppelman describes it as “overall professionalism, including how the contractor presents in meetings and interacts with the surety.”

Alignment matters. “Alignment is essential regarding business growth plans, contractual risk management, balance sheet liquidity and continuity in management and ownership,” McAllister says.

Transparency is also critical. “Builders and contractors seeking surety help should maintain up-to-date financial statements with supporting documentation for WIP, underbillings, overbillings, cash flow and cash reserves,” Nebraska says. “This builds credibility.”

He also encourages proactive communication. “Be proactive in communicating the business strategy and plans with the surety and surety agent, treating them as key partners,” he says.

McAllister underscores the importance of open dialogue. “Clear, reciprocal communication should support operations rather than disrupt them, ensuring both parties have shared understanding of organizational strategy,” he says. “Promptly addressing challenges is key. Both contractors and sureties value timely, honest updates so they can respond proactively and maintain strong, collaborative relationships that support successful project delivery and sustainable growth.”

Scott offers a final reminder. “Time is valuable,” he says. “Your partners, including your surety, should provide insight into market conditions, competition and construction trends. Meetings with surety partners should set clear expectations, clarify needs and enable execution of your business plan.”

In an environment defined by change, the fundamentals remain constant. Contractors that manage capital, demonstrate capacity and exhibit character—while maintaining strong communication—position themselves to secure the surety support necessary for sustainable growth.

SEE ALSO: NAVIGATING THE CHALLENGES OF A 2026 SURETY MARKET

The post Prove It: What Surety Underwriters Seek in Contractors first appeared on Construction Executive.

Financial management is the foundation of any company—and construction companies are no different. The ability to preserve project profitability, manage cash flow, mitigate debt, retain earnings, and establish a continuity and succession plan are key to ensuring long-term success in any market. 

SEE ALSO: RESTORING THE USS ALABAMA: SURETY LESSONS FROM AN 80-YEAR-OLD BATTLESHIP

Preserving Project Profitability

Preserving project profitability extends far beyond the construction phase. It begins during the prebid process and continues through project execution and closeout, including effective subcontract management. Contractors should consider the following strategies to protect and enhance project profitability:

• Thoughtful project selection aligned with strategic and financial objectives
• Development of a formal go/no-go policy to evaluate and price potential risks
• Establishment of aggressive payment and retention schedules
• Implementation of proactive billing and collection practices
• Timely and assertive negotiation of change orders and requests for equitable adjustments
• Adoption of a proactive internal subcontractor qualification and bonding-back process
• Negotiation of a favorable schedule of values to support adequate project cash flow
• Careful review of contract provisions related to material escalation, damages and shared-savings clauses
• Maintaining open and transparent communication with project partners to reduce the risk of future profit erosion
• Investment in fully integrated construction financial and project management software to improve efficiency and visibility

Managing Cash Flow

Access to cash flow is increasingly critical, particularly during periods of economic uncertainty. A contractor’s ability to manage cash flow effectively can often be the difference between success and failure. To maintain healthy cash flow, contractors should consider implementing the following practices:

• Preparation of complete, accurate and timely job-costing and financial reports
• Monthly review of companywide cash-flow projections
• Development of project-specific cash-flow forecasts for large or complex projects
• Evaluation of major fixed asset purchases and lease commitments with financial and credit partners to understand long-term impacts on banking and surety capacity
• Adoption of a proactive billing culture to maintain a net-overbilled position throughout the life of a project
• Aggressive and consistent billing and collection of project accounts receivable

Mitigating Debt

Extended credit facilities—such as lines of credit and long-term debt—can place significant strain on a construction business if not managed carefully. Contractors must remain aware of changing interest rate environments and consider the following:

• Reviewing the impact of large capital expenditures and lease obligations with financial partners to assess their effect on banking and surety relationships
• Maintaining proactive and transparent communication with lenders, bankers, and surety agents, including the evaluation and improvement of financial covenants
• Evaluating opportunities to consolidate variable-rate debt into fixed-rate, amortizing loans to protect against interest rate volatility and strengthen working capital
• In rising interest rate environments, prioritizing liquidity preservation over higher-risk alternative investments

Retaining Earnings

The discipline to retain earnings within the company not only reflects consistent operational performance but also demonstrates a long-term commitment to the organization, its employees and its future growth. Contractors should consider the following when planning for retained earnings:

• Establishing retained earnings targets that align with credit and bonding requirements
• Developing financial projections that support both short and long-term business objectives
• Meeting annually with key advisors—such as CPAs, bankers and surety brokers—to review year-end financial results and plan strategically for the future

Continuity and Succession Planning

As many construction company owners approach retirement, those who proactively develop and formalize a continuity and succession plan are best positioned to transition ownership on favorable terms. A well-structured continuity and succession plan should include:

• Identification of the preferred transition strategy, such as family legacy, key-employee buyout, ESOP, merger and acquisition, or other alternatives
• Early engagement (ideally 5–10 years in advance) with external professionals and trusted advisors to develop the plan
• Creation of a realistic and comprehensive financial forecasting model
• Clear identification and execution of action items with internal leadership teams
• Annual review and refinement of the plan to reflect changing market conditions and business needs

Financial management is not merely an accounting function—it is a companywide discipline and cultural mindset. From estimators and project managers to administrative staff, sales teams, financial leadership and executive management, effective financial management must be embraced at every level of the organization.

SEE ALSO: EXECUTIVE INSIGHTS 2025: LEADERS IN SURETY BONDING

The post Navigating the Challenges of a 2026 Surety Market: The Importance of Financial Management for Contractors first appeared on Construction Executive.

Monique Nightingale-Pitter
Lead Home Office Construction Surety Manager
Chubb

When expanding into new geographic markets, contractors can build a case for support from their bonding company by showcasing their ability to manage potential challenges in the new region. Here are a few key strategies that contractors can implement.

• Develop a clear business plan. Contractors should provide a detailed business plan outlining goals, strategies, and risk mitigation measures tailored to the new market. A clear business plan demonstrates the contractor’s preparedness and commitment to success.
• Prove financial stability and operational capabilities. Demonstrating financial strength and a track record of successfully completing similar projects is key. A solid financial foundation better enables a contractor to navigate challenges such as unexpected conditions, costs, or delays. Highlighting past projects where the contractor has successfully managed similar risks helps demonstrate the contractor’s ability to execute, adapt, and overcome challenging situations.
• Build local connections. Establishing relationships with local subcontractors, suppliers, and other stakeholders in the new region is imperative. Local subcontractors and suppliers likely have a thorough understanding of the region’s regulations and market conditions, which can help contractors reduce the risk of non-compliance and delays. Local suppliers can help streamline access to materials and minimize logistical challenges.
• Highlight experienced leadership. Having qualified and experienced key personnel to manage and execute the work also increases the contractor’s likelihood of success in the new market. These tactics can not only help contractors build support from their bonding companies but also set the stage for successful expansion into new geographic markets.

Anthony Pensabene
Home Office Senior Territory Manager
Nationwide

It’s common for contractors to expand into different geographic markets when looking to grow their business, but this can bring challenges. When contractors enter a market, they may have to build relationships with new subcontractors and suppliers, learn the intricacies of local rules and regulations and establish a labor base. They also have to get to know their new competitors, so they know how they’ll compare when bidding on projects. Another really great way for a contractor to better understand a market and its intricacies is by partnering with a local firm. These partnerships can offer valuable insights into regional dynamics, help build credibility, and accelerate the learning curve when entering a new area. For sureties, these challenges mean greater risk, but contractors can take steps to demonstrate they are positioned for success. First, contractors should connect with their surety as soon as they are considering expanding to gain strategic guidance, as well as ensure the surety is licensed to operate in their new market. They should also develop a clear business plan that articulates how they will enter the market and study applicable local laws and regulations. As always, contractors should be prepared to demonstrate proof of financial stability to the surety, such as CPA-prepared statements, evidence of capital liquidity and strong cash-flow statements. They should also study the market and their new competition and begin building relationships with suppliers and subs. Some savvy contractors even prepare shadow bids for projects in the new market so they can see how they would stack up against the local competition. By partnering with a trusted surety professional early in the expansion process, contractors can ensure they are taking the necessary measures both to appeal to the surety’s appetite and to succeed in their new endeavor.

Brock Masterson
COO—Surety Division
Crum & Forster

Expanding into new geographic markets affords contractors exciting growth opportunities. At the same time, geographic expansion is one of the leading causes of contractor failure due to the many inherent uncertainties. It is critical that the company have a clear, detailed strategy in place before entering a new territory. Discussing this plan in detail with your producer and surety can ensure that you have adequate surety capacity throughout the expansion phase.

Contractors build extensive knowledge of their home market. They have formed trusted relationships with owners, subcontractors and suppliers. Estimating inputs, including labor cost and efficiency and materials prices, are well-known.

But how has the company generated this knowledge for the new region? What size and scope of work will be considered in the new territory compared to the standard footprint? What is the approach for project pursuits, and would a partnership or joint venture with a local firm provide the necessary connections to ensure an accurate bid?

What is the management and staffing plan? Is there a plan in place to ensure regular contact and connection with senior leadership? Will the company hire a new labor force to execute work?

By developing a plan to address these questions, the contractor will be in excellent position to share a viable strategy for geographic expansion with their surety and producer. These discussions are well-received by the surety and lead to greater trust in the leadership and operations of the contractor, which will provide benefits in future strategic growth efforts.

Joseph Crawford
Vice President—Surety Underwriting Contract
Philadelphia Insurance Companies

The reasons for expansion are important and should be part of a well-developed plan. Has work within their regional niche become scarce, leading to poor financial results, or has success naturally led management to seek organic growth in new areas? The business plan to expand must show knowledge of the new market’s local laws, licensing, zoning, permitting and economic conditions. Having sound legal representation is critical.

Being able to demonstrate knowledge of the competition is also meaningful. In the case of the public bid market, what firms and how many contractors are on the bid lists? Are there many successful regional and national contractors securing awards? What subcontractors and suppliers are aligned, and is there an opportunity to establish new relationships as a potential outsider? Successful firms will often track specific lettings and prepare mock project estimates that test their preconstruction department functions before actually submitting proposals in earnest.

Another critical issue is project management. Do they have adequate labor, access to subcontractors and material suppliers that can be delivered to the job without additional costs and potential delays? A talented project manager has experience in the local market, understands the demands of the customer and can deliver a completed job on time and on budget.

Lastly, the upper management team must be able to properly monitor the construction costs and results, while funding and supporting work in the new territory. Often times, remote offices become silos, with different accounting systems, management reporting and work culture, which ultimately causes poor performance and a lack of synergy.

A sound surety partner will look for open communication of these variables and a gradual approach to new territories, along with timely receipt of work-in-process results and details on the success of local pre-construction and project management teams.

Kevin McDowell
Vice President, Surety
Arch Insurance Group Inc.

Geographic expansion remains one of the leading risk factors in surety loss activity. Because of this, sureties apply greater scrutiny to bond requests for projects outside a contractor’s typical operating area. To strengthen their case for bonding, contractors should proactively address key underwriting concerns by focusing on owner selection, subcontractor risk and labor availability.

Owner selection is always important, but especially so when entering new markets. Sureties are more comfortable when contractors work with owners or GCs with which they have a proven relationship, reducing uncertainties around contract terms, payment practices and decision-making. If the relationship is new, then contractors should clearly communicate the rationale for pursuing the project and outline strategies to manage potential risks.

Subcontractor risk is another critical factor. If the contractor’s usual subs won’t travel, then sureties will want to know how new subs are evaluated and vetted. Bonding subcontractors can provide added protection, as it involves surety prequalification and offers recourse in case of default.

Labor availability continues to challenge contractors. Sureties expect a clear staffing plan that outlines how labor needs will be met, whether through existing crews or new hires, and how those new hires will be integrated into current and future operations.

Ultimately, transparent communication with the surety about these factors helps build trust and supports bonding decisions when expanding geographically. Contractors who demonstrate thoughtful planning and risk mitigation are more likely to secure support for out-of-territory projects.

Mike Ito
Senior Vice President
Amerisure Surety

Major project delays or claims are unfortunate and often unpredictable events that can impact a contractor’s internal resources and financial position. When faced with these events, a contractor will have to spend significant organizational time and resources to provide solutions. However, the impacts of these events—even when addressed properly by the contractor—can create difficulties with their surety company, in the worst cases, resulting in reductions in bonding support.

Surety companies strive to assess negative events and evaluate the contractor’s management of them as part of their ongoing capacity assessment of the business. Negative events that come as a surprise to a surety company can shake the confidence of underwriters and result in over-reaction. Clear, proactive communication with the surety company is a time-tested way of retaining confidence and keeping bonding support aligned with the contractor’s business plan.

The best way for a contractor to receive guidance in communicating with their surety company through these events is to engage a professional surety specialist agent. A professional surety agent will work with the contractor in understanding the problems at hand, how they are being addressed and the potential impacts. The agent can then filter relevant information to the surety company, minimizing surprises and providing clarity. A professional surety agent can help to facilitate discussion with the surety decision-makers and ensure questions or concerns are addressed smoothly. A professional surety agent can help ensure a contractor’s bonding program stays intact, even through an impactful negative event.

WHY HAS FASB TOPIC 606 CREATED INCONSISTENCIES IN HOW RETAINAGE IS BEING RECORDED ON THE BALANCE SHEET OF CONSTRUCTION CONTRACTORS?

Kevin Birch
Surety Regional AVP
CNA Surety

Revenue Recognition Standard FASB Topic 606 was implemented more than six years ago, and there continues a wide range how CPA firms are reporting retainage on the balance sheet. The inconsistencies in how retainage is being reported relates to the fact that the revenue recognition standard Topic 606 is a ‘principles based’ versus ‘rules based’ standard. ‘Principles’ allow a wide range of interpretation and in the balance sheet placement of retainage.

CPA firms that strictly interpret the revenue recognition standard Topic 606 will place retainage in three areas on the balance sheet: 1) contract receivables (an asset), 2) contract assets (an asset) and 3) contract liabilities (a liability). Such treatment of retainage will come with notes disclosure such as the following:

‘Billed and unbilled amounts for which payment is contingent on anything other than passage of time are included in contract assets and contract liabilities. Retainage which the company has an unconditional right to payment subject only to passage of time is included in contract receivables.’

Topic 606 permits jobs that are overbilled (a liability) are net against the retainage amount (an asset). This standard suggests that jobs which have $10,000,000 overbillings (a liability) and also these same jobs have $10,000,000 in retainage (an asset) have $0 contract liabilities. All of this should be disclosed in the notes of the financial statement which results in an understatement of assets and liabilities on the balance sheet.

WHAT FINANCIAL REPORTING TECHNOLOGIES ARE IMPROVING COMMUNICATION WITH SURETIES?

Robert Coon
President
National Association of Surety Bond Producers

The surety industry continues to explore opportunities to make the surety bonding process more efficient, including automating contractor financial information. In recent years, the National Association of Surety Bond Producers spent significant time and energy in standardizing bonding process documents and in automating an essential financial information tool, the work-in-progress report. Often, such reports require that the surety agent manually enters contractor financial data into a digital format. Hopefully, those days are numbered. NASBP and other organizations, including XBRL US and the Construction Progress Coalition, have been working diligently to build a better approach by employing XBRL [eXtensible Business Reporting Language] as the standard digital language to communicate financial information between construction software programs. With encouragement from NASBP, the U.S. Small Business Administration Bond Guarantee Program for small contractors leveraged this technology to streamline its process for WIP reporting. Construction software technology vendors are also starting to roll it out in their financial and management systems. Although contractors may not be aware that XBRL technology is what’s driving it, exchange of data in this standardized format will greatly enhance the interoperability of their various software packages. In addition, it has the potential to speed up the adoption of AI applications in construction. Improving the speed and efficiency of data reporting within the contractor’s operations and with their financial partners gives them the opportunity to focus on building better projects. This aligns well with the surety industry’s focus on helping contractors succeed.

HOW OFTEN SHOULD WIP REPORTS BE UPDATED TO KEEP BONDING RELATIONSHIPS STRONG?

Kasie Roark
Principal
CLA (Clifton Larson Allen LLP)

Work-in-progress reports are more than just financial snapshots—they’re trust-building tools. To maintain strong bonding relationships, contractors should update WIP reports at least quarterly, though monthly updates are ideal. Regular, consistent reporting provides accurate financial visibility and demonstrates a commitment to transparency.

Equally important is the quality of the estimates within those reports. Level-headed, consistent projections that don’t fluctuate wildly from one period to the next instill confidence in the contractor’s financial discipline and forecasting ability. Bonding companies rely on these estimates to assess risk, and erratic figures can raise red flags.

But estimates alone aren’t enough. The contractor’s ability to deliver on those projections—meeting schedules, budgets and performance targets—is the true measure of estimating skill. A track record of reliable execution reinforces the credibility of future WIP reports and strengthens the bonding relationship over time.

Timely updates, steady estimates and dependable performance form the trifecta of trust. Contractors who embrace this rhythm not only improve their financial reporting—they build enduring confidence with their bonding partners.

Gray K. Coyner
Principal
Thompson Greenspon

In construction bonding, the three Cs—character, capacity, capital—are essential to building a strong surety relationship. Sureties rely on your performance and accurate, timely financials to make informed decisions. A key tool in this process is the work-in-process report.

The WIP report should be updated and reviewed monthly as part of the month-end close, alongside job A/R and retainage. Effective analysis requires collaboration between project managers, accounting, and management.

There is an expectation that well-managed construction companies will produce a monthly WIP report, and your surety will expect this as your bonding program grows. The WIP report also helps contractors manage backlog to determine if new work should be bid.

Analysis of the WIP report can identify problem jobs before they become a bigger issue. Construction estimates change as work is performed, and identifying an item missed in an estimate or a change on a jobsite early is key. Analysis of the WIP schedule monthly will help identify and mitigate job fade and cash-flow issues much earlier than preparing the schedule quarterly or at the end of the year. Your banker and surety are integral parts of your project team and should be informed of any significant issues noted in this analysis. If issues are not addressed early, or worse, ignored, they could limit your bonding and lending capacity.

When timely and effectively analyzed, monthly WIP reports help contractors manage risk, drive growth and give their sureties the confidence to provide a bonding program.

WHAT LESSONS HAVE EMERGED FROM RECENT MAJOR SURETY CLAIMS THAT CONTRACTORS SHOULD TAKE TO HEART?

John A. McDevitt
Regional Vice President—Latin America, Client Relationship Liaison Manager—United States, Global Risks Surety Claims
Liberty Mutual Surety

Recent major surety claims have revealed critical lessons for contractors managing today’s increasingly complex and large-scale projects. These claims are reshaping the role of surety claims teams and how contractors perceive and engage with them. Notably, some of the most effective strategies for claims avoidance and mitigation have come from contractors who treat their surety as a strategic partner—not just during underwriting, but throughout the lifecycle of the bond.

Proactive collaboration with your surety claims team before issues arise can help contractors better navigate risk, protect their projects and ensure long-term success in a demanding construction landscape. Check to see if your surety claims teams offers access to in-house engineering and construction accounting professionals for project reviews, as well as opportunities to engage with experienced claims attorneys and specialists before claims arise.

Whether it’s a preconstruction project review, a lunch-and-learn session on mitigating payment bond claims, or a discussion on the importance of documentation and notice provisions in assembling affirmative claims or defenses, your surety claims team may be a valuable resource. Engaging early allows contractors to establish and reinforce best practices, review data and gain insights into industry trends, and explore effective strategies for claims avoidance and control. While some claims are unavoidable, building strong relationships and trust with your surety claims team before problems arise can dramatically improve the efficiency and efficacy of claim responses—for both contractor and surety. Reach out to your underwriting partners to explore the services your surety claims professionals may offer.

WHY ARE SURETIES LOOKING MORE CLOSELY AT SUBCONTRACTOR DEFAULT RISK IN 2025?

Jason Dettbarn
Senior Vice President—National Contract Surety Leader
Merchants Bonding Company

2025’s been an unpredictable year, and with several economic warning lights flashing, sureties may begin scrutinizing subcontractor default risk more intensely. Higher-for-longer financing costs are still pressuring balance sheets and deal flow, keeping credit tight for trades already operating on thin margins. Last year, corporate insolvencies hit a 14-year high, signaling potentially tougher credit cycles ahead and increased risk for undercapitalized subs.

General contractors are a good barometer of mounting pressure on subcontractors. An AGC/FMI risk study reported nearly 70% of respondents observed increased subcontractor distress or defaults heading into 2024—a trend that persists. Cash-flow pressures remain, with the industry reporting slow payments and uneven profitability which can erode liquidity and raise default probability.

Tariffs and policy uncertainty continue to affect materials, timing and pricing, which can push already-thin subcontractor margins into the red. And firms still cite an insufficient supply of workers and subcontractors among their top concerns. Labor problems create operational risks that can have a domino effect on work; schedule slippage, rework and, ultimately, defaults.

In response, some sureties are requesting deeper subcontractor prequalification, tighter scrutiny of WIP and cash conversion, and closer monitoring of backlog concentration (especially on megaprojects). A surety partner with common sense underwriting and claims will help with cash-flow issues before insolvency strikes. Stronger general contractor controls can include joint checks and disciplined pay-when-paid language. The aim isn’t to restrict capacity; it’s to ensure projects are staffed by subs with the character, capacity and capital to withstand unpredictable conditions.

HOW CAN CONTRACTORS IMPROVE THEIR BALANCE SHEETS TO INCREASE SURETY CAPACITY IN A RISING RATE ENVIRONMENT?

Todd Feuerman, CPA, CCA, MBA
Director
Ellin & Tucker

For contractors, bonding capacity is often the gateway to growth and ongoing operations, which hopefully lead to winning bids for profitable projects. Surety underwriters measure this capacity by closely evaluating a firm’s financial health, with the balance sheet and net working capital serving as key indicators.

Net working capital—current assets minus current liabilities—is one of the most critical metrics. Bonding companies typically apply a multiplier (often 10x) to a contractor’s working capital to establish maximum bonding capacity/bonding program. Improving this position requires disciplined management of receivables, proactive billing practices and careful vendor payment strategies. At the same time, contractors should minimize non-qualifying assets that underwriters exclude from working capital calculations—like prepaid expenses.

A strong balance sheet amplifies these efforts, and consistent profitability increases retained earnings. To bolster equity, focus on the prudent control of short-term debt and limiting owner distributions during growth periods. These practices create stability and demonstrate a contractor’s ability to weather downturns.

Equally important is financial transparency. Sureties expect CPA-reviewed statements prepared on a GAAP basis, including the percentage-of-completion method. They also want to see clear job schedules that outline backlog, contract assets/liabilities, as well as gross profit trends. Firms that provide timely, reliable financial reporting to the bonding company instill greater confidence in their financial health.

Finally, underwriters also weigh management quality, operational history and internal controls. Contractors who pair sound financial practices with disciplined project management are best positioned to increase bonding capacity—and in turn, their ability to secure and perform larger contracts.

HOW DO SURETY BOND CLAIMS IMPACT A CONTRACTOR’S ABILITY TO OBTAIN FUTURE BONDING?

Cullen S. Piske
President
The Gray Surety

A contractor whose business plan depends on surety bonding will likely encounter a claims situation at some point. When a surety receives a claim, it begins an investigation into the underlying circumstance, whether the issue is nonpayment or performance.

A contractor must maintain direct and frequent communication with their surety as well as their bond agent during the investigation phase. Providing documentation to the surety claims staff is essential to the process.

Performance claims often develop from small disagreements between parties. As a contractor, it is important to keep emotions out of a dispute. Committing to fulfill contractual obligations is essential. While it can be difficult, postponing disputes until a contract is complete will help the surety maintain confidence and continue to extend surety credit.

In the case of payment claims, a surety’s obligations may be at odds with a contractor’s priorities. Pay-if-paid clauses are rarely a surety defense, meaning that a surety could be deemed responsible for a claim despite a contractor not being paid. Additionally, back-charges on subcontractors must be meticulously documented and submitted to the surety if there are disputes with subs and suppliers.

Surety disputes occur occasionally, but communication with your surety is the keystone to maintaining a strong bonding relationship.

IS IT NECESSARY FOR SURETIES TO REVIEW CONTRACT DOCUMENTS PRIOR TO A CONTRACTOR BIDDING ON A PROJECT THAT REQUIRES BONDING?

Hank Nozko Jr.
President
ACSTAR Insurance Company

The surety industry is mixed on the subject of requiring review and approval of bid and contract documents for projects that require bonds. It depends on the size of the project, the size and strength of the contractor, and the relationship between the contractor and its surety. Application of the requirement is all over the place. There is no specific answer.

Generally, the peril associated to imbedded, unfriendly contract documents, is a bigger risk to smaller contractors versus larger contractors. There is a greater limit to financial resources of smaller contractors to absorb a project loss that has been intensified as the result of onerous provisions in the contract documents. For example, a surety will be more concerned by a smaller size principal entering into contracts that for example, waive the recovery of costs associated with a change unless a written notice in writing is provided within days of encountering a changed condition; requiring the contactor to perform extra work without payment until some contingent event or time; requiring the contractor to pay legal expenses even if the contractor prevails in a dispute.

Exposure to unreasonable consequential or delay damages. Very broad indemnification clauses that make a contractor liable for damages that are unrelated to its work. Clauses that allow withholding payment for reasons unrelated to the work. Clauses that force a contractor to absorb the expense of accelerating its work, like working overtime, without compensation, even if the contractor did not cause a delay. Costs and damages arising from these types of provisions could be multiples of the amount of a contract and possibly jeopardize the financial wellbeing of a contractor. A smaller contractor might be less able to absorb such extraordinary costs. Therefore, this surety and probably others, most likely will look at contract documents contemplated by contractors in which the financial resources might be disproportionate to the relative exposure to a specific set of contract documents that contain difficult contract provisions. The advantage of a surety reviewing contract documents, is the benefit of having a second set of eyes looking at the documents and sharing thoughts about risks associated to specific project documents, before bidding a project. The review is helpful and free.

SEE ALSO: EXECUTIVE INSIGHTS 2025: LEADERS IN CONSTRUCTION TECHNOLOGY II

The post Executive Insights 2025: Leaders in Surety Bonding first appeared on Construction Executive.

Dennis Ferretti

Vice President, Contract Surety
Philadelphia Insurance Companies

Ben Franklin said, “An investment in knowledge pays the best interest.” I believe an investment in people pays the best interest when it comes to bonding.

All surety underwriters are trained to evaluate contractors using the three C model: character, capacity and capital. The quality of a contractor’s existing workforce and recruitment, training and retention programs will reveal itself to the underwriter during the three C review and will directly impact its ability to obtain bonding.

It’s often argued that there is no need to assess capacity and capital if a surety underwriter is not confident in the character of a construction company’s ownership. The owners of a construction company that deploy financial and people resources for training new and existing employees, that recruit with purpose and vision based upon the company’s short and long-term strategic goals, and that include a high retention rate of its people as an indicator and measure of them and their company’s success will be recognized by surety underwriters as owners of high character. This recognition will lead to obtaining bonding capacity.

Capacity and capital evaluation can be tied together. Capacity evaluation is, in large part, the evaluation of project performance over time. A positive or negative project performance will translate to a stronger or weaker capital/financial position for the contractor. Positive or negative project performance trends and the resulting capital/financial positions directly tie into a construction company’s investment, or lack thereof, in training and retention programs. The same goes for its ability and willingness to recruit and hire the best and brightest at all levels. Positive capacity and capital evaluation will also lead to obtaining bonding capacity.

Can regular communications with surety providers help construction firms access larger bonding capacity and more favorable terms?

Mark DeVito

VP, Underwriting
IAT Surety, a division of IAT Insurance Group

Regular communication between construction companies and their surety underwriters is critical to expanding a program and securing best-in-class pricing. Contractors may worry that increased communication and information sharing could lead to more underwriting questions. On the contrary, proactive correspondence reduces the chances of interruptions in the surety process. A high level of transparency and clarity builds a foundation of trust—not only trust but also shared accountability among all partners—which helps prevent unforeseen issues.

For example, in the case of problem projects, ongoing interaction can influence how the surety underwriter responds to potential financial setbacks. Similarly, in recent years, contractors have navigated various unexpected risks—such as price escalation, inflation, labor shortages and rising interest rates. The combination of these factors has led to a dramatic increase in contract sizes, and surety bond sizes and work programs have followed suit. Contractors who provided clear reasoning and expectations saw surety underwriters adapt more readily, responding with larger bonds and elevated capacity.

Our partner agents and brokers facilitate the flow of information between clients and sureties, driving consideration for the best available terms. Repetitive, meaningful communication helps sureties better understand a contractor’s character, determination and resilience. As a result, surety underwriters are more willing to tailor and stretch bond programs to best support a contractor’s vision, objectives and business plan.

Does a surety bond protect a general contractor from subcontractors filing liens?

Rebecca Peisker

Senior Vice President, Director of Construction Surety
Chubb

A payment bond guarantees that a contractor will pay laborers, subcontractors and suppliers for work performed and materials supplied on a project, per the bond’s terms, related contracts and applicable law. Surety bonds can help to add a layer of protection for general contractors, but lien laws and bonding laws vary by jurisdiction, so it is imperative that contractors consult with qualified counsel to understand any implications a payment bond may have on the lien rights of any particular party under applicable law.

Payment bonds can serve as a risk mitigation tool to protect project owners by allowing subcontractors, suppliers and laborers of the contractor to make a claim on the payment bond in the event of nonpayment by the contractor. Additional risk mitigation strategies general contractors can implement include:

Thorough Subcontractor and Supplier Prequalification: Fully vet financial results, financial performance and reputation.Establish Clear Contracts: Include clear payment terms, dispute resolution procedures, an obligation to bond liens, and obtain lien waivers in the amount of the payment upon receipt of the payment.Incorporate Appropriate Default Provisions in Subcontracts: Include the failure to pay undisputed payments to subcontractors, suppliers and laborers as an event of default. This type of provision is often in prime contracts. The general contractor can mitigate risk to itself by passing obligations downstream to its subcontractors and suppliers. The general contractor may have additional recourse in connection with a subcontractor default of this nature if it has obtained a performance bond from its subcontractor.

By implementing these strategies, general contractors can help reduce project-related risks associated with subcontractors, suppliers and laborers.

What are some ways to implement tech to reduce insurance costs and mitigate risk?

Brock Masterson

COO—Surety Division
Crum & Forster

Successful surety underwriting involves, among other things, assessing a contractor’s ability to identify and manage project risk. Key factors considered include appropriate contractual provisions, accurate pricing and estimation, efficient project execution and subcontractor management.

Advancements in technology have given companies new tools to supplement internal controls and proactively manage many common risk factors. For example, generative AI-based software can help identify, summarize and modify contractual provisions. Most of these tools can summarize dense provisions, giving the reader a high-level understanding of the contract and offering alternative language to achieve simplicity or other contracting objectives. Users should understand confidentiality obligations and limitations of these tools before using them.

Estimating tools provide real-time and predictive pricing data for key materials and costs. These capabilities are particularly useful during inflation or tariff volatility, when recent experience can differ significantly from the future, to ensure the best likelihood of profitability.

Subcontractor prequalification software allows prime contractors to analyze financial statements and work-in-progress schedules, offering feedback on financial health and guidelines for potential workloads the subcontractor could effectively manage.

To improve jobsite communication, earbuds can translate languages in real time via a mobile app, fostering greater connection among contractors on a jobsite.

While none of these tools replace trusted advisors such as attorneys, CPAs, surety producers or surety companies, they offer accessible feedback in real time to help ensure contractors have the information needed to identify and manage risk effectively.

With an increasing number of small and medium-sized enterprises entering the construction market, what advice do you have for firms seeking their first surety bond?

Jeff Cose

SVP, Head of National Bond Center
Nationwide Surety

Being prepared can help you successfully navigate the surety bonding process, especially if it’s new to you. Because bonds are due at the bid letting or when a contract is signed, it’s important to start early since it can take time to gather the necessary documentation and go through the application review with your underwriter. Before you begin, make sure your personal and business credit are in good standing. This information will be reviewed when you apply for a bond, especially when you’re working with smaller bond programs. Be aware that they will take a close look at your individual and business payment history and any liens, judgements or bankruptcy proceedings. It’s also critical to assemble a strong support team with the expertise you need to achieve a positive outcome. Partner with an experienced surety professional agent or broker to ensure you’re matched with the market that meets your specific surety program needs. You’ll also want to work with a CPA to help you with the annual financial statements, an attorney to review contracts and provide legal guidance, and a banker who can help you establish deposit accounts, loans and an operating line of credit. Having experts by your side can help streamline the application process and bring you peace of mind as you undergo the process for the first time. By giving yourself time to prepare and working with experienced professionals, you’ll increase your chances of success and ensure you’re ready for any bond opportunities that come your way.

How are advanced technologies like blockchain and AI transforming the process of evaluating a contractor’s bond worthiness?

David Hewett

Chief Underwriting Officer
Merchants Bonding Company

As artificial intelligence and automation become increasingly integrated into the construction industry, surety will be more important than ever in mitigating new and complex risks. AI is revolutionizing construction through predictive analytics, automated design, robotics and smart project management, enhancing efficiency and reducing human error. However, AI-driven models can fail. Automated processes can malfunction, and data-driven decision-making can introduce unforeseen liabilities. Surety bonds provide a safety net in this evolving landscape, ensuring that construction projects utilizing AI remain accountable and financially protected. Projects integrated with AI will need surety to guarantee performance and compliance with evolving regulations.

On the other side of the coin, AI is revolutionizing how surety companies assess a contractor’s bond- worthiness, making the process faster, more accurate and data-driven. AI can hyper-personalize risk assessment, using data to apply common sense underwriting at an unprecedented level. Automated document processing, and the use of AI to quickly verify financial and work experience information allows an underwriter to give the contractor and their agent faster bond approvals with less administrative burden. AI can give the surety the ability to assess real-time performance as well as historical financials, detecting potential risks before they escalate, allowing sureties to intervene to mitigate losses.

In an industry where AI adoption is accelerating alongside project complexity, the role of surety as the foundation of trust and risk management remains as vital as ever.

With an increasing number of small and medium-sized enterprises entering the construction market, what advice do you have for firms seeking their first surety bond?

Michael T. Roberts

Vice President, Surety
Arch Insurance

Always remember the surety relationship is based on trust. If enterprises seeking their first surety bond focus on committing to a detailed business plan, establishing financial and operational stability and emphasizing transparency, then they will set the stage for a strong, long-term relationship with their carrier.

Having a comprehensive and achievable business plan is one of the best ways for contractors to build trust with the surety underwriting community. Sureties bet on people, and their trust in contractors’ ability to complete their projects goes a long way. To that end, it’s important to have reasonable expectations on initial bond support. Enterprises can sabotage themselves by taking on too many projects or projects that are too large or too complicated at the outset. Instead, they should seek to understand their own capabilities and ability to execute on projects. Based on that understanding, they can develop a detailed business plan with an emphasis on their goals and objectives over the next several years.

Establishing the financial and operational stability that will help you to execute your business plan is essential. Consider obtaining a bank line of credit for emergency purposes, and work toward increasing it over time. A solid financial foundation, along with a strong back office, accounting and field departments, will drive increased interest from the surety community and give contractors the best opportunity for future success.

Finally, transparency is key to growing trust in a new surety relationship. Be proactive in communicating expectations, asking questions and sharing any challenges you encounter. Quick reporting and transparency when issues arise help to strengthen trust with the surety, which can significantly improve your chances of securing future bonds.

Can regular communications with surety providers help construction firms access larger bonding capacity and more favorable terms?

Hank Nozko Jr.

President
ACSTAR Insurance Company

Contractors that regularly communicate with surety providers will in all likelihood gain greater bonding capacity and more favorable terms for bonding. A contractor should regularly communicate with its surety broker, but should also communicate directly with the surety. The recommendation of your agent or broker plays an important role in determining a contractor’s bonding program; however, the ultimate decision about capacity and terms flow from the surety. If you are a contractor, ask your agent or broker to invite your surety to join in on updates, at least a few times per year. Providing quarterly or even monthly financial statements is a cornerstone of a good surety relationship. Making a brief presentation with an explanation about statement changes and events that might affect the financial statements is a very valuable means of demonstrating proficiency and building trust in a surety relationship. Providing advance notice of difficulties denotes responsibility, integrity and character which are essential for an enduring surety relationship. A big negative surprise without advance disclosure will weaken or possibly end a surety relationship.

You know your company best. Participating in discussions with your surety will improve your chances for more favorable terms and greater capacity. Communicating directly with your surety will nourish a closer relationship. Declining support is less likely to happen with a well-informed surety. Your surety relationship should be similar to a banking relationship that involves a line of credit or term loan. If you have such a banking relationship, do you talk with that bank?

SEE ALSO: SURETY TRENDS TO KEEP A EYE ON IN THE CONSTRUCTION INDUSTRY

The post Executive Insights 2025: Leaders in Surety Bonding and Insurance first appeared on Construction Executive.

• Reduced likelihood of contractor default
• Enhanced project oversight
• Lower completion costs in case of default
• Expertise in project completion
• Improved contractor pricing

The surety-bonding process helps ensure contractors have sufficient workforce and expertise to undertake the entire backlog of work under consideration as well as the financial ability to cash flow a project through completion while paying workers, subcontractors and suppliers.

PROGRESSIVE DESIGN-BUILD LEADING THE WAY

As funds from the IIJA flow to the states, many projects have seen increased scope, scale and costs. This has led to new procurement methods, including progressive design-build. PDB is a phased procurement process that involves design milestones before finalizing the budget. This approach allows for bonding obligations to align with each project phase rather than requiring a single bond for the entire contract upfront. This results in more accurate pricing for labor, supplies and surety bonds, and potentially increases the number of contractors bidding on projects.

The surety industry has adapted to the growing use of PDB by supporting phased bonding. Recently approved in states such as Ohio and Florida, phased bonding expands the pool of contractors and reduces the impact on a contractor’s bonding capacity. In Ohio, the $3.6-billion Brent Spence Bridge Corridor Project prompted legislation to allow phased bonding. Similarly, Florida has passed legislation permitting multiple surety bonds corresponding to different project phases.

As infrastructure projects become more expensive and timelines lengthen, it is expected that federal and state agencies will increasingly adopt phased bonding. The Surety & Fidelity Association of America is assisting with this transition by providing customized bonding packages and templates for interested parties.

MODERNIZING BROADBAND

While IIJA-funded projects in traditional areas like roads and bridges are familiar, a new demand is emerging in the broadband sector. The BEAD Program, managed by the Commerce Department’s National Telecommunications & Information Administration, is a $42-billion initiative to expand high-speed internet across the U.S. through broadband cable expansion and
consumer subsidies.

To support this initiative, SFAA and the National Association of Surety Bond Producers have created the BEAD Program Surety Bond Information Kit. This kit includes performance bond forms, model award agreement language and sample letter templates to help internet service providers assess their bondability. The BEAD Program Surety Bond Information Kit is available for free
download.

The surety industry is committed to supporting our construction partners in managing risks and growing their businesses as they undertake new projects and adopt innovative methods. We look forward to continued success together.

SEE ALSO: RISKY BUSINESS: SURETY EXPERTS TALK RISK MITIGATION IN CONSTRUCTION

The post Strength in Surety: Surety Bond Market Is Primed to Support Federally Funded Projects first appeared on Construction Executive.

Surety bonding lines between the contractor and surety firm are very similar to that of a banking line of credit. While a construction firm’s banking line of credit is extremely important and is underwritten with financial scrutiny, a company’s
bonding line can be even more important and have a more intense underwriting process. Surety firm credit analysts are well versed in the nuances of construction firms and skilled at dissecting and evaluating financial statements and work-in-progress schedules, as well as the global operating level of
a contractor.

It is important to have a clear understanding of how a bonding company evaluates a construction firm for surety bonds, what information the underwriters need and how to communicate both positive and negative company and job information. Ultimately, the quality, accuracy and reliability of the contractor’s financial statements are one of the most critical elements used by the surety producer when they present contractors to the bonding company.

Surety firms will evaluate many variables prior to determining bonding capacity and establishing bonding lines at the project level and company level. Here are the five most common:

1. Financial Reporting

One of the primary challenges contractors face is providing timely, accurate, reliable financial statements prepared by a CPA firm experienced in the construction industry. These financial statements should include a complete and accurate work-in-progress schedule so the bonding company can gain insight into job performance and backlog. Bonding companies scrutinize financial statements, job timeline projections, cash-flow forecasts and debt management practices to assess a contractor’s ability to manage project costs and fulfill bond obligations.

2. Bank Lines of Credit Terms and Conditions

Bank lines of credit are critical for general company operations, but even more important for access to a proper bonding program. Surety firms tend to focus on several items as they relate to the line of credit, including terms and conditions. The best-in-class construction firms generally have significant lines of credit that typically are not borrowed on and have a term greater than two years.

3. Project and Performance History

Another significant challenge lies in demonstrating a successful track record and ability to deliver projects on time and with- in budget. Surety firms assess a contractor’s project history, including past performance, job issues, geography of projects and profit improvement, deterioration trends and adherence to contract completion deadlines.

4. Job Gross Profit Improvement/Fade Trends

Effective contract management, job-bidding processes and contract fiscal management are key attributes that a surety firm will closely scrutinize. The surety firm wants to be confident that jobs are completed on time and within budget. Gross profit improvement is always the goal, but construction is tricky, and fade does occur. But too much fade, too often, is a red flag to the surety.

5. Change-Order Management

Changes are part of the delivery of any construction project. But to keep the project on schedule and within budget, those changes must be managed and converted to financial changes within the contract. A change order, or an amendment, is a mechanism that identifies, defines and tracks those changes in a way that is acceptable to all parties. Surety firms scrutinize a contractor’s change order conversion rate to realize financial gains.

Surety producers play a vital role in working with contractors to manage and enhance surety-bond programs and are vital partners to any construction firm. Surety producers are able to work with construction business owners to understand how important quality internal and external financial reporting and transparent communication is to obtain and maintain a strong bonding program. While robust performance has a way of curing most issues, there is no substitute for open, continuous communication with the surety producer and ultimately the bonding company.

SEE ALSO: EXECUTIVE INSIGHTS 2024: LEADERS IN SURETY BONDING

Join SuretyDIGIT: Transforming the Surety Bond Process

SuretyDIGIT is a coalition uniting surety companies, brokers, contractors, technology providers and obligees to revolutionize and digitize the surety bond process. Supported by The Institutes RiskStream Collaborative, NASBP, and SFAA, SuretyDIGIT aims to streamline the bond process through secure, digital tools, enhancing efficiency, reducing costs, and saving time across the industry. With over 40 organizations already on board, we invite all stakeholders to join our collaborative effort and help modernize the industry. Learn more and join us: suretydigit.org
There’s no cost to join! Follow SuretyDIGIT on LinkedIn

The post Special Agents: The Right Surety Agent to Help You Obtain the Right Surety Bond first appeared on Construction Executive.

Brock Masterson

COO – Surety Division
Crum & Forster
Surety Division

Even the best contractors can’t foresee every challenge throughout the life cycle of a construction project. Supply-chain delays, cost inflation, unexpected change orders and contractual claims can wreak havoc on project schedules, profitability and, perhaps most importantly, cash flows. Contractual dispute-resolution clauses often require contractors to continue working and performing their contracts during the claim-resolution process, regardless of ultimate responsibility. To the detriment of the contractor, this process often includes a combination of mediation and arbitration before proceeding to litigation. This can lead to contractors using their own capital to fund disputed work—potentially for years and many times without payment by responsible upstream parties. During the past year we have seen news coverage of numerous contractor failures due in part to liquidity problems caused by litigated contractual disputes. Contractors should build balance sheets that maintain sufficient capital and liquidity, so unexpected conflicts or cash-flow issues cannot impair the ability to pay bills as they become due. Establishing stable credit facilities to support unexpected cash-flow shortages on a short-term basis is a best practice. Firms should build strong relationships with bankers, attorneys, surety agents and surety carriers, as they can offer valuable insights on the best practices needed to overcome unexpected conflicts or cash-flow issues. A disciplined financial plan and trusted professional relationships can help contractors weather uncertain times.

HOW DO RELATIONSHIPS WITH THE SURETY PRODUCER, UNDERWRITER, BANKER AND OTHER PROFESSIONAL ADVISORS IMPACT A CONTRACTOR’S ABILITY TO OBTAIN BONDING?

Ryan Springer

Vice President-Bond
EMC Bond

A strong surety-contractor relationships goes beyond transactions; it’s a true partnership that can weather the ups and downs of business. This partnership should be consultative and collaborative, extending to the contractor’s surety producer, banker and accountant.

Having a dedicated team of advisors transforms a contractor’s journey, ensuring stability, growth and a pathway to becoming an industry leader. Advisors offer valuable insights and guidance, helping contractors navigate challenges and seize opportunities. Together, they ensure that the business remains financially stable and ready for new projects and increased surety capacity.

This teamwork not only strengthens the contractor’s bond program and credit but also drives overall growth and profitability. By nurturing these relationships, contractors can achieve best-in-class status, solidifying their position in the industry. Ultimately, a strong support system is crucial for long-term success and resilience in a competitive market.

IS IT IMPORTANT TO A CONTRACTOR’S ABILITY TO OBTAIN SURETY BONDING TO HAVE A BUSINESS CONTINUITY AND SUCCESSION PLAN IN PLACE?

Guy Tenold

Senior Director, Business Development
Nationwide Surety

Yes, it definitely is. I have been in the business for 37 years and I have seen serious or even fatal accidents involving contractors occur in the middle of a project. When something tragic like that happens, the project is thrown into turmoil. As a surety, if we are bonding a contractor, we need to know that they have a plan in place in the event of a serious or fatal accident to ensure the project will be completed, as promised.

And while that is important for us as a surety, it is equally important for contractors that they have a continuity or succession plan in place in case there is a serious disruption in their ability to complete the work. That’s because having a plan will help protect their employees and their families if an injury or worse occurs. It is in the best interest of all parties that there is a contingency process in place to complete the project, because it increases the likelihood of financial stability and reduces the chances of litigation.

Continuity plans are especially important for larger projects with a longer duration since the longer a project is, the greater the risk of a significant disruption. However, a continuity plan is important for smaller or shorter projects because, given the nature of risk, anything can happen at any time.

When contractors go through the effort of developing a continuity plan for their company, it demonstrates to sureties that they are a good-faith partner and a more worthy risk.

Tom Williams

Underwriting Director
CNA Surety

Business continuity planning is a critical piece of the Surety/Contractor relationship. Sureties want to know what happens to their bonded work if something happens to key people and/or shareholder(s). More importantly, a well thought out continuity plan can benefit key employees and protect family members in the event of the incapacitation or death of one or more key people or shareholders. The responsibility–and liability–of the construction company often falls on family members who are unprepared for that responsibility, thus jeopardizing family assets as well as careers.

Continuity planning falls into two, general categories: Completion Planning, and Continuance Planning.

Completion planning simply involves a plan to finish all outstanding work so that the business will wind down in an orderly fashion, satisfying all obligations (performance and financial) in a way that relieves all interested parties of those obligations. It should be supported by a formal agreement with those key people, identifying the individuals and how they will be compensated.Continuance planning on the other hand, involves a formal plan to transition company ownership to others. Business continuance plans are many and varied in their structure. Such planning helps ensure the future viability of the firm and provides an exit strategy for the current owners, who are compensated for the transfer of ownership.

Regardless which option is chosen, having a plan to complete the work and satisfy outstanding obligations is an important piece of any business owner’s larger financial plan. It is an equally important part of the surety underwriting process.

WHY IS IT IMPORTANT TO PROVIDE THE SURETY WITH A CERTIFIED FINANCIAL REPORT?

Mike Hall

Vice President – Surety
Philadelphia Insurance Companies
Featured Products

Providing the surety with certified financial reports is important for several reasons. The first reason is risk assessment. Sureties need to assess the financial stability and creditworthiness of the principal (the party seeking the bond). When prepared by a construction-oriented CPA, certified financial reports offer a clear, accurate picture of the principal’s financial health.

These reports also help sureties with decision-making. Sureties use these reports to make informed decisions about whether to issue a bond and under what terms. Accurate financial data helps a surety evaluate the risks associated with the project or contract.

Since they are often audited by an independent accountant, certified financial reports provide transparency and assurance that the information is reliable. This transparency helps build trust between the surety and the principal.

In addition, certified financial reports are important for compliance. Many sureties require certified financial statements as part of their underwriting process when a contractor performs larger projects. Failing to provide these can lead to delays or denial of bond issuance.

Finally, these reports are important for ongoing monitoring. Even after a bond is issued, sureties typically request updated financial reports to monitor the principal’s financial condition throughout the bond’s life. This helps manage potential risks early on.

Overall, certified financial reports play a crucial role in the bonding process, ensuring all parties have the necessary information to make sound financial decisions.

Tim Mahoney

Principal – Construction Industry
CLA (CliftonLarsonAllen LLP)

Providing a certified financial report demonstrates a contractor’s commitment to maintaining high standards of financial management and accountability and helps to establish a foundation of trust between the contractor and the surety. A certified report from a qualified construction CPA provides a comprehensive overview of the contractor’s financial health and operations, offering a clear picture of the financial position, which is critical for the surety’s evaluation process. It provides a level of consistency and transparency in the contractor’s reporting. It also enables sureties to base their critical decisions on the financial strength of a business and evaluate the contractor’s ability to meet their obligations and handle potential risks. This can ultimately lead to better bonding terms, lower premiums and increased opportunities for contractors to secure projects and grow business.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CLA) to the reader. For more information, visit CLAconnect.com.

HOW CAN TRANSITION OF OWNERSHIP AFFECT A CONSTRUCTION FIRM’S ABILITY TO OBTAIN SURETY BONDING?

Monique Nightingale-Pitter

Vice President, Construction Surety
Chubb
Construction Surety Bonds

A construction company’s principals may desire to transfer ownership due to reasons such as retirement, succession planning or the need for additional capital or expertise. This transition can take various forms, including internal management buyouts, employee ownership, mergers/acquisitions, sales to competitors or investors, or even going public through an IPO.

Whatever the reason, any time a construction company is considering transferring ownership, it is important to consider the impact on their surety relationship and involve their surety in discussions early in the process. An ownership transition can have various implications on the company’s ability to obtain surety bonding. Two major considerations that surety providers will review are financial impacts and key personnel changes.

Ownership transitions often bring about substantial financial changes for the company. For instance, increasing debt or reducing capital to finance the transition can negatively impact balance sheets. Such financial consequences can make it more challenging for the surety to provide capacity at the construction company’s preexisting limits.

In addition to the financial impact, the surety’s relationship with key personnel who are responsible for driving the construction company’s continued success also plays a crucial role. If the ownership transition introduces new or inexperienced key personnel to the company, it may impact the surety’s consideration whether to support larger, more complex projects.

It is imperative to have a clear, well-defined transition plan in place along with proactive and transparent communication with the surety throughout the ownership transition process. By doing so, construction companies can navigate this period smoothly while preserving strong bonding capacity.

Shawn Scott

Chief Underwriting Officer, Contract East
Liberty Mutual Surety
Surety Solutions

A construction firm’s ownership transition could impact surety credit, but presents an opportunity for the contractor, agent and underwriting team to align business continuity with surety needs. Early and often communication is key to understanding the intent of an ownership change. It is important to bring the surety in early to allow an opportunity to ask key questions and help identify potential impacts on surety credit. Underwriting considerations include understanding the ownership transaction and assessing the quality of management succession. An ownership transaction is mostly financial in nature, while management succession is largely about people. Underwriters will want to understand the purchase price and related impact to the business plan. Company valuations should be performed by an independent, reputable firm. Providing components and expectations contributing to the valuation, including forecasted balance sheets and income and cash-flow statements, helps create alignment between contractor and underwriter. A construction company’s results can be volatile. Frequently, a consultant will secure different valuations based on various revenue and margin assumptions. This information helps the underwriting team determine surety credit related to need. Managing succession planning can be difficult. Successful ownership transitions develop continuity plans long before putting the company up for sale. Strong leadership and culture promote the best engagement and alignment to revenue and profitability objectives. Key business relationships need to be maintained. In the end, construction firms benefit from early planning, putting the right people in place, and maintaining adequate capital through an ownership transition.

Jason Dettbarn

SVP – National Contract Surety Leader
Merchants Bonding Company
Succession Planning

A well-crafted succession plan ensures the continuity of a contractor’s business and is a vital aspect of a long-term business strategy. It can also significantly impact a company’s surety credit, which is why it’s so important they invite their surety’s input when selecting a succession plan. The three most common options are an internal transition, an external sale, and an employee stock ownership plan. No matter which option a contractor selects, sureties want the plan to address the following:

Continuity and Stability: A well-structured succession plan ensures business continuity and keeps key operational and financial personnel in place which can improve a contractor’s surety credit.Financial Wellbeing: Financial arrangements tied to a succession plan can severely affect a contractor’s balance sheet. Sureties will review these transactions to assess their impact on financial strength and surety limits.Experience and Leadership: The experience and track record of the incoming leadership are critical. Sureties are more comfortable with leaders who have a proven history in the industry.

Integrating succession planning into the broader strategic framework is essential for contractors who aim to safeguard their business’s future. Contractors should involve their surety partners early, through communication of plans and updating them on significant changes, in order to protect their ability to obtain or retain their surety credit.

Henry W. Nozko, Jr.

President
ACSTAR Insurance Company

Transition of ownership may or may not have an affect on obtaining bonds. Under some structures there is no affect to a surety program but under other configurations there could be a substantial affect including discontinuation of a surety program.

In family-owned construction companies, if ownership is transitioning from one generation to another, and both generations are active in management, and the company is not leveraged to accommodate the transition, there is usually no change in availability to bonding.

When an owner-operator sells its ownership in a construction company to an unrelated third party, but continues to manage the company, and the company’s financial position is not leveraged by the acquisition, and the new ownership provides indemnification to the surety, it is unlikely any change will occur in the surety program.

If a construction company is sold to a third party in a leveraged buyout, financed in part by the company, then the surety program is usually reunderwritten and the terms for surety usually change. If the new owner provides indemnification and has substantial financial resources, that would mitigate changes in the terms.

If a contractor is sold to a private equity firm and the company is leveraged in part, to finance the acquisition, and the private equity firm does not provide indemnity, most likely the surety program will be discontinued.

The above are just a few examples of how ownership transitions can affect availability of bonding. If an ownership transition is being considered, and the company relies upon having access to a bonding program, before proceeding, careful analysis should be given to the affects the transition may have on the availability of bonding.

WHAT FINANCIAL HEALTH CHECKLIST WOULD YOU GIVE A CONTRACTOR SEEKING SURETY BONDING?

Todd Feuerman, CPA, CCA, MBA

Director in the Audit and Accounting Department
Ellin & Tucker

Contractors looking to secure surety bonding must have their finances in order. Sureties need confidence in your company, your people, your reputation and ultimately, your financial well-being. Here are the five most critical areas to focus on:

Accurate Financial Statements: Ensure your financial statements follow proper accounting standards and are accurate for under-writing purposes. Financial statements should include a balance sheet, income statement, and a schedule of contracts completed and in progress as of a defined reporting date.Up-to-Date Work-in-Progress Schedule: The WIP schedule is probably the most important source of data you need to prepare for financial statements and by far the most important schedule a surety will need for underwriting.Strong Financial Health: Good health is important and that includes the financial strength of your business. Sureties will examine it closely as they build a bonding program.Bank Credit Availability: A solid relationship with your bank is crucial. Sureties like to see that you have access to a suitable line of credit to assist in cash flow planning.Manageable Project Backlog: A healthy backlog of future projects shows stability but don’t overextend yourself. Sureties want to see that your backlog matches your capabilities, experience, geographic comfort zones and financial resources.

These five items will help ensure financial fitness to secure the surety bonding needed to grow your construction business. Take these steps to ensure you’re not just ready to get bonded—but to thrive as a contractor.

HOW DO SURETY BOND CLAIMS IMPACT A CONTRACTOR’S ABILITY TO OBTAIN FUTURE BONDING?

Darrel Lamb

Regional Vice President
Old Republic Surety

A claim on an existing bond or bonds will not automatically end all future bond approvals. Claims are sometimes a part of doing business and often can be resolved with good communication and cooperation of the principal. However, if communication and cooperation breakdown and the claim(s) result in the surety writing checks, surety credit on new projects could be suspended resulting in a declination for a new bid. It is always in the contractor’s best interest to resolve claims as quickly as possible to not interfere with their ability to bond new work.

If the underlying reason that triggered the claim is the result of some material adverse change to the construction company, then these issues would likely need to be rectified before the surety would consider additional bond credit.

The surety application for new surety credit will ask if the contractor has had previous surety claims or if a prior surety has paid out claims on the contractor’s behalf. If the answer is yes, this will be a red flag to the new surety and may result in further investigation of the circumstances around the prior loss and may result in the decline of surety credit. If the contractor has made the surety whole again after a payout, the outlook for future bonding capacity is greatly improved.

HOW CAN A CONTRACTOR PROTECT THEMSELVES FROM SURETY BONDING FRAUD?

Zach Mendelson

NASBP President
National Association of Surety Bond Producers
Social Media: @nasbp

Contractors and subcontractors can take simple actions to avoid becoming inadvertent victims of fraudulent or unauthorized bonds. Construction businesses should undertake a straight-forward two-step process to verify all bonds: first, determine the authority of a surety to issue a bond in the jurisdiction of the project—i.e., that the surety company possesses a valid certificate of authority from the state insurance commissioner—then verify that the surety company actually authorized issuance of the bond. To determine if the surety has the necessary certificate of authority, contact the relevant state insurance department directly. See the National Association of Insurance Commissioners to get state-specific contact information. Please note that calling the insurance department ensures that you receive the most current and complete information about the surety company’s status. Next, verify that the surety authorized the issuance of the surety bond. Contact the surety company directly to receive verification that the surety bond has been duly authorized by that surety company. Contact information should be available from the state insurance commissioner and, if the surety company is certified to write surety bonds on federal contracts, from the U.S. Department of Treasury Circular 570. Remember that your licensed bond producer is an invaluable resource about the market reputation of individual surety companies and can guide you in this process, including helping direct you to the right contacts.

WHAT ARE THE MOST COMMON REASONS A SURETY BONDING APPLICATION IS DENIED?

Josh Billiard, CPA, CCIFP

Partner
Plante Moran

Surety underwriters are experiencing greater losses recently (size and frequency) compared with the last few years. Driven by concerns that contractors have been artificially buoyed the past few years by government subsidies such as PPP and ERC funding, which has now run dry, underwriters have a heightened focus on the basics of working capital, tangible equity and overall debt loads.

In this environment, contractors will struggle to obtain bonding for two primary reasons:

The contractor’s fundamentals are not aligning with more traditional pre-COVID/pre-government subsidy benchmarking required for the type of bonding program requested. In particular, contractors asking for greater single-job or overall bonding program coverage may be in for a bad answer when the contractors’ working capital and tangible equity are weaker compared with pre-COVID/pre-government subsidy measurements.Challenges with executing the current work program profitably, with significant profit fade from previous projections.

As is always the case with obtaining surety bonding, the earlier the contractor requests the needed program, the better. If a contractor has a weakened balance sheet now compared with recent history, the time is now to open up dialogue with the bonding agent to avoid an untimely denial.

Given the greater volatility underwriters have experienced in contractor performance recently, combined with a challenging reinsurance market, they are simply not taking as much risk now compared with the last few years. Contractors would benefit from greater frequency of communication and collaboration with their bonding agents to ensure those agents can effectively manage their client’s need with the underwriters.

HOW SHOULD CONTRACTORS APPROACH THEIR PLAN RENEWALS THIS YEAR?

Steven D. Davis

Director/Senior Vice President
McGriff Construction Insurance Services

Contractors with upcoming insurance renewals should consider four best practices to assure that they are getting optimal results from the underwriting community. First of all, start the renewal process earlier than normal, about 90 or more days in advance. Underwriters are getting to look at multiple accounts due to the current market conditions, and the objective is to allow ample time to sort through options, coverage issues and any required actuarial analysis. Secondly, the underwriting submission should be comprehensive and recommend that the AGC risk profiler be completed, which will allow a deep dive into the construction operations as well as risk management and safety/loss control practices.

Relationships matter in this business and can make a difference when managed well. Think about delivering your renewal jointly and in-person, with key individuals from the construction company.

Lastly, more and more contractors are looking at captive or other risk-financing solutions to better manage their insurance programs. Whether a construction group captive or single-parent facility, contractors do have options to evaluate during the process.

SEE ALSO: EXECUTIVE INSIGHTS 2023: LEADERS IN SURETY BONDING

The post Executive Insights 2024: Leaders in Surety Bonding first appeared on Construction Executive.

IIJA AND BONDING

Now more than halfway through its five-year authorization lifespan, the Infrastructure Investment and Jobs Act has allocated $454 billion in funding for 57,000 infrastructure projects of various kinds nationwide, according to the U.S. Department of Transportation. Though the mechanisms, requirements and other complexities of the massive federal legislation have frequently meant delays in project starts, many projects are underway across the United States, with the influx expected to continue in the coming months.

As some experts see it, IIJA may not alter bonding. As Paul A. Healy, national practice leader, contract surety, for AON’s Construction Services Group, reports, “We do not see changes specifically triggered by the IIJA.”

Jason Dettbarn, senior vice president, national contract surety leader for Merchants Bonding Company, echoes Healy’s point. “Our surety underwriting experts do not expect any changes to bonding in light of the IIJA. Even so, we are pleased to see increased spending on infrastructure supported by the IIJA,” Dettbarn says. “We do see our infrastructure clients having larger backlogs and more opportunity for work due to the legislation. This has been a positive for the construction industry as well as for the surety industry.”

Along that line, Chris Hillman, surety underwriting manager for Philadelphia Insurance Companies, points out: “The IIJA is expected to generate significant opportunities for contractors, particularly those in the public sector. The surety requirements for federal work should lead to more bond needs and activity throughout the surety industry.”

READY, FED, GO

Faced with any new opportunity, construction companies have to weigh the pros and cons of taking on potential projects based on the nature of the work, their own capabilities and a range of other factors. And when it comes to the influx of public projects, a number of contractors are forging ahead.

“A major change we have already begun to see is more contractors returning to public works spaces, either because private opportunities have slowed or in preparation for sizable infrastructure projects at the federal, state and local levels,” Hillman says.

With more public works contracts and RFP respondents comes more competition and lower rates, which can prompt contractors to seek out different avenues for their next project—be they new owners, territories or work scopes. Each of those can pose challenges that a contractor must consider. Hillman points out that surety underwriters are particularly vigilant in evaluating such things.

“Contractors should work with their surety broker to anticipate and prepare for underwriting questions,” he says.

Any way you slice it, federal work and its bonding need to be done just so, as with any project, client or contract. “Federal work requires strict adherence to contract administration and federal requirements. If you are planning to do federal work, be sure to be well educated in the administrative requirements and regulations,” Healy says. “It’s best to start with a small federal job to get experience with the requirements.”

CONTRIBUTING FACTORS

The influx of federal projects is one significant factor in an overall construction scene that presents some other pressing issues for contractors. “A lot of the jobs coming out are large, and some are very complex,” says Michael Heidrick, head of construction surety for The Hartford. Among other things, there can be pricing implications as a result. “This may limit the competition of contractors for this work. Inflation is already impacting the price of the jobs contractors are taking today, so not having enough contractors to bid this work may mean additional pricing increases,” he explains.

“Increasing job size increases backlog dollars as well,” Heidrick continues. “Some contractors have been able to grow their balance sheets to support their increased credit needs. Some are not keeping up. This is a challenge for both the contractor and the surety.”

Heidrick sees other factors at play as well. “Supply-chain issues continue,” he points out, particularly for specialty items such as switch gears and generators, among others. And if that wasn’t enough, contractors have had to become experts at logistics in order to meet domestic sourcing rules in the IIJA, which requires, for one example, that all steel and iron used in such projects be sourced domestically. Hillman likewise points to supply-chain disruptions, which he believes “are still affecting the availability and pricing of work equipment and building materials.”

Not every company can cope with every contingency. “The upshot is that the IIJA increases the demand for a finite amount of contractors qualified to do the work,” Heidrick says. “But that could possibly exacerbate the supply of an already stretched skilled-labor market.” The point is apt: Skilled-labor shortages continue, with the construction industry alone falling about 501,000 workers short. “First and foremost is the challenge of finding enough skilled labor, particularly in the areas of construction growth supported by the IIJA,” says Dettbarn.

That shortage also extends across job positions as IIJA unfolds. “We’re seeing a significant void of skilled labor and job supervisors, which is a continued challenge to both prime and subcontractors,” Hillman says. “New work opportunities associated with IIJA should intensify demand for skilled workers, even if spending slows in other sectors.”

CHALLENGE…ACCEPTED?

“There are other prevalent and recurring challenges for contractors as we underwrite new job requests,” Hillman says, explaining that those challenges could continue as IIJA works continue to unfold. Those include incomplete or unachievable designs, such as when contractors are regularly asked to bid from incomplete plans. “Incomplete plans make it more difficult for owners to quantify how much they can expect to spend for delivery, while forcing contractors to carry means and methods that may or may not be necessary,” Hillman says.

“As a result, we have seen contractors be the low bidder on jobs that have far exceeded budgets because of design flaws, at which time the owner either needs to make scope adjustments or search for additional financing,” he explains, pointing out that contractors in such a situation will experience delays and other challenges. Hillman continues: “From a surety perspective, the surety views that project as part of a contractor’s backlog, and it could impact available surety credit, limiting other opportunities.”

Hillman and his colleagues are also seeing an increasing tendency for owners to group projects together under one contract. “These jumbo-type contracts roll multiple locations or scopes under one master contract.” While doing so can streamline processes and oversight, Hillman argues that it also “drastically alters competition among contractors as it severely limits companies that can participate. Contractors then face choices whether to attempt to directly compete on something much larger than they are accustomed to, which is a significant surety challenge, or develop new or different backlog sources.”

Contractors seeking bonding should also bear in mind that depending on the sector, showcasing risk-management efforts is key. “A primary risk for general contractors is subcontractor pre-qualification and management of subcontractor performance,” Healy says. “For specialty contractors and heavy-civil companies, where they self-perform a large percentage of the work, access to skilled labor and specialty equipment is critical.” Healy recommends that contractors get with their bonding companies and walk them through the controls and methods for those key risk areas.

“We’re also looking at experience and level of sophistication,” Heidrick says. “Generally, large contractors have larger balance sheets, more experience, better business practices and more resources to handle the inevitable challenge. However, there are also plenty of small contractors out there who have figured it out. They have found a niche they excel in, and by extension take a lot less risk,” he says.

On the other hand, contractors shouldn’t bite off more than they can chew. “Loading up on work is dangerous,” Heidrick cautions. “New work uses cash. Cash-flow planning is critical, along with getting proper bank credit to handle unforeseen cash needs. Building liquidity in the balance sheet to safeguard the enterprise is more important than ever.”

According to Heidrick, it boils down to project selection and risk mitigation. “The most important thing a contractor can do to ensure success is picking the right work for themselves,” he says. “Having a project selection process—a discipline within the organization to make the project ‘go’ or ‘no-go’ decision—is imperative.” He also recommends further mitigating risks by negotiating contract terms, especially the payment and change-order terms.

GOOD GROWTH

Even for companies with all their ducks in a row, there’s also the matter of handling new growth that may come with more and larger federal contracts—a good problem to have, but a problem nonetheless. So, how do contractors manage?

“We’re often asked how construction firms can handle increased growth, and it remains at the forefront of our discussions with construction companies,” Dettbarn says. “It all revolves around two key aspects in terms of growth: operational and financial,” he explains. “Operationally, does the construction company have familiarity with the owner, type of work being performed, the size of the project and location? When too many of these are new, we see increased risk for a project failure. Our experience tells us that growing firms have increased risk for cash-flow constraints.”

Dettbarn emphasizes that construction firms must also ask themselves: Does their firm have the financial strength to get through this constraint? “We highly recommend working with a construction-oriented certified public accountant as well as insurance agents that are experts in surety,” he says. Seeking out the right advice can help contractors be cognizant of how things may play out in new arenas.

“Surety underwriters want to see good liquidity and consistent profitability,” Healy says. “It’s important for contractors to manage cash flow. This includes managing startup/mobilization cash flow related to new work and staying on top of receivable management to get timely payments.” He adds: “Managing change orders/claims is becoming more important as it can significantly affect cash flow if costs are incurred before there is a firm contractual commitment and funding to pay for the change orders.

“All told, we’ve really seen things go either way for contractors,” Dettbarn says. “There are some for which one or two jobs helped take the company to the next level, and we’ve also seen where one or two jobs caused significant financial harm.” In Dettbarn’s view: “The main difference we see between those that grow and those that fail is the discipline and risk-selection process that companies use to move up to the next level.”

The post Risky Business: Surety Experts Talk Risk Mitigation in Construction first appeared on Construction Executive.

Scott Elliott

Assistant Vice President

Philadelphia Insurance Companies

It is often said that effective communication is the key to a good relationship and that nobody likes surprises. Both of those statements are true when it comes to a contractor’s relationship with their surety agent and surety underwriting company.

Most contractors are accustomed to having an annual meeting with their surety, usually after their fiscal year-end financial statement has been issued. More frequent communication often improves the relationship with the surety and in turn, improves the contractor’s capacity and underwriting terms.

Communication should also occur during the year if there are changes to the contractor’s business plan due to either internal or external factors. Some common issues that should be discussed are changes in size, type or scope of work being pursued; growth in the backlog or work program; changes in ownership and/or continuity plans; changes in key personnel; and changes to their banking relationship or other creditor relationships. Macroeconomic issues such as a recession or banking industry problems may also warrant some communication with the surety.

Sureties can be a good source of information and guidance with many of the issues noted above. The most successful surety relationships are those where the surety is treated as a business partner and not simply a creditor or vendor.

Brock Masterson

Chief Operating Officer – Surety Division

Crum & Forster

Constructive relationships between a contractor, a surety company and their surety agent often require care and consideration comparable to that which is required to maintain a healthy marriage. When this process is effectively managed, these relationships can last decades.

The construction economy is fickle and cyclical based on many factors outside of a contractor’s control. Inflation, high interest rates and labor and supply-chain constraints have impacted both the profitability of ongoing construction projects in recent years and the timing of new work.

To extend credit, a surety needs a clear and real-time understanding of a contractor’s financial condition, operating strategy and capabilities to execute that strategy in the face of an uncertain market.

Contractors often are faced with a challenging job or a tremendous opportunity on a new project that falls outside the scope of their standard surety program. It is imperative that companies share these opportunities or challenges with their surety in a timely manner to ensure that the necessary surety capacity remains available to meet their needs.

Sureties understand the cyclicality of the construction market and will work with their customers to manage through growth opportunities as well as short-term difficulties. However, when negative news is not proactively shared with the surety, it may impact the trust and confidence needed to support a contractor in challenging times. Proactive, open and honest dialogue among all parties is essential to instill the trust and confidence that is crucial when managing a volatile industry such as construction.

Aaron J. Jamison

Regional Vice President

Nationwide Surety

In contract surety, character counts. Character, along with capacity and capital, are at the very heart of our underwriting mindset and help guide our risk selection. One important way to gauge character is through regular interaction and communication with our contractor clients, which in turn helps to build trusting relationships that are mutually beneficial.

As surety, we often interact with our contractor clients; to aid in securing their account, pursuit of a large or complex project, or if the contractor is experiencing a financial hardship or ownership transition. We always seek opportunities to add value in these discussions and support our broker and contractor clients.

It’s well worth the effort to cultivate a strong relationship among the surety, agency partner and contractor client. That’s because when we know and trust one another, it becomes easier to collaborate together on projects, large and small, and agree on terms that are in the best interest of all parties subject to underwriting guidelines.

At Nationwide, we believe in offering the right partners the right solutions for the right risks. When we pair our highly rated surety products with the specialized underwriting expertise our contractor clients deserve and expect, we’re setting the stage for a partnership where the needs of everyone involved—along with mutual trust and character—are at the forefront.

I’m proud to be part of a surety team that puts a premium on communication and trust. As I meet with our agency partners and our contractor clients, whether it’s face-to-face or virtually, I know it’s going a long way to create meaningful relationships that are here for the long haul.

Jay Quillinan

Senior Vice President, Director, Construction Surety

Chubb

A strong relationship between a contractor and its surety can greatly enhance the value of a surety program and facilitate access to greater surety capacity with more beneficial terms and conditions. Regular communication with our contract surety partners is foundational to our underwriting platform. The current average tenure of our construction surety customer relationships is approximately 23 years, and we typically meet with our customers at least once per year. While the review and analysis of our customers’ financial statements and results are critical to our underwriting process, relationships are also a significant component.

Frequent and meaningful interaction allows us to better understand our customers’ business needs and objectives. It also provides us with greater insight into the organizational depth, systems and controls of our clients, which enhances our understanding of their risk evaluation processes. As a surety provider, we strive to anticipate and comprehend our clients’ needs so that we can provide expertise, solutions and stable and dependable surety capacity to enhance their business. Ultimately, a strong relationship predicated on trust and regular, open communication can help construction firms access increased surety capacity with more beneficial terms and conditions.

How has obtaining a surety bond changed with digital transformation?

David Hewett

Chief Underwriting Officer

Merchants Bonding Company

Digital transformation across the bonding process has resulted in improvements for applicants, agents and underwriters. What used to be a completely manual and time-consuming process is now faster, easier and more secure due to digital solutions.

Digital platforms, like Merchants Bonding Company’s online bonding solutions the Hub and the Hub Express, use web-based technology to provide a range of e-services. From real-time document delivery to online payments, e-services are basically instantaneous which contributes to overall time-savings.

Automation is another powerful digital solution being used to target processes or specific steps, like document generation, approvals and declinations, and data entry. Automation of tasks frees up time that individuals can invest in more valuable endeavors.

Digital tools can enhance the underwriting process by enabling surety companies to assess risk more accurately and efficiently. Advanced data analytics and algorithms can help underwriters evaluate applicants’ financial health and creditworthiness quickly, leading to faster decision-making and improved risk management. Sureties can also utilize the tools to provide insights to contractors on job results and benchmark information.

Other digital tools, like online portals and mobile apps, allow stakeholders to work when and where they want; to track the status of bond applications in real-time; and receive instant notifications. The result is more seamless communication, increased accessibility and transparency.

By leveraging technology, the bonding process has become more efficient, transparent and user-friendly, ultimately benefiting applicants, agents and surety companies alike.

Joseph M. Sforzo

COO

Surety2000

The landscape of obtaining surety bonds has been dramatically reshaped by the emergence of digital technologies. Traditionally, acquiring a surety bond was laden with challenges, involving tedious paper-based applications, manual verification procedures and prolonged approval timelines. However, the advent of digital transformation has sparked a profound revolution in this realm, rendering the process notably streamlined, efficient and accessible.

Foremost among the transformative shifts is the digitization of application procedures. Today, individuals and enterprises can seamlessly apply for surety bonds online, eliminating the need for cumbersome physical paperwork and expediting submission and processing timelines. Through user-friendly online portals, applicants gain effortless access to comprehensive information regarding diverse bond types, prerequisites and rates, empowering them to make well-informed decisions.

Furthermore, the adoption of electronic surety bonds has catalyzed the expeditious approval and issuance of bonds. Automated underwriting systems and electronic verification processes enable bond issuers to swiftly evaluate applications, culminating in accelerated approvals and issuance. Such enhanced efficiency yields mutual benefits for both applicants and bond issuers, fostering quicker turnaround times and augmenting overall customer satisfaction.

In essence, digital transformation has revolutionized the landscape of obtaining surety bonds, rendering it more convenient, transparent and efficient. Through harnessing digital technologies, individuals and businesses alike can navigate the bond acquisition journey with unparalleled ease, thereby ensuring compliance and safeguarding interests across diverse industries and endeavors.

The post Executive Insights 2024: Leaders in Insurance and Surety Bonding first appeared on Construction Executive.