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By the end of 2018, the construction and surety industries remained robust and resilient. For most contractors, backlogs are as strong as they have been in over a decade, margins have returned to pre-recession highs and work is abundant. For surety companies, profits are at an all-time high, loss margins remain low and demand for bonding, along with total spending in the building industry, continues to grow across the nation.

According to the U.S. Census Bureau, total construction spending in 2017 was $1.24 trillion and is expected to grow to over $1.35 trillion by the end of 2018.

Along with construction spending, the surety industry’s historic results have continued to improve. Since 2012, the direct written premium for the industry has grown from $5 billion to over $6.2 billion at the end of 2017, an increase of over 23 percent. And the industry does not appear to be slowing down any time soon, with projected direct written premiums of more than $6.5 billion in 2018.

The continued results and positive forecast for both underwriters and contractors have many wondering, “When is the market going to reach its boiling point and how do I prepare for the inevitable decline?” Many subcontractors, overextended with work opportunities and thin on resources, have started to show signs of struggling and an increase in defaults. This growing frequency of subcontractor defaults has resulted in some of the industry’s largest sureties experiencing significant general contractor failures domestically and internationally.

Rather than speculate, surety reinsurers are beginning to institute firmer underwriting compliance standards for front-line sureties. In response, surety underwriters are depending even more on their clients and agents to proactively manage their operation and risks associated with growth in an expanding economy. “Best-in-class” contractors are using the market’s positive growth and outlook to focus on what they do best and intelligently grow their backlogs, rather than over extending themselves by taking on work far outside their abilities and capacity. As growth continues, three main questions continue to be at the top of all contractors’ and underwriters’ minds: labor shortages, material costs and governmental policies.

CONTINUING LABOR SHORTAGES

The ability to attract and retain skilled labor is the number one concern of general contractors, subcontractors, suppliers and vendors. Although the quantity of skilled labor has increased in recent years, it has not kept up with the increase in construction spending. As a result, the industry is experiencing one of the largest labor shortages in history.

The 2008 recession saw backlogs shrink and contractors were focused on managing overhead and ensuring sustainability. To survive, many had to make difficult decisions to lay off key employees, opting to keep only the most vital roles filled. Many of the employees who were laid off were unable to find work and forced to retire or seek employment in other industries. At that time, training and developing the construction industry’s future work force and leaders were non-existent. In addition, high schoolers became more focused on four-year college placement as opposed to joining the workforce immediately upon graduation or learning a trade.

Today’s contractors are feeling the long-term effects of this mass exodus in the construction labor market and, now with demand at an all-time high, contractors simply don’t have the supply of skilled labor to match the need. The year 2018 marked that largest gap in growth between new construction employment and construction spending since post-recession.

Surety Outlook 2019: The Peak of the Cycle