September 23, 2020
By: Cornelius “Con” F. Riordan

A construction surety bond is underwritten on the basis of an individual contractor’s ability to perform the contract to be secured by the bond. Underwriting a bond has always been a challenge because there are many factors that influence the decision to issue a bond. But issuing a bond in the current pandemic marketplace has far greater risk than before due to factors outside the contractor’s control.

Where construction is deemed non-essential, most construction activity was halted. Where construction is deemed essential, projects continue at a slower and more restrictive pace. The pandemic has caused labor and material shortages. Contractors have furloughed all or part of their workforces. Governmental entities recommend that employees stay home if they or household members display COVID-19 symptoms. Social distancing on job sites and pandemic-related absenteeism has resulted in construction delays. Material supply chains have been disrupted due to government-imposed restrictions and the shifting of priorities to products needed to combat the virus.

When a surety issues a bond, it does not expect to incur a loss. The surety underwriting process is the rigorous evaluation of a contractor’s ability to perform bonded work at no loss. Although every surety company has its own unique underwriting standards, there are common fundamentals of underwriting.

Those fundamentals are often called the three Cs: Capital, Capacity and Character. The underwriter thoroughly examines the contractor’s financial condition (Capital), its ability to successfully complete contracts (Capacity), and management’s track record of keeping promises and dealing fairly with others (Character). In the post-pandemic construction world, the surety will be much more selective in approving a contractor’s bonding request. Character, more than all other criteria, will be critical to the underwriter’s decision to extend surety credit.

Consequently, underwriters require more details on the contract the surety is asked to bond. Pre-pandemic, underwriters relied more on the contractor’s track record and financial strength. Now they are looking more carefully at the terms of the contract for which a bond is sought.

Underwriters look for terms allowing time and money for pandemic-related delays. In particular, the underwriter will ask if the contract contains a force majeure or similar clause addressing relief from delays and disruptions caused by the pandemic. They could provide relief from time deadlines and compensation for the delay, thereby reducing the surety’s risk. A force majeure clause typically lists acts of God, government action, public health emergency, epidemics, or terrorism among the delaying events.

Equally important are COVID-19 laws, regulations, and guidelines governing the project, such as protective clothing and social distancing mandates, virus testing, quarantining of workers, and the likelihood of work stoppages or jobsite shutdowns. The underwriter will analyze if the time to complete the job is reasonable under pandemic-related limitations and restrictions and will ask the contractor to provide a plan for accomplishing the work within the allotted time.

A contractor must be prepared to show clearly its plan to overcome these types of limitations and restrictions and complete the contract to be bonded. Providing that information will assist the underwriter in evaluating a contractor’s ability to meet pandemic-related challenges and may increase the likelihood of securing the bond.