Surety Bond News

Green construction focuses on building projects that use less energy, water and materials in the structures themselves. The green principles also apply to the construction techniques utilized in erecting a building by choosing the most efficient and least wasteful processes. While this revolution has already proven to be a great success in promoting eco-construction, it has thrown quite a kink in the traditional construction bonding process. (more…)

Individual surety ship is said to be the Wild West of contract surety bonds; there is little to no regulation on the bonds. When contractors have trouble obtaining bonds from licensed sureties, they turn to “individual sureties” who are not regulated. These individual sureties can ruin a construction project with their unregulated bonds, just like it did with the Korean Seventh-day Adventist Church.

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Once again amendments have been presented concerning the government run SBA Surety Bond Guarantee Program (SBA Program). Senator Ben Cardin’s (D-MD) staff has been cooperating with SFAA and NASBP in the final stab of the year to enact the Senator’s amendments concerning small contractors. Some wonder whether these changes are moving the program in the right direction.

The proposed modifications boost the maximum contract amount bonded under the SBA Program from $2 million to $5 million and would also provide the SBA Administrator discretion to establish the liabilities of its Bond Program when claims arise; this would allow SBA bonded contractors to either do larger jobs or a larger volume of jobs as well as provide increased bond lines (similar to a line of credit). These provisions were incorporated in the 2009 economic stimulus package (ARRA) but expired on September 30, 2010.

The amendments have been integrated in to numerous bills in the Senate this year including the final tax extenders package that President Obama signed into law but they didn’t make the final draft. While changes must be made to the SBA Program due to its laborious procedures, these amendments may not be the steps that should be taken. Smaller sized contractors are in support of these changes which would end up providing more/larger jobs but it’s also risking tax payer’s money having them work on larger jobs where they have little to no experience. Should a claim arise, the SBA would have to pay the claims for the incomplete jobs.

The SBA Program is difficult to deal with as is and needs an overhaul when it comes to procedure. Most surety companies don’t want to work with the SBA because it is a mismanaged program which limits the surety market quite a bit. When working with the SBA Program you are often required to send four or five copies of the same contract to several departments. Additionally, nothing can be photocopied being everything must be in blue ink which will cause agents to fill out the same form several times; just a couple examples of the cumbersome process. Although success has come from the program giving smaller contractors more opportunities, you can look at it as tax dollars being thrown out the window for the simple fact that the SBA Program is usually avoided. For the agents that do work with the SBA, it’s mostly because the program is a niche market for the wrong reasons being there is so much red tape involved.

Above is a table showing the SBA’s total revenue and liabilities; from 2005 to 2009 the total administrative costs of running the program outweighed the total revenue brought in and this is projected to continue through to 2011. This shows why changes in efficiency and operation need be made to the program.

In the end, these amendments have a risky nature giving more flexibility to smaller contractors that may not have the ability to handle the work load. Given, changes need to be made to the SBA Program they should be more focused on the procedure and efficiency of operation. Money is being misused because we have this government run SBA Program in place but is sparsely being utilized by contractors and sureties alike because of the procedures they have in place. While these amendments are trying to change some of the rules, it’s not necessarily in the right direction. Until the efficiency of the program improves, we will see the same pattern of sureties and contractors avoiding this program that was established to provide more working opportunities.

A nuclear renaissance has begun in this country.

Here is a cursory overview of what is coming and when, respectively: “Proposed New Nuclear Power Plants” and “First Wave or Second Wave?”. As you can see, the plans span decades. That is because nuclear energy facility construction requires years of wide-ranging and comprehensive planning, licensing and financing efforts. All of this is changing rapidly, but it is already underway. The extent of the work that will be bonded is not clear, but given the the risks, public responsibilities and probable general contractors, the use of construction contract surety bonds is likely. My personal opinion is that it is highly advisable, and I have written about it here:

Surety Bonds for Nuclear Energy Facility Construction Cost-Savings.

On a personal note, I should mention that before I had ever heard of a surety bond, I was involved in the tail-end of the last round of new nuclear construction in several capacities. I have been following the progress of the nuclear renaissance for about a year now, reading everything available and finally meeting some of the people involved in June. There is no primary source for this news and information, but there is an extensive blogosphere covering the developments. There are few traditional sources covering this other than highly-specialized, expensive paid sites and studies, very few of which specialize in the construction side of the nuclear industry, much less matters of interest to surety.

I would summarize my findings simply by saying that it looks like there is a sizable new market opportunity awaiting, but it is fraught with unfamiliar risks, particularly in regard to construction standards as well as nuclear and environmental regulations, state, federal and local. This is a whole other world of construction, folks.

“How big is that market?” I hear you asking. Well, $188 billion is one number that was floating around last last year. And at the National Press Club in July, Senator Lamar Alexander of Tennessee announced a $700 billion plan to almost double the number of reactors nationwide. There is similar legislation pending in Congress, e.g., the American Energy Act.
I am loathe to put a number on it myself, and hereby chastise the mainstream construction press for being so late to the game reporting on this with any kind of comprehensive summary. The numbers on the board change frequently for reasons including: federal licensing, corporate fluctuations, financing, federal loan guarantees and state approvals, listed here in no particular order. But I would submit that they are indeed substantial.

Due to their sheer size, complexity and duration, these projects do not easily lend themselves to bonding in their entirety. But some proportion of bonding is probably feasible for many of the subcontracts and large fabrications. In fact, “modularity” is a phrase used a lot in the renaissance circles, and that ties-in very well with surety, at least in my opinion. The overall financial guarantees for the general contracts with the utilities are mostly confidential, thus not revealed on the state utility regulatory websites. But just to give you number-hungry sureties one red-meat example, the first new project underway is Plant Vogtle 3 & 4 in Georgia, at $6.446 billion, so sharpen your pencils boys and girls. Other projects on the boards may be higher or lower, as some are expansions at existing facilities and others completely new. At least one of the general contractors involved has mentioned that there may be a need for financial guarantees for its subcontractors, citing surety bonds specifically. For a number of reasons, I think it can be expected that others will soon follow suit, if they have not already done so. You might want to give the old “heads-up” to reinsurers, as nuclear exclusions are prevalent in insurance and surely confusion will ensue among that quarter. Sureties which predominantly bond smaller subcontractors should also take note and dust-off the old guidelines from thirty years ago before they are blindsided. Questions may be forthcoming.

Bear in mind, these are only the domestic projects, dwarfed by what is planned worldwide. China, India, Brazil, Italy, the UAE, Finland and even Saudi Arabia are all in the mix. Those of you in international markets may have even greater opportunities there.

The surety industry has a lot to offer in this effort, as I’ve argued in the other post. I see it as an opportunity that should be explored.

by Surety Insider

The stimulus package is absolutely gigantic. So much so, I thought I would create a list of pros and cons related to the construction industry pertaining to the bill. Many of the cons are items that the industry was pushing for, but did not get.

Overall, the bill looks like a victory for the construction and surety industries. See below for details.