After a tough year for the construction industry in 2023, we are now finding the need for contractors to supply bonds on their projects, giving employers and funders a secure contingency.
Not since the failure of Carillon in 2018 has the surety market experienced such losses.
This is being driven by:
- Inflation (especially for contractors signed up to fixed-price contracts)
- Lack of liquidity in the supply chain and the potential negative impact on cash flow and profit margins across the sector.
- Material and labour shortages.
- Project delays.
- Cladding and PI insurance related issues.
- Shock waves from the COVID pandemic.
- The fallout from Brexit.
As a result, underwriters are facing capacity constraints and have been advised to prioritise careful management of the bottom line over chasing premiums. Notably, surety underwriters are seeking out robust, cash-rich, and profitable companies with a high net worth as a priority.
An additional outcome of these shifts is the rise in premium rates. This surge is often spearheaded by reinsurers who are actively increasing their rates, contributing to the evolving landscape of the insurance market.
The importance of bonds
In this environment, it’s key for contractors to look after their cash and access working capital. Utilising the surety market for bonds instead of a bank can help. A surety bond is an advantageous tool for construction contractors. Bonds being provided by insurance companies have no effect on the balance sheet, unlike using a bank, which can tie up working capital. Banks will often be fully secured with cash and charges over assets, which is unattractive at a time where liquidity is key to a business.
Sourcing bonds through the surety market will allow more flexible options on bond wordings, whilst spreading out the liability as a broker will set up facilities tailored to bonding requirements. Thus, it’s critical to utilise the services of a specialist broker to access the surety market to confirm the necessary capacity is available.
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