Bonded project portfolios outperform non-bonded portfolios
A study conducted by Ernst & Young’s (EY) – The Economic Value of Surety Bonds finds construction projects protected by surety have lower rates of contractor default, lower cost of completion in the case of default and are finished faster than non-bonded projects. For a bonded portfolio of construction projects, the overall value of surety bonds more than covers their cost.
EY’s analysis quantified the benefits surety bonding generates throughout the lifecycle of a portfolio of construction projects – including benefits extending beyond the financial protection surety companies provide when contractors default. As a result, EY’s research found that bonded project portfolios perform better than unbonded portfolios, even when considering conservative default rates.
The report exposes the risks of unbonded construction projects, including project delays and higher costs, especially in the case of default. EY’s analysis makes clear surety bonds deliver exceptional economic value for vital infrastructure projects and highlights the economic value and protections surety bonds deliver for construction projects.
Based on a survey of developers, interviews with experts on construction project defaults and an assessment of project portfolios, the analysis identified three areas where surety bonds have a significant impact on construction projects:-
Lower cost of completion upon default and necessary completion expertise Unbonded construction projects on which the contractor defaults were found to have a cost of completion 85% higher than projects protected by Surety Bonds. Experts on construction project defaults also unanimously indicated the Surety is generally more able to provide the expertise and resources needed to promote a successful transition or re-procurement process than an owner.
Lower rate or likelihood of default
Unbonded projects are more likely to default than bonded projects, by as much as ten times. This analysis assessed portfolio performance using a default rate of 10 times a bonded portfolio’s default rate and found unbonded projects are more likely to default than bonded projects. This is in large part because unbonded projects lack the various types of support bonding provides to projects e.g. prequalification of a contractor’s expertise and financial strength and greater project oversight.
Improved or lower contractor pricing
75% of owners reported that Surety Bonding reduces contractor pricing. Respondents cited increased confidence in the general contractor complete the project and pay subcontractors and payment protections for subcontractors as some of the factors that impact contractor pricing. The analysis demonstrates that any level of improved contractor pricing will only increase the cost benefits of a portfolio of bonded projects.
The EY report found additional benefits surety bonds bring to construction projects, including:
More rigorous prequalification and review;
Higher priority placed on bonded projects and greater project oversight;
Greater timeliness of completion;
Necessary experience and resources when defaults occur.
