Many small and midsize contractors don't consult their surety-bond underwriters soon enough after running into trouble that could trigger a bond—an event that threatens a contractor's ability to remain in business, according to surety executive Roland Richter.

Business management and performance are the major factors that will determine which contractors survive the years-long downturn in the construction industry, but the size of a contractor also is important, says Richter, vice president of marketing at Liberty Mutual Surety in Plymouth Meeting, Pa.

That's because project owners more likely will continue with larger, complex projects because of the importance of those projects and their longer planning lead times. Smaller projects are easier to cancel, which suggests that smaller and midsize contractors—those with work backlogs valued at between $5 million and $100 million—“will feel the negative economy sooner and more severely,” he notes.

“Contractors experiencing project losses first need to develop plans that address overhead, liquidity, problem projects and ongoing business concerns,” Richter advises. “Concurrently, contractors should immediately communicate any problems to their agents and sureties.” Many sureties will help guide a bonded contractor through its difficult period, he adds.

“Recognizing that each underwriting situation is unique, sureties have a vested interest in helping contractors work through a problem and prevent a bonded default,” he says. “A good surety agent understands this and should leverage his or her relationships with the contractor and underwriter to facilitate mutually acceptable solutions.”

But when critical information about a contractor's situation is withheld from a surety, the underwriter's reaction could be much different.

Concerned about a contractor's deteriorating financial condition—which makes the contractor a riskier bonding candidate—the surety might severely restrict its future capacity, Richter explains. The surety might compel the contractor to either bid on only smaller projects that pose less risk to the underwriter or postpone bidding on any future project until the contractor can demonstrate it has sufficiently recovered financially.

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