As we wrap up 2023, it’s time to look at what’s in store for the Surety Market in 2024. Last year saw an increase in claims, rising inflation, interest rates volatility, labor shortages, and supply chain disruptions, setting the stage for a cautious approach ahead. Expect stricter underwriting as the market aims to stay profitable. Let’s explore how these factors affect the construction industry and your surety program.
As contract values continue to increase with inflation, capacity, and single project limits should continue to be monitored and discussed with your surety agent. Knowing what your program limits are, in addition to the financial and operational items that affect these limits, can allow you to manage your financials in a way that can give you control over your surety program. Staying on top of your available capacity, meeting regularly with your surety partners, and having open dialogue with your underwriting team are ways to ensure that there are no surprises regarding program constraints.
As interest rates rise the ability to borrow money becomes more expensive for both contractors and owners. Contractors who use their bank line to cashflow their business may see increased scrutiny from their surety. While all surety companies want to see that contractors have an appropriate bank line in place, they prefer contractors not to rely on these bank lines to run their day-to-day operations. Receivable collection and managing cash will be even more important for 2024 as sureties will be looking to confirm that your business can withstand the higher cost of borrowing.
Owners are also dealing with the effects that inflation, material costs, and labor burden are having on contract values causing them, at times, to delay projects and even completely cancel them. We are seeing sureties ask more clients to provide proof of owner financing before approval of bonds. While this has always been a good business practice for contractors, sureties asking for proof more frequently and for smaller projects means that they are seeing more and more issues arising for their clients due to lack of funding or funding falling through. Some larger general contractors are even considering prequalifying their owners. To assist our clients in addressing these two risks of doing business, McConkey’s surety team has created a proof of financing template, and we are extending our prequalification services beyond subcontractor review, and including owner review as well.
Labor remains an issue in most industries as fewer people are entering the trades while simultaneously experiencing a large amount of retirements. Companies have resorted to several unconventional ways to attract and retain employees such as creating relationships at the high school level, teaming with tech schools and colleges, paying higher wages, and offering referral bonuses to employees. While material costs have stabilized, they have still not returned to pre-COVID levels in most industries. Labor shortages and material costs continue to be a question at every surety meeting as they drive up the cost to do business for their clients, and we will continue to see this in 2024. Maintaining an open dialogue with your surety regarding your plans to mitigate the effects of any labor shortages or material issues you are seeing will help alleviate any concerns.
In Q3 of 2023, most surety companies experienced higher-than-usual losses. If sureties continue to experience increased claims notifications and losses, which is expected, underwriting due diligence can be anticipated to tighten even further. However, with the new entrants coming into the industry and the lack of significant losses, we could see some of the negatives combatted, to a degree, allowing the market to remain fairly competitive. As we get further into 2024, it will be more telling, but a good cautionary strategy, especially if we enter a hard market, is to have a backup surety in place if there is any uncertainty surrounding your program.
If you have concerns about your program or want to gain more control, reach out to our surety team. We’re here to help you navigate the market and ensure your success.
