Contractors were confronted with many challenges in 2022 and into 2023. Despite the supply chain disruptions, labor shortages, schedule delays, and continued inflation, contractor profits remained mostly positive, and times have been good. The construction and surety markets have both experienced record growth over the past 15 months, and many contractors have experienced record backlogs and revenues. However, additional risks and uncertainty are gaining momentum as industry challenges persist and the threat of economic recession grows. How will this affect the surety market and what can you do to prepare?
Challenges in the construction industry
- Continued inflation and material price increases.
- Managing record backlogs in a tight labor market.
- Supply chain disruptions and schedule delays.
- Banking industry woes and economic uncertainty.
How will surety underwriters respond?
Capacity remains and most will continue using a commonsense underwriting approach. Underwriting will remain disciplined and may become more conservative:
- A focus on timely financial reporting / work-in-progress (WIP) analysis
- More frequent financial updates, information needs, and communication both at renewal and throughout the year.
- A bigger focus on working capital, cash, and banking relationships.
- More questions and information requests at bid time, especially for larger projects and for spikes in backlog.
What can you do to prepare?
- Focus on working capital / Retain cash and earnings in the business.
- Solidify your banking relationships; Increase your bank line of credit capacity.
- Implement best practices and continued process improvement.
- Understand your surety’s expectations.
- Speak with your surety agent on a quarterly basis.
- Make a plan / Set goals and benchmarks.
- Have your or one of Seubert’s surety agents conduct a risk assessment.
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