Construction spending in the United States remains high, despite private construction decreasing by 1% year-to-date versus a 4.8% increase for public construction, according to the latest U.S. Census Bureau data.
The largest private spending increases occurred in the power sector (6.2%) and private office construction (7.7%). The largest public spending increases occurred in highway and street construction (10.8%) and other transportation projects (9.3%).
As a result of continued strong construction trends, the surety industry has seen corresponding growth in the value of covered projects. The surety industry issued bonds totaling over $6 trillion in contract surety exposure over the last 20 years, including $650 billion in 2018 alone.
While sureties paid more than $75 billion in connection with covered projects over the past two decades, the good news is that the construction industry has been strong and project success rates have been high, resulting in low losses for the surety industry. Strong, well-managed construction companies, coupled with robust surety underwriting criteria and prequalification, have produced exceptional project success rates.
As contractors and sureties partner on future work, a few trends are notable and will impact surety underwriting considerations.
Megaprojects on the Rise
According to a recent report from FMI, a management consulting company focused on contractors and construction, more than 670 megaprojects costing over $ 1 billion are in the planning stages, equaling a future investment value of $2 trillion. In addition to the sheer size, these projects are made even more complex by the involvement of multiple public and private stakeholders.
In the last six years, the annual value of megaprojects rose to 33% of all construction starts in the U.S. The FMI report also estimates that megaproject spending will equal 20% of all construction spending in the next decade, up from 1.8% in 2012-2018.
This has led to signs of stress due to contractors’ potential limited capacity to deliver such large, complex jobs. While the megaproject sector is strong from a surety perspective, underwriting conditions continue to tighten, according to surety industry leaders.
Skilled Labor Shortage
The construction industry lost 600,000 jobs after the recession in 2008, and many of those workers never came back, despite an abundance of opportunity. The Department of Labor reports 434,000 construction jobs were vacant this past spring, with many construction managers seeing and feeling the shortage on their jobsites every day.
This reality has caused construction projects to slow and contributed to the 6.2% rise in the cost of construction in 2018.
The construction industry added 7,000 net new jobs in September, putting its unemployment rate at 3.2%, according to an Associated Builders and Contractors analysis of U.S. Bureau of Labor Statistics data. Unemployment across all industries was 3.5% in September—the lowest recorded in 50 years.
“The current U.S. economic expansion will persist for the foreseeable future, as ongoing job growth propels consumer spending and as surprisingly modest inflationary pressures keep interest rate increases at bay,” says ABC Chief Economist Anirban Basu.
“Nonresidential construction employment continues to expand—a reflection of a segment that remains flush with work,” Basu says. “The ongoing declines in various measures of unemployment are consistent with the notion that the average contractor, including subcontractors, will continue to face enormous difficulty recruiting new employees. Many contractors continue to pay for substantial overtime, translating into flat profit margins or worse in the context of still plentiful bidding opportunities.”
Slow Payment Concerns
Contractors are also being challenged by slow payments.
According to a recent study of 184 firms by Rabbet and Procore Technologies, slow payment cost general contractors, contractors and subcontractors $64 billion in the last year. This was a $24 billion increase from the previous year’s study that only surveyed contractors and subcontractors. The report found that the average turnaround time for payment was 51 days, with 63% of contractors saying they passed on bidding on projects if the owner or general contractor had a reputation for slow payment. More ominously, only 39% of subcontractors said they had enough cash on hand to cover late payments.
Due to these trends and the resulting increase in project complexity and risk, it is essential that contractors have a strong partnership with their surety.
“The surety industry is proud to support our construction partners with advisory services to manage risk and grow their businesses,” says Lee Covington, president of The Surety & Fidelity Association of America.
