At the 2019 Surety Alliance meeting in Miami, the Canadian Centre for Economic Analysis’s 2017 report “The Economic Value of Surety Bonding in Canada” surfaced as a compelling discussion topic. The conclusion driving home the value of the surety process.
Interestingly enough, some of the largest construction losses in the country’s history have occurred since its publishing, a country that requires 50% bonds or half that of the US market.
Still, this positively surpasses the inadequate requirements in other countries around the world such as Spain, Germany and France. Or the UK, who suffered its largest construction loss ever with Carillion, where 10% bonds are the norm.
The report’s insights are based on information obtained from 6 sureties, 150,000 projects, 10,000 construction firms and 3,000 claims going back approximately 20 years. The data clearly shines light on the value of surety bonds and below are several data points that exemplify just that.
To Bond or Not to Bond.
The graph above shows the historical and projected insolvency of firms partaking in bonded projects versus those without bonds as shown by:
- Blue line = historical number of Canadian construction firm insolvencies
- Green line (large dash) = modelled rate of insolvency in status quo risk baseline with NO surety bonds
- Green line (small dash) = modelled rate of insolvency in status quo risk baseline with surety bonds
- Red line (large dash) = modelled rate of insolvency in high risk baseline with NO surety bonds
- Red line (small dash) = modelled rate of insolvency in high risk baseline with surety bonds
Further the below chart shows the amount of insolvency in Canada’s construction sector bonded and non-bonded.
For those companies “born” into the recovery, now is the time to self-evaluate. We’ve lived through a few of these cycles, and every time we’re on the downside we’ve had clients say,
The introduction of performance and payment bonds leads to less contract insolvency on both ends of the risk spectrum. Less insolvency leads to fewer project delays, with reduced risk of the project to both the upstream and downstream participants.
Ripple Effect of the Downstream
The above graph depicts a network of industry dependent firms from a construction firm (primary brown plot) to its subcontractors, (large red subplots), its suppliers and vendors (small red subplots). Should the construction firm go bankrupt therefore unable to pay those further down the chain, a ripple effect occurs increasing the likelihood of financial damage and possible insolvency of the subplots. Should these subcontractors, suppliers and vendors become insolvent, their customers may become effected.
Furthermore, construction delays have a far greater negative impact beyond the firms involved or project at hand. If a vital public service is stalled or remains incomplete, the overall economy and public suffer.
The report’s findings show that:
“Non-bonded construction firms are ten times more likely than bonded companies to suffer insolvency at any given point in time.”
It also concludes:
“The highest economic and fiscal benefits versus the premium costs required comes from a policy that requires a combination of performance and payment bonds – with 100% of public infrastructure projects bonded.”
It is evident that the surety process; the underwriting of contractors and construction projects, pre-qualification of bidders, vetting of suppliers and vendors, increases the operational and financial capabilities of the parties involved.
In the data driven world we live in today, as a policy maker, why take the risk at the expense of the general public and stakeholders continuing down a high-risk path when the evidence shows that – meaningful bonding requirements work.
References:
Canadian Centre for Economic Analysis. (2017). The Economic Value of Surety Bonding in Canada.
