The construction industry has been an ever-changing environment over the last decade or so because it has had to adapt to the rise and fall of the marketDemand has changed, requirements have changed, and desires have changed. Will all these changes in play, it becomes a fair question as to whether sureties are still an important part of the business. The answer to that question is a resounding yes. With the changes to the construction industry, risks have increased if anything, making sureties a more important part of business than ever.
The primary purpose of a surety is to financially protect the obligee if the principal does not fulfill their contractual obligations. With the changes in the market, there are new reasons why the need for this promise is so vital for contractors.
Increased competition in the marketplace presents more than one factor to the changing construction climate. Everyone in America knows that during the recession, construction was one of the hardest hit industries. Although still recovering, the industry has yet to see conditions equivalent to what they were before the fall of the market. Even though the market has not fully rebounded, demands of owners have changed and become surprisingly stringent. More responsibility than ever falls on the heads of the contractors from the expectation to finish uncompleted designs to the need to lower overhead costs significantly just to be able to stay in the market. With increased responsibility comes an increased opportunity for risk.
The likelihood of subcontractor default is a scary, but relevant factor in construction. A recent risk study conducted by the Associated General Contractors of America (AGC of America) places the risk of subcontractor default as one of the three highest risks in the construction industries. Other major risks include highly-detailed contract language and a shortage in skilled laborers. The fact that the very purpose of a surety for a contractor is to protect against subcontractor default and statistics are showing that default is still a huge risk, is alone enough to warrant a surety.
It seems as though subcontractors are not adjusting to the new industry standards in the same manner that others in construction have been forced to. Maintaining the high overhead or pre-recession times is not going to cut it in today's industry. As an unfortunate side effect, this takes many who may have proven their worth as a subcontractor out of business as they fail to match the bids of others who have adjusted. The fact that experienced subcontractors are losing bids links to the other risk factor of a lack of skilled laborers. With the shortage, the workload for those who are skilled is increased and falling behind on that workload is a major contributor to the trend of subcontractor default.
A surety, then, becomes a great way to combat these risk factors. Not only does a surety guarantee that if the subcontractor falls behind and fails to live up to their promise, the financial institution will financially compensate you but it also serves a wonderful second purpose. To be guaranteed a surety, the subcontractor must live up to the scrutiny of the bank or lender. By undergoing this process, contractors can be more assured that the subcontractor they hire is reliable.
Contractors are in many ways in a more precarious position than they were ten years ago with more liability risks being tossed to them every day. However, the risks are manageable. With proper management of these risks, contractors can know that they are protecting their business. One of the most important ways of doing that is a surety, and it is clear that now more than ever not only it is important, it is necessary.
For more information contact Skyline Risk Management, Inc. at (718) 267-6600