Billion-dollar projects could potentially test the capacity of the surety market.
Disaster recovery plus
sureties could be next.
By Gregory DL Morris
Building is booming in the United States. Billion-dollar projects are no longer unusual. The trend toward larger projects is mostly a boon to contractors and to the surety-bond underwriters who back the developments, but the volume and size of the work is becoming a matter for concern for some underwriters.
“It is a very different thing for a general contractor to do $800 million in revenue
from two $400 million projects or from 100 $80 million projects,” said Geoff Delisio,
senior vice president of surety, Berkshire Hathaway Specialty Insurance.
In another example, Delisio noted that typically the electrical work is 20 to 25
percent of a project. On a billion-dollar project, that is a $250 million subcontract.
“Risk managers [at owners and contractors] are dealing with this daily,” said
Delisio. “We have similar thoughts: How much risk do we want to take on a single
project? As we look ahead, we don’t see anything but larger projects. Are $5 billion
or $10 billion projects too far in the future?”
“Ten years ago, I could count the number of billion-plus-dollar projects on one
hand,” said Peter Quinn, head of bonding/surety, Euler Hermes Americas. “That
has increased four or five times.”
QUESTIONS AROUND CAPACITY
The regulatory requirements for surety in the U.S. have resulted in higher
barriers to entry for new surety underwriters than in some other lines of insurance.
The regulatory regime also means offshore markets are generally not open.
Delisio said capacity could become a concern depending on the size of the
project and where a surety underwriter attaches: “We may see the first push on
tightening this year or next.”
For now, most remain confident that capacity is adequate but, as Delisio
advises, there are contributing factors to keep an eye on.
Susan Hecker, national director of contract surety, Gallagher, said, “At a project
size of $2 billion or more, it might become an issue, but many of those projects are
joint ventures and have a co-surety structure.
“There are always underwriting questions around large public-private partnership
projects as well as when mega-contractors secure multiple large contracts,” she said.
“However, those situations could also be a credit case … more individual contractor
capacity issues rather than an indication of a restriction of overall surety capacity.”
“We have not seen overall tightening in the surety market,” said Joanne Brooks,
vice president and counsel, The Surety & Fidelity Association of America. “But as
an industry, we should be prepared to tighten, or we are going to be called upon
under the bonds to finish some of these projects and ensure subcontractors and
suppliers are protected and paid.”
Brian Fogle, vice president and regional underwriting officer, Liberty Mutual
Global Surety, said the issue is currently more of a capability crunch than a
“There has been plenty of surety capacity since the recession and the lag in
construction. The building surety businesses have been waiting for this recovery.
But it can be a challenge when it all comes at once.”
The volume of work is of increasing concern, said Brooks. “The issue is not
really capacity in the surety sector, even for large projects. It is more a matter of a
given contractor’s capacity. There are a limited number of contractors at the top
end who are capable of performing billion-dollar projects.”
Not only is there a greater demand
for builders, but projects are also lasting
longer, Fogle added.
“When projects last five or eight
“The building surety
years, rather than two or three, capital
and commitments are tied up for
longer. That also increases risk. Owners
Brooks has observed that sureties
could consider reining in capacity because
of several trends in the construction
businesses have been waiting
for this recovery. But it can
be a challenge when it all
comes at once.”
—Brian Fogle, vice president and regional
underwriting officer, Liberty Mutual Global Surety
• Billion-dollar building projects
are no longer outliers.
• Capacity in the surety market
could tighten within a few years.
• Phasing a project is one way to
extend bonding capacity.