Economic uncertainty is one of the key driving factors in the increasing demand for surety bonds. Main contractors appointed on a scheme are being asked to put a performance bond in place as a prerequisite of the successful tender.
Inflation, supply chain disruption, staff shortages, delayed payments and interest rate increases are the main factors that have a detrimental impact on a contractor’s cash flow. This ‘perfect storm’ has resulted in an increased demand for surety bonds as employers look to protect themselves from such risk.
Performance bonds help assure employers’ that work on their project will still be financially viable if things go wrong and act as a ‘guarantee’ over the performance of a contractor’s obligations. Should the contractor default on such obligations, the employer will, in theory and subject to the bond terms, have an effective remedy to the contractor’s breach by liquidating the bond. The client can then progress the necessary works knowing that the bond will retrospectively cover their incurred costs.
Alternative options:
Surety providers are playing a more prominent role in a market that traditionally banks once dominated. Businesses see these providers as an excellent way to increase their sources of finance & more importantly, liquidity.
When a bank issues a bond, the amount will be locked in the credit facilities; but when a company takes a bond with an insurer, their bank-based credit potential remains untouched.
In addition, the surety providers review Bond wordings, enabling you to steer away from conditions that could have a negative impact.
Presentation of risk:
Surety providers and underwriters have taken an increasingly cautious approach about offering bonds to anyone but the strongest of contracting companies- this has resulted in a perceived performance bond ‘shortage.’
However, capacity levels as a whole have remained the same- the difference is that underwriters have taken a more rigorous and cautious approach. Hence, the presentation of the risk is vital, and networks/relationships across the bond market are key to secure bonds for upcoming projects.
An advisor’s added value:
The true value of the right advisor comes into focus in a hardening market. An advisor with solid market relationships and a creative strategy will go a long way to alleviate much of the strain associated with the uncertainty of the challenging market.
The most important factor that impacts the cost of the bond is the contractors financial strength and the Bond wording required.
We recommend that contractors work closely with their advisory team to maintain regular communication and share as much detailed information as possible to ensure a successful application.
About J3 Advisory:
J3 Advisory’s relationship across the bond & surety markets enables their clients to secure competitive rates for their facilities and ensure they have sufficient capacity to support them from the tender stage to the execution of the Bond.
If you have a project you wish to discuss, call 020 3096 0718 or email us on [email protected]
