Double Edged Sword Slashes Surety Bond and Construction Industries

There is still a long, winding road of recovery to be traveled for our economy. With the potential of a federal government shutdown, it’s obvious some sacrifices had to be made to keep air in the lungs of the government. Congress was forced to make cuts to various segments of the American economy; however the Construction Industry was hit the hardest and in turn adversely affecting the surety bond sector as well.

The government cuts sliced $28 billion from funding for fiscal year 2010. More than half of the cutbacks, $17.1 billion, comes from the construction industry and gives it the short end of the stick. This bill may help have helped keep our government afloat, but it seemed to disproportionately target American construction which in the end negatively affects the surety industry and, unmistakably, the construction industry as a whole. Below is a list of the federal budget decreases concerning American contractors:

FY 2011 CONTINUING RESOLUTION BUDGET REDUCTIONS  
     
Line Item Dollars Cut Below FY 2010 % of $28B Cuts
     
Rural Water Subsidies $40,000,000.00 0.14%
NIST Construction $77,000,000.00 0.28%
NOAA Construction $23,000,000.00 0.08%
FBI Construction $133,000,000.00 0.48%
ATF Construction $6,000,000.00 0.02%
NASA Construction $54,000,000.00 0.19%
Corps of Engineers Construction $414,000,000.00 1.48%
Defense Environmental Cleanup $638,000,000.00 2.28%
GSA Construction $812,000,000.00 2.90%
GSA Repairs and Alterations $134,000,000.00 0.48%
CBP Border Fence Construction $226,000,000.00 0.81%
CBP Construction $60,000,000.00 0.21%
Coast Guard Bridge Construction $4,000,000.00 0.01%
Clean Drinking Water Construction $997,000,000.00 3.56%
DOD Military Construction $6,237,000,000.00 22.28%
Veterans Affairs Construction $277,000,000.00 0.99%
Air Force Construction $279,000,000.00 1.00%
Embassy Security Construction $52,000,000.00 0.19%
Federal Highway Trust Fund $650,000,000.00 2.32%
Rescission of Federal Highway Contracts $2,500,000,000.00 8.93%
Rescission of Highway Earmarks $630,000,000.00 2.25%
Rail Line Improvements $24,000,000.00 0.09%
High Speed Rail $2,900,000,000.00 10.36%
Lead Hazard Reduction $20,000,000.00 0.07%
     
TOTALS $17,187,000,000.00 61.38%
     

This bill seems rushed when you look at the lopsided nature of the cuts inside it; the data above clearly shows how the construction segment of the federal government has received no remorse. The surety industry is not in support of these cuts simply because it affects its livelihood directly. The cuts will terminate thousands of jobs which will prevent contractors from obtaining new projects because of the high volume of workless contractors competing and the dwindled amount of jobs available to compete for. As a result, the contractor’s financial strength will suffer with work so scarce; if you’re familiar with surety bonds the surety companies decide whether or not a contractor is qualified for bonding in part by analyzing both their financial strength and credit as a gauge. More often than not, contractors are required to obtain a surety bond in order to work on publicly funded projects, whether state or federal.

 Working less comes with the consequence of negative effects of their financial condition. Surety companies will be writing fewer bonds because more and more contractors will have trouble qualifying with their vulnerable financial state. Fewer bonds means less premium for the surety companies, and the premium is the main source of income that keeps them thriving.

It’s unfortunate the budget cuts bill was a double edged sword; harming both the construction industry and the surety industry. Although the negative impacts on the American construction business was apparent, these cuts makes one ask how much Congress considered the damaging effects they would have on other facets of industry within our economy.