‘It’s In Everybody’s Best Interest To Complete A Project’: How Surety Bonds Can Provide Comfort In Times Of Uncertainty

Whether it’s lingering supply chain disruptions, increased materials costs, labor shortages or schedule delays, the construction industry is no stranger to challenges.

In 2020, construction projects across the country were halted due to the pandemic — with as many as 68% of builders nixing at least one project completely. Since then, construction materials have undergone a near 36% price increase over the past three years, and almost 40% of construction companies let go of workers due to pandemic-related supply chain setbacks and heightened costs. 

Though market conditions are slowly starting to improve, developers are still struggling to get distressed projects completed in a way that satisfies all stakeholders. As a surety consultant, that’s where The Vertex Cos. steps in.

“At the end of the day, a surety bond is essentially an insurance policy that ensures owners are provided with a completed project,” The Vertex Cos. Chief Operating Officer Mark Degenaars said. “If there’s a project where a surety bond is involved, and it becomes distressed in some manner, both the owner and the contractor have the ability to contact the surety in an effort to settle a dispute by getting a third party involved.” 

The Vertex Cos. is an international multidisciplined professional services firm that aims to “better the natural and built environments.” Founded in 1995, the company offers engineering, environmental, forensics, project advisory and witness and dispute resolution services. Vertex is known for its diverse experience with sureties, as well as public agencies, debt and equity investors, REITs, developers, general contractors, architects and institutional owners, among other stakeholders.

Degenaars said that regardless of why a project may be distressed — whether it is scheduling conflicts, disputed change orders, design challenges or funding issues — a surety company will investigate the claim to see what exactly is going on. From there, there may or may not be further involvement.

“A positive aspect to bonded construction projects is that owners, or whoever is funding the development, have a policy to go back on,” he said. “The surety companies that we work with live true to the bond. They will investigate a claim and if deemed valid will attempt to assist with addressing project problems and work to facilitate completion of a project.”

In nonbonded construction, there is no surety partner and resolving issues can pose greater challenges, he said. If there is an issue with the project, the owner and the contractor must simply rely on following the dispute resolution clauses within the contract. This can typically push problems down the road and end up going to litigation because there is no third-party involvement looking to resolve disputes and focus on the successful completion of the project.

The burden is then placed on the developer or owner to resolve contentious matters, which can end up being time-consuming and costly. In unprecedented times like these, this can add an extra layer of uncertainty to an already complicated equation.

“Current economic conditions have pushed some developers toward bonding their nonpublic funded projects,” he said. “Sourcing materials and increased costs are a problem, along with staffing and inflation, among other industry struggles. The cost of capital and rising interest rates are placing financial burdens on contractors across the nation, as it relates to lending and borrowing.”

Overall, a combination of all of these factors is causing an increase in distressed construction. Developers and contractors alike are facing volatile market conditions and economic headwinds, furthering the need for surety bonds.

Degenaars advised that to avoid distressed or suspended construction projects, knowing the red flags before they turn into a serious issue is key. He said that because of its multidisciplinary nature, The Vertex Cos. can see the full life cycle of a project — from budgeting to program management to disputes and claims — ultimately working with surety providers to solve problems before they compound.

“At Vertex, we firmly believe that the key is to try and meet and facilitate with these groups before issues grow and the disconnect becomes larger,” Degenaars said. “Having a construction consulting firm with experience on surety projects and vast knowledge about working through distressed construction can help.”

For instance, owners may not notice in time that a contractor has compressed timelines, ultimately leading to a false end date. On the contractor side, he said that they may not see that an owner is not funding in a timely manner, or not addressing change orders efficiently. That creates a cash crunch and, ultimately, a domino effect throughout the entire project, he said. 

“At the end of the day, it’s in everybody’s best interest to complete the project,” Degenaars said. “Addressing issues before they snowball is essential to the success of all parties, and working with surety consultants who can look at all facets of a distressed construction in a collaborative manner before the project reaches a point of no return is imperative in this day and age.”

This article was produced in collaboration between The Vertex Cos. and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.