Lexington National Insurance Corporation is a proud member of The Surety & Fidelity Association of America (SFAA), the leading national trade association for sureties. The SFAA recently engaged Ernst & Young (“EY”) to analyze whether bonded construction projects performed better than non-bonded projects. The results were clear – bonded projects perform better.
The EY Report (.https://surety.org/wp-content/uploads/2022/11/EY-SFAA-Report-on-economic-value-of-surety-bonding-ES-2022-FINAL-1.pdf) finds public and private construction projects protected by surety have lower rates of contractor default, lower cost of completion in the case of default, and are finished faster than non-bonded projects. For a bonded portfolio of construction projects, the overall value of surety bonds more than covers their cost.
EY’s analysis quantified the benefits surety bonding generates throughout the lifecycle of a portfolio of public and private construction projects – including benefits extending beyond the financial protection surety companies provide when contractors default. As a result, EY’s research found that bonded project portfolios modeled perform better than unbonded portfolios, even when considering conservative default rates.
“The EY Report sets out the risks of unbonded construction projects, which include project delays, higher contract prices, and higher completion costs in the event of default. Surety bonds make sense for both public projects and private projects,” said Lexington National President Mark Holtschneider. “The report is particularly important because EY is a nationally recognized and trusted firm,” Holtschneider continued.
The three most significant benefits identified by EY were 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.
“This report represents the industry’s most comprehensive examination of the economic benefits and protections of surety,” said Principal & Co-leader, EY Quantitative Economic and Statistics Group, Robert Carroll. “Based on our analysis, the multiple benefits surety delivers help manage risk and provide strong economic and performance value to construction projects,” continued Carroll.
Lexington National is rated A- “Excellent” by AM Best, and we focus on writing construction bonds for small and mid-sized contractors. As a small, family-owned surety, we can move quickly and make fast decisions. We are eager to issue contract surety bonds for public and private jobs. For more information, contact our President Mark Holtschneider (410-868-9608; mark@lnic.com) or our Vice President of Contract Surety John Dykstra (443-801-8043; John@lnic.com).