What are the Benefits of Surety Bonding?
What are Surety Bonds?
Who are Surety Bond Producers?
What are Surety Companies?
What are the Benefits of Surety Bonding?
Surety bonds have a significant impact on public and private construction projects. An economic analysis conducted by a leading global consulting firm, Ernst & Young (EY), quantified the benefits surety bonding generates as follows:
Lower cost of completion upon default and necessary completion expertise – Unbonded construction projects on which the contractor defaults were found to have a cost of completion 85% higher than projects protected by surety bonds. Experts on construction project defaults also unanimously indicated the surety is generally more able to provide the expertise and resources needed to promote a successful transition or re-procurement process than an owner. Over 90% of these experts reported public and private owners/developers generally do not have the expertise and resources to complete the project.
Lower rate or likelihood of default – Unbonded projects are more likely to default than bonded projects, perhaps by as much as ten times. This analysis assessed portfolio performance using a default rate of 2.5 times, 5 times, and 10 times a bonded portfolio’s default rate, and generally found unbonded projects are more likely to default than bonded projects. This is in large part because unbonded projects lack the various types of support bonding provides to projects (e.g., prequalification of a contractor’s expertise and financial strength, greater project oversight).
Improved or lower contractor pricing – 75% of owners/developers surveyed reported that surety bonding reduces contractor pricing. Respondents cited increased confidence in the general contractor to complete the project and pay subcontractors and payment protections for subcontractors as some of the factors that impact contractor pricing. The analysis demonstrates that any level of improved contractor pricing will only increase the cost benefits of a portfolio of bonded projects.
According to the EY Study, additional benefits surety bonds bring to both public and private construction projects include:
More rigorous prequalification and review – Prior to construction, prequalification was more likely to occur for bonded projects (96% of respondents reported that pre-qualification was performed for bonded projects as compared to 61% for non-bonded), and during construction, contractors provided more information for bonded projects – general contractors were nearly twice as likely to share more than one financial update for bonded projects as for non-bonded projects.
Higher priority placed on bonded projects and greater project oversight – Respondents reported that contractors prioritize bonded projects when experiencing financial challenges. Nearly 5 times as many respondents indicated that contractors place a higher priority on bonded projects as compared to unbonded projects when facing financial difficulty. Greater project oversight with more involvement by construction managers is likely to help prevent losses.
Greater timeliness of completion – 5 times as many public and private owners reported, bonded projects are more likely to be completed on time or ahead of schedule than non-bonded projects. And when a project does default, an unbonded project will take nearly 2 times longer to complete than a bonded project.
Necessary experience and resources when defaults occur – 100% of construction default experts surveyed/interviewed for this analysis said sureties have the expertise, tools and resources necessary to complete a project in the most cost and time-effective manner as compared to an owner who does not have the same expertise and experience as a surety.
For more information about the benefits of surety bonding and to learn more about 2022 Ernst & Young Study, visit https://surety.org/suretyprotects/. #SuretyProtects