Blog: Surety Bonds support construction clients through challenging times

Construction bonds are a long-standing feature of the construction market, but demand for this protection has risen exponentially in the past 12 months.

The current economic climate has led many employers to include bonds as a contractual requirement for bidding contractors.

The challenging economic climate and rising insolvencies within the construction sector have led many to write bonds into contracts.

Bonds are often considered an essential layer of protection against insolvencies within the industry and its supply chain.

However, they are also driven by the need for fairer payment practices and the abolition of retentions, reducing the financial risks for employers.

The role of wholesale bonds brokers in construction

Working with a wholesale surety broker guarantees in-depth knowledge of the products available and access to trusted surety markets without the inconvenience of shopping around. Using a bonds broker streamlines obtaining a competitive quote for clients who are subject to strict tender timescales.

There’s no doubt that using an expert also reduces at least one part of the heavy administration burden of preparing the all-important tender document.

Arranging a bond is a complex process that requires expert advice. Compared with other lines of insurance, there are few financial incentives in obtaining multiple quotes from several sources because pricing will likely remain static.

Compared with other lines of insurance, there are few financial incentives in obtaining multiple quotes from several sources because pricing will likely remain static.

Surety bonds are unique because they’re calculated exclusively on the client’s financial profile, not the broker’s relationships. Larger wholesale broker buying power is unlikely to result in a more competitive premium in this market.

Protecting your construction clients

It’s tough times for construction brokers, and client retention is paramount, so many prefer to work with firms of a similar size to themselves to avoid the risks of sharing sensitive client data. Working with a bonds broker who can offer tripartite or indirect communication options is vital to prevent this conflict of interest.

Quality customer service and in-house bonds underwriting expertise are also important when looking for a bonds broker. Construction clients are under pressure, and it is therefore crucial to work with a wholesale broker who can get it right the first time and avoid jeopardising the client’s tender process.

The benefits of bonds for your customers

Bonds provide employers with instantaneous access to funds and guarantee the completion of work.

The construction sector uses a wide range of bonds, including performance bonds, advance payment bonds, retention bonds, section bonds (mainly used for local authority works such as highways and sewers), bid bonds, NHBC bonds for new homes and warranty bonds.

Performance bonds, (sometimes known as surety bonds or contract guarantees) are the most commonly used bonds in the construction sector.

Performance bonds guarantee the contractor's obligations under the contract and protect against insolvency, reducing the risks for the employer who employs them to do the work.

The future

There's no doubt that securing a bond is an influential factor during the construction contract bid selection process, and some contractors may even consider bonds an influential factor in new business acquisition. As bonds are used more frequently in the future, all parties need to have a solid understanding of the bond options available to them and when they can be used.

Providing reassurance that an expert is arranging this cover is a powerful client retention tool for construction brokers. It minimises unnecessary delays that could jeopardise new business contracts or expose them to potential future financial or legal problems.