Top three causes of surety bond losses on construction projects

Like anything with great potential reward, construction carries its own unique risks. According to a study by Travelers Construction Surety, the top three causes of surety bond losses on construction projects are:

1. Poor project planning and management: This includes inadequate project estimating, scheduling, and risk management. When projects are not properly planned and managed, they are more likely to experience delays, cost overruns, and change orders, which can all lead to financial losses for the contractor and the surety.

2. Inadequate cash flow: Construction projects are often capital-intensive, and contractors can run into cash flow problems if they are not careful. This can be caused by a number of factors, such as delays in payments from the owner, unforeseen costs, or poor cash flow management. If a contractor runs out of cash, they may be unable to complete the project, which can lead to a surety bond claim.

3. Failure to properly subcontract: Subcontractors play a critical role in many construction projects, and contractors need to be careful when selecting and managing them. If a subcontractor fails to perform their work, the contractor can be held liable for the subcontractor’s performance. This can lead to financial losses for the contractor and the surety. Visit 5 Essential Tips for Prequalifying Subcontractors

In addition to these three common causes, there are a number of other factors that can contribute to surety bond losses on construction projects. These include:

• Inadequate contract negotiations: Contractors need to be careful when negotiating contracts with owners to make sure that they are adequately protected from risks.
• Changes in project scope: Changes in the scope of a project can lead to cost overruns and delays, which can put financial strain on the contractor.
• Claims by subcontractors or suppliers: If a subcontractor or supplier believes that they have not been paid for their work, they may file a claim against the contractor’s bond.
• Environmental problems: If a project causes environmental damage, the contractor may be held liable for the cleanup costs.

To reduce the risk of surety bond losses, contractors should:

• Develop and implement a comprehensive project management plan: This plan should include a detailed project estimate, schedule, and risk management plan.
• Maintain good cash flow management: This includes invoicing the owner promptly, tracking payments, and managing expenses carefully.
• Carefully select and manage subcontractors: Make sure that subcontractors are properly licensed and insured, and that they have a good track record of performance.
• Clearly define the scope of work in the contract: This will help to avoid disputes later on.
• Obtain adequate insurance: This will help to protect the contractor from liability for environmental damage, claims by subcontractors or suppliers, and other risks.

By taking these steps, contractors can reduce their risk of surety bond losses and improve their chances of success on construction projects. 

Surety1.com is a service of AssuredPartners one of the largest and fastest growing insurance agencies in the nation. Representing over a dozen surety bond companies, Surety1.com is the premier provider of surety bonds for the construction industry, nationwide, since 2003. For more information, contact the surety bonding experts at Surety1.com.