Evaluation of Construction Surety Bonding Criterion for Changing Economic Conditions

Changing economic conditions have created uncertainty in the construction industry. Developers, construction companies, and sureties are all sensitive to the potentiality of failure and subsequently the need to manage financial risk. Over the last 15 years, many have observed economic growth, recession, recovery, and growth again. In this same time period many have also observed change in the surety market. As construction firms seek to expand, the demand for performance and payment bonds increases. Economic growth periods pose an interesting dynamic for sureties to anticipate risk and the next economic downturns. The purpose of this study is to investigate the bonding requirements in changing economic conditions in regards to the bonding standards during downturns and booms in the economy. Interviews were held with sureties to collect information on bonding criterion used during these economic conditions. The outcomes show that differences exist from one economic condition to another, while important surety bonding criterion are identified. Sureties become more risk averse during negative economic change, but sureties are also more willing to take on more risk during positive economic changes. Understanding the changing nature of bonding requirements helps construction companies prepare financial risk management strategies for varying economic conditions.