The construction industry has rebounded over the last few years and more growth is forecasted in 2017. That is, so long as the construction workforce can supply enough labor to meet growing demands. Employment issues aside, the construction industry can confidently expect a boom to at least one sector: infrastructure. By electing Donald Trump, the country has committed itself to serious spending in this area.
Surety Bonds on Public Projects
Chief among the differences between public projects and private ones is the requirement of surety bonds on public projects. In order to protect public funds and the subcontractors and suppliers on public projects, the Miller Act and Little Miller Acts have been passed on the federal and state level. You can click the prior links for a more in depth analysis, but essentially the Miller Act and Little Miller Acts require a contractor on a public project to provide performance and payment bonds in order to ensure that a project is completed and that all parties to the project get paid.
One of the main reasons these bonds are required is that public property cannot be encumbered by a mechanics lien. On private projects, subcontractors and suppliers, as well as contractors, may file a mechanics lien after going unpaid on a project. Because this is option is not available on public projects, surety bonds on these projects provide parties down the chain a vehicle to assert claims of nonpayment. When a contractor fails to provide payment, a subcontractor or supplier may file a claim against the surety bond, much like a party would file a mechanics lien on a private project.
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Trump plans to fund infrastructure improvements largely through public-private partnership (P3) projects. P3 projects differ from public projects in that public and private entities both invest into the project and both attain some ownership or interest in what is essentially a public project. Just as surety bonds are required on public projects, P3 projects are also protected by the bonds when public property is in play. This means that the demand for surety bonds will be tied to the demand for infrastructure construction, as well as the demand for public projects in general.
Supply of Sureties, Demand for Bonds
Over recent years, the surety bond industry has shown incredible profits. Due to this performance, those insurers formerly abstaining from the construction bond market have begun creeping into the construction industry. As a result, there is greater competition among surety providers. What’s more, because some of these providers are relatively new to the market, they provide cheaper bonds in order to compete with established bond providers such as Travelers, Zurich, and Liberty Mutual. The greater the competition between bond providers, the better. The prices of providing performance and payment bonds should drop with more available surety options.
While prices could dip in the short run, the demand for surety bonds will also be increasing over the coming years. As previously mentioned, Trump’s massive infrastructure plan calls for yuge amounts of spending on public projects and P3 projects, both of which will require surety bonds. So while more bonds would inevitably be needed to keep up with a growing construction industry, the need for bonds will skyrocket when infrastructure projects start breaking ground. When the demand for surety bonds on public projects and P3 projects begins catching up to the growing number of suppliers of the bonds, savings on performance and payment bonds will start to diminish.
For a more in depth look at the supply of surety bonds, check out these articles from Property Casualty 360 and Construction Executive.
Takeaway
Overall, this is an exciting time for contractors, subs, and sureties alike. More projects will become available in the infrastructure sector in the coming years. While the new administration seems to prefer P3 projects in order to limit public spending, these projects will require payment and performance bonds just as a normal public project would. The foreseen increase in demand for these bonds has drawn insurers to the bond market. Increased competition will lead to more favorable prices for contractors, which should lead to better margins for everyone down the chain. Who doesn’t love construction growth and increased cash flow?
