Understanding the Individual Surety in the 21st Century

Construction is an $845 Billion industry representing 10% of the U.S. Gross Domestic Product.  It is vitally important to the U.S. economy.  To keep this sector of the economy running, and to protect itself against the risk of failed contractors and construction projects, the construction industry relies on the surety industry. The risk of failure from the project owners (whether private or public) is transferred to bonding surety companies or individual sureties by means of a centuries old instrument known as a surety bond.

In 1935, the Federal Government passed the Miller Act, requiring bid, payment and performance bonds for most Government construction projects. Almost all 50 states (and most local jurisdictions) have enacted similar legislation requiring surety bonds on public construction projects, and these are generally referred to "Little Miller Acts.”  Thus, surety bonds are required on most public (and private) construction projects.

According to publicly available statistics after 2007, construction represents almost 10% of the U.S. Gross Domestic Product. Construction is an $845 billion industry and represents the second largest economic sector in terms of revenue and employment. It is comprised of nearly 650,000 construction companies and 5.7 million workers.

To have projects complete on time and on budget are two goals of any project team.  However, construction is a risky business. The failure rate for construction companies has been estimated in excess of 28%. In the seven-year period from 1990 to 1997, more than 80,000 contractors failed on construction projects in the United States. That left a trail of unfinished private and public construction projects with liabilities exceeding $21.8 billion. How are these failures managed in the construction industry? How does the construction industry avoid the huge impact of these failures? The answer lies in the surety bond industry.

manage this risk and, more specifically, to transfer the risk of failure from private or public project owners ("Owners") to insurance companies and other individuals and entities, the surety industry arose.  Sureties, by means of surety bonds, offer assurance to an Owner that a contractor is capable of completing the contract on time, within budget, and according to specifications, and that it will meet its financial obligations to its workers, subcontractors and suppliers.  Sureties also provide financial and technical assistance to contractors so Owners get what they contracted for - a completed project - and, in doing so, the sureties reduce their own risk exposure.

Surety bonds have been used in commerce for centuries, dating back to the Roman Empire around 150 A.D.  In 1880, the first corporate surety company established in the United States, United States Fidelity and Casualty Company of New York.

To protect taxpayers from contractor failures, Congress passed the Heard Act in 1894.  This Act required surety bonds on all federally-funded construction projects. Its successor, the Miller Act, passed in 1935, requires performance bonds for public work contracts in excess of $100,000. (40 U.S.C. § 270a et. seq.) The Miller Act is the current federal law mandating surety bonds on federal public works. Under this act, contractors on certain Federal construction projects are required to obtain bid, payment and performance bonds.

Individual sureties facilitate a bond market for small, minority, women-owned and start-up contractors. The commercial bond market for small, minority, women-owned and start-up contractors is not only already extremely limited but, in fact, is essentially non-existent. Since Calendar Year 2000, even before September 11, 2001, the surety industry has changed significantly. Five of the top ten surety companies have disappeared, capacity has shrunk among others and re-underwriting has multiplied. According to The Surety Source, a contributing factor to the current lack of bond availability is the demise of many bonding companies over the past several years. The following companies have

ceased all bond operations: Mountbatten Surety; Capitol Indemnity; Universal Bonding; Kemper Ins. Co.; Frontier Ins. Co.; Gulf Ins. Co.; Amwest Ins. Co.; Harleysville; Crum & Foster; and XL Insurance. All construction companies, but especially small, start up and those without extremely healthy balance sheets, have experienced challenges finding bonding.